Industrial rents could dip 6-8% in Q4: Knight Frank

By Lee Meixian

[email protected]


Oct 1, 2016

AVERAGE industrial rents island-wide could fall 6-8 per cent year on year in the fourth quarter of 2016, as industrialists continue to take bold consolidation and relocation steps to cope with challenging business conditions, a Knight Frank report released on Friday said. Rentals have fallen 4.4 per cent cumulatively for the first half of this year, according to official data from JTC. Rental statistics for the third quarter are not released yet.

But according to Knight Frank's own basket of properties that it tracks, overall industrial rents fell 1.2 per cent quarter on quarter (q-o-q) in Q3 to S$2.08 per square foot per month (psf pm). The decline was broad-based, across most locations.

Tan Boon Leong, executive director and head of industrial at Knight Frank, who authored the report, said some industrialists are relocating to lower-rent locations even if the locations are not as attractive. Some used car traders and parallel car importers are also moving to smaller showroom premises amid weaker car sales.

"With softened demand and strong pipeline supply of industrial space in the market concurrently, the double- whammy situation is expected to weigh down on industrial rents further. This may be in exception to freehold industrial units where demand and rents are likely to remain resilient given the limited supply," he said.

On the transaction side of things, the consultancy also expects average prices for leasehold factory and warehouse units to fall 4.5 per cent to 6.5 per cent year on year (y-o-y), and those for freehold factory and warehouse units to fall 0.5 per cent to 2 per cent y-o-y in Q4.

Mr Tan expects the relocation of larger oil and gas services companies to impact smaller supporting companies in the Pioneer-Tuas cluster especially. "Smaller companies offering supporting services in the oil and gas industry and ecosystem are expected to face stronger headwinds in the coming two to three quarters, as oil prices continue to fall and with large foreign oil and gas services companies McDermott and Subsea 7 relocating most of their operations out of Singapore to Kuala Lumpur, Malaysia," he said. The companies had made the decisions earlier this year, with McDermott citing proximity to regional clients as the motivation for the move, while Subsea 7 is purported to have decided so for cost reasons.

Knight Frank added that a next wave of consolidation is expected among these smaller businesses, and this will lead to further weakness in the demand for space in the Pioneer-Tuas industrial cluster. In particular, vacancy of spaces of 1,500 sq ft or less, which meet the needs of such smaller businesses, is expected to rise.

The Pioneer-Tuas cluster in fact suffered the largest rental decline of 9.6 per cent q-o-q in Q3 among all the regions, mainly due to the under-performing oil and gas industry, related offshore and marine services, and general manufacturing that dragged down the activities of related and supporting trades in the Business-2 cluster for heavier industrial use.

Rents in certain clusters that are considered more established industrial hubs were more resilient. These include the Kaki Bukit, Ubi, Paya Lebar, Eunos cluster and Kallang, Geylang, Bendemeer cluster, which respectively improved by 2.6 per cent and 1.3 per cent q-o-q.

These venues also have amenities such as food centres, and are supported by improved accessibility thanks to the near completion of stage-three Downtown Line by 2017 which covers stations such as Bendemeer, Ubi and Kaki Bukit.

As for business park rents, they also moderated downwards by 4.1 per cent q-o-q to S$4.22 psf pm in Q3, despite earlier talk that this hi-tech space will be better able to preserve its rental values. Nonetheless, business park space equipped with flexible layout, ready amenities, good connectivity, and clustering effect remain well-occupied, the report said.

On the transaction side, average price of upper-floor strata-titled factory units rose in Q3 despite the number of transactions falling. In the first two months of Q3, there were only such 84 transaction caveats, making up just over a third of the 222 caveats lodged in the whole of Q2.

For warehouses, average prices of upper-floor strata-titled units fell in tandem with softening demand. There were only five caveats lodged in the first two months of Q3 - about 30 per cent of the 17 caveats lodged in the whole of the preceding quarter. But freehold assets, particularly in the central region, remained highly sought after, evident in the quarter-on-quarter improvement of their transaction prices over the past two quarters.