Mar 11, 2016
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Amid a slowing global and local economy, the industrial property market hangs in a balance, with declining leasing transactions, and lower sale and rental prices. But analysts say not all is lost in the market and there’s some optimism.

By Nikki De Guzman

The local economy in Singapore is often the indicator of how its industrial property market will perform.

In recent times, the country’s economic growth has decelerated to such a state that business activity in various sectors, such as manufacturing, has slowed down, resulting in negative sentiment for industry property.

However, analysts who spoke to CommercialGuru said a silver lining might be in sight for this property segment with the rise of e-commerce in Singapore and the region. They believe these so-called e-tailers may create a pool of tenants that could potentially occupy warehouse spaces.

In this issue, we explore the warehouse property sector and find out how it fares in the market given the current economic situation here and abroad, as well as how it can affect the industrial property sector in the near term.

Market headwinds

Last year, Singapore’s economy grew at its slowest pace since the start of the Global Financial Crisis in 2008. According to government data, the city-state’s economy grew by just 2.1 percent in 2015, lower than the 2.9 percent growth in the year before.

The country’s economic growth moderated due to local and global headwinds, and was reflected in the performance of the manufacturing sector’s activities – which the nation is highly susceptible to. As these headwinds are considered by analysts to be “deep-rooted” in nature and are likely to persist for some time, the growth outlook for the manufacturing sector as well as the economy in general, is predicted to remain modest this year.

Given this, demand for industrial space is expected to remain subdued in the near term, especially with an upcoming supply estimated to hit twice the amount of the 10-year average demand.

Silver lining

However, not all is lost for industrial real estate.

According to CBRE’s industrial property report released in December 2015, a potential underlying demand driver for Singapore’s industrial property market is the rising number of e-commerce start-ups operating here.

Euromonitor International’s statistics in November last year revealed that the country’s e-commerce sales have an 11.5 percent compound annual growth rate in the years spanning from 2011 to 2015. CBRE said the sales growth rate reflects the possibility of these businesses looking at warehouse properties for their operations.

True to form, the impact of e-commerce in the warehouse property sector, particularly logistics, has become more pronounced in recent years.

Catherine Ng, Director of Industrial Services at Colliers International said: “The trend of not owning a physical retail store and the ease of online shopping have helped boost the demand for warehousing facilities over the last few years.”

Knight Frank Singapore echoed this. Research Head Alice Tan said: “With the significant increase of e-commerce businesses over the last few years, having adequate and strategically-located storage spaces will be imperative to support the smooth operations of their businesses.

“In the face of heightened competition amongst e-commerce retailers and increasing demand for goods, we anticipate that this will increase the demand for warehousing spaces,” she added.

Euromonitor International’s data shows that Singapore’s e-commerce sector will continue to grow as the nation picks up in internet and mobile retail sales going forward.

But despite the promising signs, CBRE said the e-commerce sector may not be a major demand generator for now as the business segment’s occupier footprint is still relatively small. The property consultancy attributed this to Singapore’s limited geographical and market size, “which reduces the need for large-scale inventory”.

Property analysts noted that in the end, demand for warehouse spaces will still be generally dependent on the market performance of Singapore’s manufacturing and logistics sector.

Demand-driven

“Industrialists are generally affected by the overall local and global economy,” Tan said. “In times of positive economic growth, an increase in imports will in turn drive the demand for warehouse spaces. Needless to say, when the market is weighed down by a fall in imports, this requirement for space will inevitably be affected.”

This is true and evident in the latest caveats lodged in the Urban Redevelopment Authority’s (URA) real estate information system (REALIS). In light of the challenging business operating environment here, REALIS revealed that leasing and sales deals remained low last year.

This is true and evident in the latest caveats lodged in the Urban Redevelopment Authority’s (URA) real estate information system (REALIS). In light of the challenging business operating environment here, REALIS revealed that leasing and sales deals remained low last year.

Table 1 shows the leasing transactions for each quarter of 2015. After a 21.86 percent increase in leasing deals from the first quarter to the following quarter, leasing transactions remained on the downward slope from the second half of the year. Leasing transactions declined by at least nine percent in Q3 to 307, and fell further by another nine percent in Q4 to 279 transactions.

Rental prices, on the other hand, hovered around $2.10 psf per month, and $1.98 psf per month in 2015, closing the year at $2.01 psf per month.

On the sales front, warehouse prices for freehold and leasehold properties ended the year in contrasting styles, as shown in Table 2. Data from REALIS indicates that prices of freehold warehouse properties held firm from the second half of the year, ending at $680 psf. Meanwhile, sales prices for 30-year and 60-year leasehold warehouse properties closed the year with a 19.45 percent quarter-on-quarter decline in Q4, from $527 psf to just $424.50 psf.

Outlook

Amid a jittery global macroeconomic environment and uncertainties in the local economy, the business operating environment is expected to remain challenging this year. In a survey conducted by the Economic Development Board (EDB), it revealed that business expectations for the manufacturing sector are expected to be weak in the first half of 2016.

Given this, property analysts say industrial landlords should consider reassessing how to utilise their assets better and widen the list of potential occupiers to help inject demand into industrial real estate, instead of just depending on traditional demand-drivers such as external trade and manufacturing.

CBRE said the move will help create a “viable operating business environment for start-ups”, in addition to injecting fresh demand for a muted industrial market.

Knight Frank also noted that “landlords could take this opportunity to convert their warehouses to other types of uses that are seeing growing demand”. Tan said landlords could also consider introducing additions and alterations to enhance their building specifications “to meet the changing needs of industrial end-users”.

As for tenants, Tan said “a wider availability of warehousing options (will be presented to tenants), given the upcoming warehouse supply of 6.9 million sq ft of GFA slated for completion by end of 2016”.

She added that the uncertain macroeconomic outlook, likely muted manufacturing performance for this year, as well as the higher cautiousness amongst industrial end-users to control costs, could see more tenants opting for shorter lease terms and/or with more flexible lease arrangements. She also said that given the future headwinds, more companies with expiring leases might also “consolidate their warehouse needs”.

Looking ahead, Knight Frank said it anticipates rentals to likely stay flat or even trend lower by three to five percent over the first six months, depending on the overall manufacturing sentiment going forward.

SIX80 Upper Thomson Road
680 Upper Thomson Road

Type: Light Industrial (B1)

Manager: LHN Group

Lease Term: Flexible

Facilities: High ceilings, air-conditioning, car parking

Nearby Amenities: Thomson Plaza

Owned and managed by LHN Group, this industrial property at 680 Upper Thomson Road is a two-storey development zoned for Light Industrial (B1) use.

With a gross floor area of 36,252 sq ft and a floor-to-ceiling height ranging from 2.6 metres to 2.8 metres, SIX80 Upper Thomson Road features units of up to 4,100 sq ft that can be used as an ancillary office, showroom, F&B operator, or childcare centre. It also features Work + Store units – storage spaces fitted with carpeting, air-conditioning systems and lights – with sizes ranging from 191 sq ft to 762 sq ft. The property comes with 49 carpark lots.

Located off Upper Thomson Road within the Tagore industrial estate, the building is within proximity to retail shops at Thomson Plaza, Thomson Estate and Yio Chu Kang Estate, as well as residential and industrial estates. It is also easily accessible via the Seletar Expressway (SLE) and Central Expressway (CTE).

 

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