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Amid poor industrial and manufacturing conditions, market players are becoming more cautious as further downside risks are expected.
By Nikki De Guzman
Aside from policies by the government to make rents more affordable, other key drivers of industrial rent and sale prices are manufacturing and economic performance.
Given the headwinds in the manufacturing sector and the current local and global economic situation, expectations for the industrial sector, particularly for factory properties, have tapered.
In this issue, we look at factories, and find out how the current economic situation will affect factory demand, prices and rents.
Challenging times
According to government data, Singapore’s economy grew by 2.1 percent in 2015, slowing from the 2.9 percent growth in the year before. The figure marked the republic’s slowest pace of growth in GDP since the 2008 Global Financial Crisis.
“The key driver of sale and rental prices is supply and demand for the asset. Supply and demand for industrial assets are generally affected by macroeconomic conditions as they support economic activities such as manufacturing, which comprises more than 20 percent of Singapore’s GDP,” said Nancy Tan, Head of Real Estate, Cambridge Industrial Trust (CIT) Management.
In December 2015 alone, the country’s overall manufacturing output declined for the eleventh consecutive month with a 7.9 percent year-on-year fall, according to the Economic Development Board (EDB). Overall, the manufacturing sector saw an annual decline in output by 5.2 percent last year, just after it registered 2.7 percent annual growth in 2014.
As the manufacturing sector is expected to continue with its weak performance this year, and the general outlook remains pessimistic, Knight Frank said that business owners have put their expansion plans on hold, contributing to a drop in acquisitions for factory units.
DTZ’s Regional Head for Southeast Asia, Dr Lee Nai Jia, added: “With the current economic condition, we expect firms to put expansion plans on hold; current local and global conditions will exert further downward pressure on prices and rents.”
As such, analysts expect prices and rents to continue the downward trajectory while transactions are also expected to remain muted.
After effects
Despite poor performances in the demand-driving sectors for industrial properties, the Urban Redevelopment Authority’s (URA) Real Estate Information System (REALIS) shows that leasing volumes for factory properties in 2015 improved by 2.56 percent to 6,932 from 6,759 transactions in the previous year as shown in Table 1. This could be due to demand chasing new supply that came on-stream in 2015, analysts estimate.
“Manufacturing performance does affect factory rents in Singapore, but its effect manifests only one quarter after. The relatively stable rental environment also reduces companies’ need to buy properties, so as to hedge against rental volatility,” said Lee.
Industrialists are expected to go for lower-priced spaces as cost-saving initiatives have become more imperative to keep businesses afloat. Knight Frank said that landlords and sellers are expected to face higher pressure to adjust asking prices and rents, “to increase the probability if clinching buyers and tenants”.
While landlords are expected to carry forward the burden of current market conditions, tenants, on the other hand, are expected to see positive gains.
DTZ’s Lee said: “For landlords, the challenge will be to offer more amenities and much needed infrastructure to retain tenants.” He added that tenants would benefit given more options, and these options are expected to be reasonable rates.
Property consultancy Savills added that some landlords have “re-signed on rents below their asking price” to prevent their units from remaining vacant for too long.
But experts noted that amid an increasingly uncertain economic backdrop, industrialists have lesser paying power. CIT said that demand and rental prices were affected as more companies become cost-conscious and cautious with regards to business expansion and relocation costs.
Table 2 shows that median rents for factory properties decreased by around 4.06 percent last year compared to 2014. Median rents for factory properties last year hovered around $1.87 psf to $1.91 psf and remained flat in the last quarter of 2015, ending at just $1.89 psf, down 3.08 percent year-on-year.
Workaround
“Demand and rental prices are affected as more companies become more cost-conscious and cautious with regards to business expansion and relocation costs,” CIT’s Tan said.
“With the high level of competition in the market, landlords will place more emphasis on defending occupancy levels and retaining customers, through the maintenance of high service standards such as constant customer engagement,” she added.
Knight Frank, in addition, said landlords have become more in tune with the issues facing their tenants and have adjusted their rental expectations to retain them. It also encourages owners to enhance the specifications of their properties to ensure that they meet the spatial needs of a much larger pool of possible tenants.
“As Singapore undergoes restructuring and established new niches in the higher-value-added manufacturing and industrial sector, it is imperative for landlords to enhance their building specifications,” the property consultancy said, adding that a forward-looking vision will help to create future opportunities.
Outlook
CBRE has said that the demand outlook for industrial properties is expected to remain soft, at least until global trade fundamentals stabilise. It added that rental gaps are expected to narrow in the near to mid-term.
Knight Frank echoed this prediction. “With a slowing global trade, plummeted oil prices, and weak manufacturing sentiment, rentals and prices of industrial properties are envisaged to stay flat or trend lower for the first half of this year,” said Alice Tan, Head of Research at Knight Frank.
Savills said the influx of some 31.1 million sq ft of factory and warehouse space this year is expected to add downward pressure on overall factory rents.
Meanwhile, industry players are expecting the operating environment to remain challenging this year.
“I expect landlords to respond to the increasingly competitive environment by being more customer-focused and introducing more flexible leasing options, as tenant-retention will be a priority. For tenants, the future supply may mean that they have more choices, but at the same time, they are expected to remain cost-sensitive and, therefore, cautious in assessing their real estate requirements,” said CIT’s Tan.
“Notwithstanding, if the property is well-located and with attractive specifications, landlords can still expect a sustainable demand,” she added.
As for tenant sentiment, CBRE said cost containment “should remain the key theme in 2016 as occupiers seek to be more space efficient to increase operating margins”.
8 & 10 Pandan Crescent
8, 10 Pandan Crescent
Type: B2 Industrial
Owner: AIMS AMP Capital Industrial REIT
Facilities: High ceilings, loading bays, 24-hour security
Nearby Amenities: Eateries, supermarkets, shopping malls
Nearest Transport: Major expressways, Clementi MRT station
Comprising two blocks, one a five-storey (Block 8) and the other a six-storey (Block 10) warehouse building, the property has a gross floor area of 871,230 sq ft and net lettable area of
708,674 sq ft.
Unit sizes range from 4,000 to 25,000 sq ft. Zoned for Business 2 use, the warehouse features high ceilings and good fl oor loading. Its loading and unloading areas can
Its loading and unloading areas can accommodate a total of 80 bays with 38 dock-levellers on the first storey. The two blocks are serviced by 16 cargo lifts and 12 passenger lifts.
Located at the junction of Pandan Crescent and West Coast Highway, the property is approximately 13 km away from the city centre. It is well-served by expressways such as the West Coast Highway, AYE and PIE. 8 & 10 Pandan Crescent is owned by AIMS AMP Capital Industrial REIT.
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