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Global economic uncertainty casts pall on industrial property
S'pore also expected to face competition from Iskandar soon, says Knight Frank
BY KALPANA RASHIWALA [email protected]

KNIGHT Frank has presented a cautious picture for Singapore's industrial property market, citing policies that could restrain its growth. At the same time, the Republic is expected to face competition from Iskandar Malaysia in retaining and attracting industrial space users in the near future.

Although Singapore government initiatives such as the ratification of various free trade agreements have helped to boost the Republic's market access and competitiveness, overseas manufacturers are not setting up shop here in large numbers.

"This has more to do with the global economic platform," notes Lim Kien Kim, executive director (industrial) at Knight Frank.

"Due to uncertainty in major global economies, big overseas manufacturers are not readily making investments outside their own borders. As for industrialists already in Singapore, some are moving from one building to another without expansion, while others have been downsizing their operations in Singapore in favour of lower-cost alternatives. When this happens, our local SMEs, which are mostly in supporting industries that depend on big companies coming in to Singapore, also suffer," said Mr Lim. This in turn will dampen demand all round for factory space in Singapore vis-a-vis abundant stock of completed industrial space.

Mr Lim's views refer to the large-space occupiers in premises zoned Business 2 (which typically allows heavily industrial use).

Also crimping demand for Business 1 space - where typically light industrial and warehouse use is allowed - is the fact that a lot of SMEs are importers and distributors.

"The amount of actual manufacturing or technical work is very low," notes Mr Lim.

Likewise, the operations of supporting companies such as those involved in mechanical and electrical engineering are seen as more desk-bound using IT, and hence deemed to be "administrative".

Mr Lim cites these as examples of occupiers that find it too expensive to lease pure office space but face restrictions if they were to look at industrial premises. This is due to Urban Redevelopment Authority (URA) rules stipulating minimum 60 per cent predominant warehouse/industrial activities and 40 per cent ancillary supporting uses (including office space) for industrial/warehouse premises.

Knight Frank also warned that the upcoming completion of supply on sites sold by the state since 2011 - in places such as Kaki Bukit, Ubi and Yishun - will further add pressure to high vacancies. Based on URA statistics, as at end-Q2 2013, the islandwide vacancy for total private-sector factory space stood at 8.5 per cent, up from 7.6 per cent a year earlier. A more detailed breakdown shows that business park space posted the highest vacancy rate of 21.7 per cent at end-Q2 2013, followed by 10.9 per cent for multiple-user and 6.5 per cent for single-user factories.

Also weighing on prospects for Singapore's industrial property market is competition from across the Causeway, given that higher operating costs in Singapore could dampen business viability for specific industrial clusters.

"Amid growing investment interest in the Iskandar region, Malaysia is seen as the 'next best' alternative to industrialists, due to its proximity to Singapore and lower cost.

"As Iskandar Malaysia fosters ease of doing business and resolves outstanding issues such as cross-border taxation, there could be an outflow of industrial establishments to this region.

"Singapore could face competition retaining and attracting industrial space users in the near future," Knight Frank said.

URA statistics show that as at end-June 2013, there was pipeline supply of 46.1 million square feet of private-sector factory space in Singapore due for completion by end-2016 - 15.6 per cent of the completed stock of 296.1 million square feet at the same date.

Based on Colliers International data, the average monthly gross rents of ground and upper floor high-specification industrial space dipped 0.3 per cent and one per cent quarter on quarter to $3.29 per square foot (psf) and $2.95 psf respectively in Q3 this year.

Colliers' executive director Tan Boon Leong said the government's stricter enforcement on legitimate use of industrial premises and weaker sentiment in view of softer economic indicators have led to sluggish take-up of high-tech space.

However, for prime conventional industrial space, the average gross monthly rent increased 1.2 per cent quarter on quarter to $2.52 psf for ground-floor space and 0.9 per cent to $2.20 psf on upper floors. This was supported by lease renewals and higher rents sought by landlords who have paid high prices for their properties in recent years. The average rent for prime conventional warehouse space too inched up 0.8 per cent quarter on quarter to $2.64 psf for ground-floor space and 0.5 per cent to $2.16 psf on upper floors.

The only segment where rents were unchanged was business park space. For the second consecutive quarter, the average rent stayed put at $4.04 psf.

"While landlords of newer buildings sought higher rents, owners of some older business park buildings faced downward rent pressure due to an increase in vacant space following the relocation of tenants to new premises," said Mr Tan.

As well, the quarter saw the completion of new buildings such as Sandcrawler and the neighbouring Nexus@one-north - in Fusionopolis. As a result, there was an overall increase in supply, which kept rent growth for business parks on the whole in check.

CBRE executive director Michael Tay noted competition from new projects is driving a number of landlords of older business park buildings to refurbish their properties.

Major leasing deals in Q3 include those of Fox International (brokered by CBRE) and Fujitsu (handled by Jones Lang LaSalle) for 24,000 sq ft and 35,000 sq ft respectively at Nexus. At Sandcrawler, talks are going on to lease out three floors totalling 70,000 sq ft.