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Industrial market posts stable Q3 despite external headwinds, but outlook cloudy

25 Oct, 2019

RENTS and prices of industrial space in Singapore remained relatively stable in the third quarter of this year compared with the previous three months, even as the industrial market faces headwinds from the US-China trade spat.

However, between the slowing economy and the ongoing trade war, overall rents and occupancy could face pressure in the quarters to come.

According to the latest data from industrial land and infrastructure agency JTC Corp, the price index was up 0.1 per cent quarter on quarter, owing to single-user factories, while the rental index was flat.

During the quarter, prices for multiple-user factories in the central region saw an increase in price, up 0.5 per cent quarter-on-quarter, while factories with a remaining tenure of above 60 years saw a price increase of 0.7 per cent. In contrast, factories with remaining tenures of 30 years and under slid 1.5 per cent, while those with a remaining tenure of 31-60 years edged up 0.1 per cent, suggesting interest in properties with longer remaining leases.

Compared with a year ago, the overall price index edged down 0.1 per cent while the rental index inched up 0.1 per cent. Meanwhile, the occupancy rate of the overall industrial property market at 89.3 per cent was unchanged for four consecutive quarters. From a year ago, it was up 0.2 percentage point.

Of the different segments, the warehousing segment appeared to be feeling the impact of the slowdown in manufacturing and external trade, with its occupancy rate falling 0.6 percentage point quarter-on-quarter, while rents eased 0.2 per cent.

Tricia Song, head of research (Singapore) for Colliers International, remains cautious about the industrial market outlook - and in particular, for the warehouse and factory segments - even as third quarter data exhibited signs of stabilisation. She said: "We maintain our forecast that overall rents and occupancy should remain weak in the next few quarters."

Even though the data suggests a stable market, demand is fragmented, pointed out Wong Xian Yang, senior research manager (Singapore and South-east Asia) at Cushman & Wakefield. "Sales and leasing conditions for conventional factory space remain challenging. On the other hand, well-located high-spec factories with longer remaining tenures and business parks remain highly sought after."

For the rest of 2019, another 0.3 million sq m of industrial space is estimated to come on-stream, while the figure for 2020 is estimated at 1.9 million sq m. In comparison, the average annual supply and demand of industrial space in the past three years were around 1.3 million and 1.2 million sq m respectively.

Of the 1.9 million sq m, one third of the supply comes from single-user factory space developed by industrialists for their own use. Multiple-user factory supply accounts for another 45 per cent or 850,000 sq m, of which about 80 per cent is meant for replacement space for lessees affected by JTC's Industrial Redevelopment Programme, JTC said. The remaining 23 per cent or so is warehouse and business park space.

While the stable industrial property market would give confidence to investors and property owners looking for steady returns, the large supply of newly completed industrial space coming onstream in 2020 represents a speed bump on the road, highlighted ERA Realty's head of research & consultancy, Nicholas Mak. Mr Mak said: "This new supply is about 60 per cent more than the five-year average of 1.2 million sq m of annual demand."

However, any glut in the market from the large injection of supply is likely to be only temporary. Mr Mak went on to add: "The supply would drop to less than 0.6 million sq m in 2021, which would allow the market to absorb the new industrial space within the two-year period. As a result, the industrial real estate market would return to a stable state again in 2021."

Looking ahead, JLL's head of research and consultancy (Singapore), Tay Huey Ying, reckons demand will be mixed over the next 12 to 15 months, pointing to the US-China trade tensions and cuts to the economic growth forecasts for this year and next.

"The government's push for Singapore's manufacturing sector to engage in more value-adding and value-creating activities, like research and development (R&D) and additive manufacturing, and adopt Industry 4.0 initiatives, such as the Internet of Things and automation, is foreseen to underpin demand for the better quality industrial premises," Ms Tay said. "However, the heightened macroeconomic risks could see more companies turning cautious on their space requirements."

Ms Song of Colliers said: "With new supply of factory space between Q4 2019 and end 2020 expected to be around 17 million sq ft (about 1.58 million sq m), we maintain our forecast that rents in this segment will likely remain under pressure in the next few quarters."

Colliers expects new business park and high-spec spaces to continue to benefit from the lack of premium inventory and tight upcoming supply, which should spell robust demand in Q4 2019, while logistics rent should remain soft, falling marginally by 1.5 per cent and 1 per cent year-on-year in 2020 and 2021 respectively before recovering post 2022.

JTC also said that based on the number of caveats lodged for industrial properties, transaction volumes in Q3 2019 declined by 20 per cent compared to the prior quarter but was up 2 per cent from a year ago.