Singapore heats industrial properties up

Industrial properties in Singapore showed stellar performance over the past 1.5 years, in 2010 and 1H 2011. The rental and price increase was largely on the back of improvement in the economy and the manufacturing sector, re-conditioning of older industrial properties which stimulated investor interest as well as increasing entrepreneurship and SMEs which find modern industrial space as low cost start ups.

Although the rental and price increase of industrial properties was largely due to the strong manufacturing and investment centric fundamentals, there has been benefits from the growth and development of other property sectors which contributed to the growth of industrial property rents and sales.

Spin off from Office and Retail Sector
Industrial properties certainly benefitted from the recent growth in office property sectors, such as office and retail.

(Retail): These include an increased demand for warehouse space, with the arrival of more retailers, which appreciate warehouses as a cost-efficient alternative to store merchandise than in the retail premises. These include retailers whose offerings are not highly sensitive to fluctuations in trends and have longer shelf life, hence requiring additional warehouse space to store those products which are ordered in larger quantity.
Some retail functions, including preparation of some F&Bs, may be possible in industrial premises, given the improved connectivity of Singapore over the years. It is also financially optimal for retailers to decentralize their functions and prepare some of the possible products in industrial premises, to save on business costs where retail rents are substantially higher than that of industrial.

The reliance on warehouses and off retail site production premises by retailers reflects that they are increasing focused on ways to raise business productivity by keeping costs lower, and retailers who are developing cost-efficient systems faster and more integrated than before to cope with retail rents which are in excess of their budgets, and available retail space which may not necessarily fit their space usage requirements.

(Office): Warehouses have also seen increased interest from businesses which have to free up space for core business activities. Storing excess company items including archived printed information in warehouses will also present business with a newer, neater office working format. Additionally, the severe office rental fluctuations over the two decades have also raised businesses’ awareness for contained business costs going ahead and businesses are generally keen in rationalizing excessive space in the company, which is fundamentally for storage of older archives which are not frequently used.

(Residential): It was only in recent times, where private residential prices have considerably run up that industrial properties benefitted. Firstly, warehouses are seeing increasing relevance for personal storage, by families which require places to keep their properties as their living premises are unable to accommodate. Some families which have capitalised on the rising prices of residential properties by selling their homes and seeking temporary accommodation in smaller premises are seeing warehouses as a solution to their space needs. These families which are waiting for an opportunity to purchase better-value homes at the right market timing will require warehouse space to store their secondary assets.

Also, the popularity of shoebox apartments, those where units are less than 500 sf each, meant that there is potential for personal warehouse storage space, from owners of such apartments. Although this may not be a totally cost effective alternative, it is definitely cheaper than a larger apartment.

The consistent issue of record high private residential prices challenging affordability requires much government efforts to ensure the sustainability of private residential properties. Hence there may be some who felt non residential properties are easier to enter and prices movements may be easier to predict.

Conclusion
As can be seen, there are various spin offs for the industrial sector, from the development of other property sectors. Notwithstanding these opportunities, investors of industrial properties are mostly seasoned property players, who are familiar with the property market dynamics including the profile and risks associated with non-residential properties. Entrants to purchase industrial properties should be mindful of this, i.e. the potential competition with the rest of the participants. It is also critical to examine the tenant demand base of the industrial property before deciding on investing on it.

Ong Kah Seng, Senior Manager, Research – Asia Pacific, Cushman & Wakefield