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Singapore's industrial property woes

By Istvan Loh

Industrial production in the country peaked in 2010 and has been in a state of decline ever since, except for minor increases in 2013 and 2014.

In 2015, the contraction was to the extent of 5.1%.The current year is no better with production contracting 0.5% in March and 0.4% in April.

The poor showing of the manufacturing sector can be attributed to several reasons. The worst performers are the land and marine and offshore engineering segments. In March, they contracted by 24.7% and 35% respectively.

Lower demand has severely affected the precision engineering cluster, which showed an overall reduction of 7.7% year-on-year in March 2016.

Impact on industrial property prices
The fall in manufacturing activity has severely affected the prices of industrial property, which declined in the first quarter of 2016 following a consistent downward trend in the previous three quarters.

In the last year, industrial property prices have declined by 4.8%. Both multi-user factories (-4%) and single-user factories (-6.2%) have contributed to the free-fall in values.

The Singapore Purchasing Managers' Index (PMI) was at 49.4 in March, indicating that output is in a contractionary phase for the ninth consecutive month. A PMI below 50 indicates a contraction.

The Jurong Town Corporation (JTC), the government agency tasked with nurturing and growing the country's industrial base, has released this table, which illustrates the trend in industrial property prices.

PRICE INDEX OF INDUSTRIAL PROPERTIES

Manufacturing activity is closely linked to the level of exports as Singapore's own population is relatively small. Consumption patterns within the country cannot result in giving the industrial sector a boost beyond a certain limit.

But external factors have led to a fall in the volume of exports and trade. In April, the export of goods made in Singapore declined by 7.9% on a y-o-y basis following a contraction of 15.7% in March.

Rental of industrial properties
According to data released by JTC, the first quarter of 2016 saw a decline in the rentals of multiple-user factory space segment in all planning regions and land-use zonings.

The three-month period to March 2016 witnessed rentals which were 5% lower in the West and Northeast regions, while the remaining regions saw rents fall between 0.8% and 3.6% on a q-o-q basis.

Meanwhile, JTC's single-user factory index fell 3% y-o-y in March and 1.9% over the previous quarter.

It has been reported that several landlords have agreed to tenants' requests for lower rentals. These requests have been made on the grounds that order levels have declined, leading to lower capacity usage and consequently a strain on profitability and cash flows.

Landlords have lowered rentals as they fear that if occupants shift to other premises, they will find it extremely difficult to locate new lessees.

If all categories of industrial properties are considered (multiple-user factories + single-user factories + business parks), the percentage change in rentals in the first quarter was -5.1% over the previous year and -2.7% over the earlier quarter.

The government has initiated several measures to boost industrial activity, which will result in increased demand for factory space.

The JTC LaunchPad @ one-north is expected to give a fillip to activity in the biomedical sciences, infocomm, media, cleantech, electronics, and engineering sectors. Singapore-based startups will be eligible for space at this location.

The recent launch of the National Additive Manufacturing Innovation Cluster is another step that could lead to an increased level of industrial activity. It is aimed at the high-potential 3D printing industry.

Entrepreneurs will have the benefit of the expertise available at the Nanyang Technological University, the National University of Singapore, and the Singapore University of Technology and Design.

But things could get worse…
Despite the efforts being taken by the government, industrial property vacancy rates remain at unacceptably high levels.

At the end of the first quarter, 12.7% of multi-user factory space was unoccupied. The vacancy levels of other segments of industrial property were no better with single-user factories (8.1% vacant), business parks (18.3%), and warehouses (9.6%) being in a similar position.

In a worrying sign, each of these categories except multiple-user factories saw a deterioration in vacancy rates in the first quarter. The improvement in the vacancy rate in the multi-user factory category was a paltry 0.1%.

But would an increase in manufacturing activity lead to higher occupancy rates in industrial property? The growth in manufacturing activity would need to be very high as a lot of additional space is being created.

JTC data reveal that at the end of Q1 2016, an additional 4.2 million square metres of gross floor area of factory space and 1.4 million square metres of warehouse space are in the pipeline and expected to come up by 2020.

Will manufacturing activity pick up?
An improvement in demand and capacity utilisation in the manufacturing sector could be the best thing to happen to industrial property's prospects.

The Singapore Economic Development Board's Survey of Business Expectations of the Manufacturing Sector provides some interesting insights.

Over 71% of the manufacturers polled expect business conditions to remain the same in the April to September period as they were in the first quarter. Another 14% expect the situation to deteriorate while 15% say that business prospects will look up.

Overall, the outlook for the industrial property sector does not seem very bright. Colliers International, a major real estate company, expects industrial prices and rents to fall by 7% to 10% this year. 

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