Industrial leasehold prices plunged to 5-year lows in Q1

Prices for 30-year leasehold properties declined 3% in 3 years.

For the first quarter of 2018, the prices of 30- and 60-year leasehold industrial properties plunged to their five-year lows, Savills Singapore revealed. Prices for 30-year leasehold properties dipped 1.5% QoQ to $344 psf, whilst those for 60-year leasehold properties inched down by 0.6% QoQ to $442 psf.

These declines have pulled down the overall sales volume below their three-year averages, despite their 19.8% jump from last year to 2,421 transactions. Urban Redevelopment Authority (URA) data showed that total sales value hit $559.7m.

For the last three years, prices of 30- and 60-year leasehold industrial properties decreased at a compounded annual growth rate (CAGR) of 3.0% and 1.5%, respectively, whilst freehold properties stayed resilient with a 1.3% price appreciation.

Only the prices of freehold upper-storey factory and warehouse units in the Savills basket saw an increase of 1.4% QoQ to $684 psf.

Despite improved performance of the industrial sector in the past few quarter, the industrial market is expected to remain muted in the near term with slow take-up, the firm said.

Savills Research senior director Alan Cheong noted that the overall vacancy rate of industrial spaces is still on the rise and that there’s an upcoming new supply of 15.4 million sqft of industrial space in 2018. “Despite the improvement in manufacturing performance in recent quarters, the sector is unlikely to drive up rents for factory and warehouse space because the government is placing more emphasis on diversifying into new value-added and productive-growth markets,” he said.

The picture has quite improved for the rental market, however, Savills did not record significant improvement in the take-up for industrial space. The industrial rental market had 2,345 deals in Q1, 11.8% higher than the three-year quarterly average of 2,097 transactions since 2015.

Even if the factory vacancy rate eased 0.2 ppt to 10.8%, the take-up was just 205,000 sqft as the vacancy dip was partly affected by the removal of 51,000 sqft of factory stock. The warehouse rental market also deteriorated with a 0.2 ppt rise in the vacancy rate to 11.1% as occupied space decreased by 22,000 sqft in the quarter.

The vacancy level also worsened by 151,000 sqft of new warehouse stock being added to the market. “This flowed through to rents and was reflected in the third consecutive year of quarterly decline in the rental index of industrial properties,” Cheong added.
Whilst digital disruption in the retail sector may have shifted demand from conventional industrial to warehouse space, advances in technology have also had an impact on other industrial space segments including business parks and hightech spaces. The net absorption of business park spaces has been positive over the past four years.

However, demand fell by 344,000 sqft and raised the vacancy rate by 1.4 ppt QoQ to 14.9%. “The latter was mainly due to the record high vacancies at Changi Business Park (CBP) and International Business Park (IBP). As vacancy levels at CBP and IBP increased in 1Q2018, their respective median rents also slipped by 6.1% and 7.5% from last quarter,” Cheong said.

On the other hand, newer business parks such as Mapletree Business City and one-north achieved a comparatively healthy occupancy level. Cheong added, “This was likely driven by the relocation of businesses as office rents escalated. Nonetheless, the business park rental market was still restrained by the slow demand for older business parks.”

As such, the monthly average rent for business park space remained unchanged at $4.05 psf for the fifth consecutive quarter.

Savills noted that there were also positive spillover effects for the high-tech industrial sector. Reversing the downward trend of the last 11 quarters, rentals increased 1.8% YoY, and monthly average prime rents for high-tech industrial space went up 0.5% from last quarter to $3.31 psf.

“With the implementation of the Precision Engineering, Electronics and Energy & Chemicals ITM, the shift in focus within manufacturing could fuel the demand for high-tech and business park spaces instead,” Cheong argued. “Unfortunately, as a large swath of industrial space in Singapore is operated by local Small and Medium Sized Enterprises (SMEs) that cannot yet benefit from the new productivity drive, their business fortunes have not turned around.”

Savills concluded that industrial activity is a tale of two markets: with those in the electronics, pharmaceutical and high-tech sectors benefiting both now and moving forward, whilst SMEs continue to face strong headwinds.

“These growth industries, often housed on JTC allocated lands, or in buildings hived off to Real Estate Investment Trusts on long-term leases, have very little touch points with industrial leasing specialists, private sector landlords, or local SMEs,” Cheong explained. “Thus, their sterling performance is not felt outside their restricted circle of influence. This view is congruent with the view of our industrial leasing specialists who feel that the industrial market is still not out of the woods.”