Research & Forecast Report

Singapore | Industrial4th Quarter 2013

Accelerating success.

Singapore’s industrial property market closed 2013 on a tepid note. Apart from the traditional year-end holiday lull, market sentiment and activity in 4Q 2013 was also affected by the effects of recent Government measures such as the Total Debt Servicing Ratio (TDSR) framework and industrialists’ continued cost-conscious stance.

“Singapore’s industrial property market closed 2013 on a tepid note. Apart from the traditional year-end holiday lull, market sentiment and activity in 4Q 2013 was also affected by the effects of recent Government measures... and industrialists’ continued cost-conscious stance.”

In the strata-titled industrial property sales segment, preliminary caveat records captured by the Urban Redevelopment Authority’s Real Estate Information System as of 7 January 2014 showed transaction volume falling for the second consecutive quarter as the effect of the TDSR (implemented in late June 2013) continued to affect sales. This has also led some prospective buyers (even if they are unaffected by the TDSR) to stay on the side-lines either in anticipation of a future price correction or to reassess their property investment strategy.

Specifically, the total number of caveats lodged for strata-titled industrial properties fell from 733 and 647 in 2Q and 3Q 2013, respectively, to 392 in 4Q 2013. Although the final number of caveats for 4Q 2013 is expected to be higher, it is not likely to lift the total sales tally of strata-titled industrial properties for the whole of 2013 beyond the 3,000-unit level. This means that the overall transaction volume in 2013 will have fallen by at least 30% from 2012’s record of 4,213 caveats.

Meanwhile, developers remained selective in their new industrial project releases in 4Q 2013. Besides the 96-unit freehold Tag.A located on Tagore Lane, new 30-year leasehold projects, where units were released for sale, include the 160-unit Woodlands Industrial Xchange on Woodlands Avenue 10 and the 100-unit Ace@Buroh on Buroh Crescent.

However, the fall in sales volume did not lead to any major downward adjustment in prices as most sellers generally held on to their price expectations in 4Q 2013. This is especially so for industrial properties with longer land tenures or those which are limited in supply.

“However, the fall in sales volume did not lead to any major downward adjustment in prices as most sellers generally held on to their price expectations in 4Q 2013.”

Notably, the average capital values of prime freehold warehouse space tracked by Colliers International continued to creep up by 0.3% and 0.5% quarter-on-quarter (QoQ) in 4Q 2013, to $661 per sq ft and $587 per sq ft, respectively, as such space remains scarce.

For prime freehold conventional factory space tracked by Colliers International, even though the average capital values eased for the second consecutive quarter, the rate of decline remain marginal at 0.1% and 0.2% QoQ for ground- and upper-floor space in 4Q 2013, compared to the respective 0.3% and 0.2% QoQ dip seen in the preceding quarter. This brought the average capital values of ground- and upper-floor prime freehold conventional factory premises to $715 per sq ft and $656 per sq ft, respectively, as of 4Q 2013.

When compared to 4Q 2012’s levels, the average capital values of both prime freehold warehouse and factory space as of 4Q

2 Research & Forecast Report | 4th Quarter 2013 | Industrial | Colliers International

2013 were still higher. However, the overall pace of growth in 2013 had slowed significantly from the strong double-digit increases recorded in 2012.

Specifically, the rate of increase in the average capital values of prime conventional warehouse space decelerated to 2.6% year-on-year (YoY) for both ground- and upper-floor space in 2013, from 2012’s annual gains of 10.5% and 13.0% for ground- and upper-floor space, respectively.

Likewise, the average capital values of ground- and upper-floor prime conventional factory space inched up by only 0.3% and 1.2%, respectively, in 2013, substantially lower than the corresponding 18.0% and 21.8% YoY increases recorded in 2012.

The greater stability seen in the movement of industrial property prices in 2013 can be attributed largely to the combined effects of Government measures introduced in recent years to rein in the real estate cost of industrialists. Besides ramping up the sale of industrial land, halving the maximum tenure of industrial sites sold by the Government to 30 years, mandating a minimum size of 150 sq m for strata-titled industrial units and releasing smaller sites with shorter-tenure sites targeted at industrialists looking to build their own facility, other recent measures included January 2013’s imposition of a Sellers’ Stamp Duty on industrial properties resold within the first three years of purchase to weed out speculative activity, and the implementation of the TDSR framework in late June 2013.

“The greater stability seen in the movement of industrial prices in 2013 can be attributed largely to

the combined effects of Government measures introduced in recent years to rein in the real estate cost of industrialists.”

Similar to the strata-titled industrial property sales segment, the leasing market was also less active in 4Q 2013, with activity revolving mostly around renewals and some relocation deals. Besides being the traditionally slower moving year-end period, the need to ensure compliance with the Government’s list of qualifying users for industrial space has continued to prolong the leasing process.

“... the leasing market was also less active in 4Q 2013, with activity revolving mostly around renewals and some relocation deals.”

Moreover, despite the uplift in economic sentiment in 4Q 2013, tenants kept a tight rein on business operating costs. Coupled with the heightened competition for tenants, particularly from recently completed strata-titled industrial developments like CT Hub, Atrix and Oxley BizHub 1 and 2, rents of older industrial properties came under pressure in 4Q 2013.

“… despite the uplift in economic sentiment in 4Q 2013, tenants kept a tight rein on business operating costs. Coupled with the heightened competition for tenants... rents of older industrial properties came under pressure in 4Q 2013.”

As a result, the average monthly gross rent of prime conventional factory space tracked by Colliers International reflected a slight decline in 4Q 2013, after having generally stayed on an uptrend for the preceding 16 quarters. Specifically, ground-floor rents dipped by 0.8% QoQ to $2.50 per sq ft, while upper-floor premises saw rents slip by 1.4% QoQ to $2.17 per sq ft as of December 2013.

Compared to 4Q 2012, prime conventional factory rents as of 4Q 2013 were up by 0.8% YoY for ground-floor space but unchanged for upper-floor premises. This represents the second consecutive year of moderation in rental growth for prime conventional factory premises, which saw respective annual gains of 4.6% and 4.8% for ground- and upper-floor space in 2012.

Source: Colliers International Singapore Research

Average Capital Values for Prime Freehold Industrial Space as of 4Q 2013

When compared to 4Q 2012’s levels, the average capital values of both prime freehold warehouse and factory space as of 4Q 2013 were still higher. However, the overall pace of growth in 2013 has slowed significantly from the strong double-digit increases recorded in 2012.

$587$656$661

$715

Factory(Ground Floor)

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3 Research & Forecast Report | 4th Quarter 2013 | Industrial | Colliers International

The prime conventional warehouse segment, too, experienced a 1.5% and 1.9% QoQ correction in the average monthly gross rent of ground- and upper-floor premises to $2.60 per sq ft, and $2.12 per sq ft, as of 4Q 2013, respectively. This resulted in the slight 0.4% and 0.9% annual declines in the average rents of ground- and upper-floor premises in 2013, which contrasted with the respective annual gains of 6.5% and 5.4% in 2012.

Over the same quarter, the average monthly gross rent of independent high-specifications (high-specs) industrial space softened by another 0.3% and 0.7% QoQ for ground- and upper-floor space, respectively. This is due to the continued slow take-up of space and the need to ensure that occupiers of such premises complied with the Government’s list of qualifying users. This brought the average monthly gross rents of ground- and upper-floor high-specs premises to $3.28 per sq ft and $2.93 per sq ft, respectively, as of 4Q 2013, which translated into the corresponding annual increases of 1.9% and 1.0% for ground- and upper-floor space.

Bucking the downward trend in rents in 4Q 2013 was the business park segment, which registered a slight 0.2% QoQ upside in the average monthly gross rent to $4.05 per sq ft. This brought the entire year’s rental gain to 3.6% – a reversal of 2012’s 1.3% YoY decline – on the back of higher rents achieved for newer and recently refurbished business park developments in 2013.

Starting from 16 October 2013, the HDB disallowed the assignment of industrial tenancies for new leases, and tenants must return the premises to the HDB for re-tender if they wish to exit from their businesses. A three-year window will be given to existing tenancies to help the lessees make business adjustments.

The JTC also revised its Assignment of Lease1 policy with effect from 15 November 2013. Industrial lessees are required to fulfil the investment and plot ratio requirements (if any) stipulated in the Building Agreement/Schedule of Building Terms/Agreement for Lease. Now, they are also required to occupy the leased premises for a longer minimum period of five years for properties with a lease balance of up to 30 years, and 10 years for properties that have more than 30 years of lease remaining, before they can sell the property in the open market.

Also with effect from 15 November 2013, the minimum occupation period (MOP) for anchor tenants in sale-and-leaseback arrangements has been extended. The lessee may assign/sell the premises to a third-party facility provider after the assignment prohibition period. This is provided that it leases back at least 50% of the gross floor area and a minimum of 1,500 sq m for an MOP of five years from the assignment date for properties on sites with up to 30 years of lease remaining, and for 10 years from the assignment date for properties with a remaining lease of above 30 years.

While lessees in most genuine sale-and-lease-back transactions will not be affected as the typical leaseback period is medium- to long-term, industrialists and third-party facility providers like real estate investment trusts (REITs)/developers who own industrial properties on JTC-leased sites will now be required to hold these properties for a longer period before they may sell them. As such, opportunities in the en bloc industrial property sales segment may decline and such sales activities may slow down in 2014.

On the strata-titled industrial property front, 2014’s transaction activity will depend on various factors including the United States’ quantitative easing policy and its ensuing impact on interest rates, the performance of the local economy and manufacturing sector, the price gap between buyers and sellers, as well as each individual project’s attributes and price point.

However, any downward pressure on the average capital values of prime freehold conventional industrial space is expected to be contained within 5%. This is in view of the fact that industrial properties with longer land tenure are expected to remain rare and more sought after by end-users and investors with a longer investment horizon. This is given that most of the new strata-titled industrial project launches in 2014 will be from recent 30-year leasehold industrial sites acquired from the Industrial Government Land Sales Programme.

“... any downward pressure on the average capital values of prime freehold conventional industrial space

Source: Colliers International Singapore Research

Average Monthly Gross Rents for Prime Industrial Space as of 4Q 2013

…the average monthly gross rent of prime conventional factory space tracked by Colliers International reflected a slight decline in 4Q 2013, after having generally stayed on an uptrend for the preceding 16 quarters.

Meanwhile, the Government has continued to tweak its policies to ensure the affordability and availability of industrial premises for genuine industrialists, with revisions to its lease assignment policies for industrial properties under the Housing and Development Board (HDB) and JTC Corporation (JTC) in 4Q 2013. These moves were intended to curb rising operating costs and speculation, ensure that industrial space remains affordable for genuine industrialists, and to better respond to recent trends in the industrial land market.

(Upper Floor)WarehouseFactory

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$4.05

$3.28$2.93

$2.60 $2.50$2.17 $2.12

4 Research & Forecast Report | 4th Quarter 2013 | Industrial | Colliers International

is expected to be contained within 5%.”

As for the leasing market, with economic and manufacturing sector prospects remaining mixed, and business operating costs (which includes real estate, labour, materials and utilities components) anticipated to stay high, industrialists are expected to remain cost conscious in 2014. Coupled with the estimated completion of over 20 million sq ft of new industrial space in 2014, this could place some downward pressure on the average occupancy rate and rents of industrial space over the forecast period.

Hence, high-specs and prime conventional industrial rents could fall by up to 3% and 5%, respectively, in 2014. However, business park rents are projected to remain relatively stable as even though landlords of newer and recently refurbished properties will continue to seek higher rents, rents of older properties, especially those with high vacancies, could face some downward pressure in 2014.

“... high-specs and prime conventional industrial rents could fall by up to 3% and 5%, respectively, in 2014. However, business park rents are projected to remain relatively stable…”

1 An assignment or transfer of lease refers to the transfer of estates, rights, title and interests in the property from the “Assignor or Transferor” (seller) to the “Assignee or Transferee” (buyer). The Assignment of Lease policy ensures that industrialists who have leased industrial land based on their proposed business plans remain committed to them for a sustained and reasonable period of time, while allowing lessees to exit on grounds of genuine business needs.

Copyright © 2014 Colliers International.

The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

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