Tuesday, September 29, 2009

Weak demand for factory space

Sales of industrial space are at their lowest since 2000, while rents slide, but the worst may be over

WHILE most economic indicators point to an improvement, the industrial property market remains depressed today as the weak business environment is likely to persist, with global demand still subdued. The first eight months of the year saw 436 industrial sale transactions, a drop of more than 45 per cent from the corresponding period last year, according to caveats lodged. This is the lowest volume since 2000.

Weak demand for industrial space continues to weigh on industrial rents and prices this year. The average monthly rents of Savills' basket of prime flatted factories and warehouses in central Singapore slid lower in Q3. Flatted factories saw rents slip to S$1.35 - S$1.65 per sq ft, from $1.70 - $2.00 psf in Q4 2008. Warehouses saw a slide from $1.70 - $2.10 psf at the end of 2008, to S$1.25 - S$1.55 psf.

High-tech industrial rents are also experiencing downward pressure as relocation of office users to high-tech industrial space slows down. Office users are now less inclined to relocate to high-tech industrial space as asking office rents in the CBD have fallen significantly and office landlords keen to retain their existing tenants are offering extras like rental concessions and fitting out costs. Consequently, average monthly high-tech rents fell from a high of S$2.50 - S$3.80 psf in 2008 to S$2.40 - S$3.20 psf recently. For instance, monthly asking rents of high-tech industrial space in city-fringe areas like Frontech Centre dipped from about S$4 psf in Q1 to S$3.60 per sq ft in August.

Meanwhile, average prices of strata flatted factory space (leasehold) in the central industrial cluster and outside the central cluster declined from their peaks of S$300 per sq ft and S$260 per sq ft in Q2/2008 to S$220 per sq ft and S$210 per sq ft respectively. Similarly, the average price of freehold flatted factories and warehouses declined from a peak of S$350 - S$500 per sq ft in Q2 2008 to S$200 - S$320 per sq ft respectively.

Recently, a number of Reits were able to leverage on the improved market sentiment and raised funds to shore up balance sheets as well as to capitalise any future opportunistic acquisitions. Even so, declining industrial rents and prices mean that deleveraging remains the Reits' top priority, largely driven by asset devaluation and the ensuing rising gearing ratios. Besides refinancing, the Reits are concerned with retaining their existing tenants to ensure steady cashflow to their unit holders. This is especially so with a sizeable amount of industrial space (31.3 million sq ft) expected to enter the market over the next 18 months.

In addition, it is understood that some head tenants who inked sale and leaseback agreements with the Reits some years ago are not renewing their leases on expiry. Therefore, more industrial space from Reits may be available in the market soon. For example, Ascendas Reit (A-Reit) reported that it had an industrial property located at International Business Park repossessed after the tenant failed to meet its lease obligations. Likewise, a Reit-owned industrial property located in the Tai Seng area is reportedly up for lease after the head tenant opted not to renew the lease.

The macro picture

In terms of investment sales activity, the only notable transaction so far this year was by A-Reit. It acquired a 149,392 sq ft 99-year plot of industrial land in Kim Chuan from SingTel for S$16 million or S$45 per sq ft per plot ratio (ppr). A-Reit will build a nine-storey high-tech building with a gross floor area (GFA) of 353,723 sq ft and lease it back to SingTel for an initial period of 20 years.

This is the first acquisition by a Reit since Q2 2008. The volume is significantly lower than last year which saw S$700 million worth of deals done, albeit with the majority of them concluded in Q1 2008. While the credit crunch has eased, the number of potential acquisitions by Reits is not likely to surge given the still fragile economic outlook.

Singapore continues to position itself as an R&D and biomedical manufacturing hub. Active efforts to attract manufacturing investment into Singapore should bode well for the industrial property market as a whole and the science/biomedical parks in particular.

According to the Economic Development Board, biomedical companies from around the world invested more than US$500 million into Singapore in 2008, while research and development spending exceeded US$760 million. Japanese drug maker Takeda launched its regional headquarters and regional clinical coordination. GlaxoSmithKline opened a S$600 million vaccine plant while Agilent Technologies set up a new life sciences manufacturing facility.

Furthermore, the manufacturing sector is starting to look up after posting several quarters of negative growth. Manufacturing saw its first positive growth of 49.5 per cent in Q2, spurred by a surge in pharmaceutical output and increased inventory restocking in the electronics sector. At the same time, the August reading of the Singapore Purchasing Managers' Index of 54.4 indicated that the manufacturing sector has expanded for the fourth time after contracting for eight consecutive months. The positive indicators, coupled with the upward revision in the GDP forecast by the Ministry Trade and Industry from between -9 and -6 per cent to -6 and -4 per cent, reinforce the general belief that the worst of Singapore's recession is over.

The writer is Director, Industrial, Savills Singapore

Source: Business Times, 29 Sep 2009

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