The full article can be found in The Business Times, Property 2018 Section, Page 22, Thursday, 28 March 2018.
The Singapore industrial real estate market has been in the doldrums in recent years. However, there are signs that the industrial property market is finally reaching the bottom of the price and rental cycle.
While the overall industrial property price index fell further in Q4 2017, the rate of decline has been slowing down. The overall price index slipped 5.7 per cent year-on-year in 2017, which was a significantly-smaller fall as compared to the 9.1 per cent year-on-year decline in 2016.
This trend is most evident in the price index of multiple-user factory space. After accelerating to a 2.3 per cent quarter-on-quarter decline in Q1 2016, the rate of price decline has been slowing since. In the last quarter of 2017, the price index slipped by a mere 0.6 per cent on a quarter-on-quarter basis.
There are also indications that the worst may be behind us in the industrial property leasing market. The overall industrial property rental index fell by a marginal 0.1 per cent quarter-on-quarter in the last quarter of 2017, which is a huge improvement from the 2.7 per cent quarter-on-quarter decline in Q1 2016, when the rental index fell at the fastest rate in the past 3.5 years.
In addition, the overall vacancy rate of factory space has stabilised at 11.1 per cent in the last nine months of 2017. This is mainly contributed by the stable vacancy rate of multiple-user factories and single-user factory space.
The government has reduced the sale of industrial land for strata development in recent years. This is evident from the sharp reduction in the number of industrial government land sales (IGLS) sites that are permitted to be strata subdivided launched since 2014.
The limited supply of big industrial sites sold in the past four years has consequently led to fewer strata-titled factories in the pipeline.
New drivers of industrial space demand
While the future supply of industrial space seems to be on a downward trend, there are reasons to be optimistic about the future demand for industrial space in the next few years.
The healthy demand for industrial space in 2017 was mainly fuelled by the steady improvement in Singapore’s manufacturing scene over the past two years. Manufacturing output has been increasing every quarter since Q1 2016.
In addition, the Singapore purchasing managers index (PMI) has been above 50 points since September 2016, which points to a steady growth in industrial activity in the near future.
The PMI is a forward indicator of Singapore’s manufacturing activity, where a reading above 50 is a sign of future expansion in the manufacturing sector.
With the rising emphasis on technology and automation, some firms are also changing their business models to incorporate innovative practices. This in turn contributes to a change in industrial space needs.
An example is farming, which is a land-intensive activity in many countries. To enhance productivity, some farmers in Singapore have begun improvising their practices and shifting towards indoor vertical farming.
Another example is integrated fish horticulture where fish farming is integrated with hydroponic vegetable farming. Such indoor farming is usually situated in industrial premises due to their stronger floor loading and lower property costs.
Moreover, from 2014, owners of single-user factories are allowed to lease out a maximum of only 30 per cent of their factory space, down from the previous 50 per cent.
One result of this policy shift is that some tenants from such factories would either rent units in a private multiple-user factory or buy their own strata-titled unit to use. This would lead to greater demand for strata units.
Presently, the multiple-user factory market is reaching an equilibrium, and it is neither a landlord’s nor tenant’s market.
In addition, the demand for industrial space is expected to pick up in 2018, due to improvements in business sentiments, growing strength in the manufacturing sector and healthy growth in the local and regional economies.
Assuming that the Singapore economy continues to expand at a healthy rate, the post-2018 future supply of industrial space may be insufficient to meet the new demand.
Hence, this would lead to a drop in the vacancy rate of industrial space. When vacancy rate falls below 8 per cent, the industrial market would become a landlord’s market.
The tightening supply of new industrial units for sale would also contribute to the industrial property price index reaching the bottom of the price cycle in 2018.
The stock of uncompleted strata units available for sale has been dropping steadily in 2017, from 1,967 units in Q1 2017 to 1,320 units in the last quarter of 2017.
This supply will continue to decline as there is a lack of major new industrial launches expected this year. As a result, the industrial property price index might start to recover as early as in the second half of this year.