Location will be a big factor as industrial rents moderate in 2020
The industrial sector is facing unprecedented challenges as the COVID-19 pandemic has disrupted supply chains due to lockdowns across the world. Global demand is contracting, taking a severe toll on the local manufacturing sector.
Industrial rents for most segments are projected to moderate in 2020.
Location will play a big factor in determining rental growth of different micro markets during this period. Factory rents and better quality industrial buildings, by virtue of being located in outlying locations, are expected to be more affected by the Covid-19 situation.
The majority of firms have been observed to have shelved their plans to relocate and proceed to renew the current lease instead, as businesses are unwilling to allocate any additional capex during this period. As a result, Cushman & Wakefield anticipates the volume of new leases to fall and for industrial rents to moderate. On a more optimistic note, the degree of rental moderation for warehouse rents is likely to be lower due to increased e-commerce activity and deliveries.
Christine Li, Head of Research, Singapore and Southeast Asia said “Covid-19 has brought about unprecedented growth in e-commerce activity as a result of controls on people movement on a massive scale. Given the increased demand for delivery of online purchases of fresh food, medical supplies and general essential purchases, cold chain logistics facilities will probably register heightened leasing activity moving forward.”
Positive Developments Despite Sombre Market
While the tone in the market was sombre due to the spread of the COVID-19 pandemic, there were nevertheless several positive developments during the quarter. In January, GrabFood launched its first cloud kitchen at Lam Soon Industrial Building. Spanning 6,000 sf, the centralized facility will enable F&B players to serve new areas by renting cooking space without setting up a restaurant.
In addition, German event organizer Deutsche Messe signed a memorandum of understanding with the Singapore Tourism Board and SingEx to host flagship manufacturing trade show Industrial Transformation Asia-Pacific in Singapore for the next five years. This will enhance and accelerate the adoption of Industry 4.0 technologies in manufacturers across Asia-Pacific. In addition, Deutsche Messe will set up its regional headquarters in Singapore due to the strategic geographical location and strong MICE ecosystem here.
Despite the plunge in oil prices, ExxonMobil has taken a long-term view and committed a multi-billion dollar investment to implement new technology at its integrated refining and petrochemical complex in Singapore. Once the facility is upgraded, it will create 135 jobs and its capacity to produce high-performance lubricant base stocks and cleaner fuels will increase by 48,000 barrels per day.
Real estate investments in the industrial sector recorded the second highest transaction volume of $606.8 million, a moderate decline of 22 per cent quarter-on-quarter. The main bulk of 1Q 2020 industrial transactions came from A-REIT’s purchase of a 25 per cent stake in Galaxis, A-REIT’s Gulab sale and the Biopolis 6 price and concept tender.
A-REIT’s purchase of Galaxis shows their interest and commitment to continue expanding their portfolio on business parks assets. Other transactions by A-REIT include the sale of 202 Kallang Bahru, the former Hyflux Building and the sale of 25 Changi South Street 1 to Hao Mart. These transactions were all in line with the company’s objectives to divest the assets whose head leases have expired. These sales were to end-users.
Brenda Ong, Executive Director and Head of Logistics and Industrial said “Investment sales for quality assets like business park and logistic buildings will still be of interest to many investors. For the moment, we do see a slowdown in vacant possession sales to end users as companies focus on operational issues arising from the disruptions to supply chains as a direct result of the Covid-19 situation. Many have put on hold their acquisition plans but we anticipate activity to return once the Covid-19 situation eases.”
Nevertheless, the long-term transformation of Singapore’s economy is still on track and the market should see more initiatives for deep tech startups, such as pharmbio and medtech, advanced manufacturing, and agri-food tech which the government has identified in its Budget 2020 statement. Industrial and logistics play a critical role to support the growth of these sectors.
Mr Paul Ho, chief mortgage officer at iCompareLoan, said, “industrial rents have always lagged behind rents for other commercial properties.”
He added, “any newer industrial properties sitting on Business 1 (B1) zones are increasingly sophisticated and looking like Commercial buildings. In fact you might not even tell them apart unless you refer to the URA Zoning Master Plan. Since industrial B1 zones are better located nearer to housing estates or regional centres and no longer mainly in Jurong, there is substantial advantage to break the zoning rules.”
Mr Ho noted that with the rolling out of the 5G wireless network and with Singapore’s being at the forefront of smart nation initiatives, the industrial market as a whole will remain optimistic.
The JTC industrial property market statistics showed that overall rents across Singapore’s industrial sector remained unchanged quarter-on-quarter (QOQ) in Q4 2019, the second straight quarter of no-change. For the full year 2019, industrial sector rents were up 0.1% year-on-year (YOY), mainly due to the improvement in business parks.
Moving forward, with overall industrial rents remaining unchanged this quarter, there is some optimism that rents may have bottomed out in the industrial market. Warehouse rents are poised to be more resilient, supported by a limited supply pipeline. Meanwhile, factory rents are expected to stay flat in 2020, suppressed by a prevailing vacancy volume of 40.1 million sq ft and a substantial amount of upcoming multiple-user factory stock.