Watch the froth in industrial property
Straits Times: Sat, Apr 28
AFTER a series of tough government measures to quell fast-rising prices in the residential property sector, suddenly all eyes are turning to industrial property.
The latest figures released by the Urban Redevelopment Authority (URA) yesterday have raised fears among property watchers that a bubble might just be forming in this once low-profile sector.
Prices jumped a robust 7.3 per cent in the first three months of the year, well up on the already notable 4 per cent increase in the fourth quarter of last year.
This strong demand has been attributed to the plentiful funds in the market and the series of residential cooling measures introduced since September 2009, diverting some investors to buying up factory and warehouse units instead.
And with prices surging at twice the pace of rental increases in the past year - which experts say hints at speculative froth - this is an area that the Government will surely keep a close eye on.
There are two clear groups buying industrial property. First, of course, are business operators looking for premises.
But the biggest concern if indeed a bubble does form - and burst - are small- time investors plonking their life savings into a factory space on the promise of capital gains and high rental yields. Should prices crash, they could get burnt badly, especially since prices are at their highest in almost 15 years.
Moreover, the industrial segment is known to be more volatile that the residential sector. If a sharp recession hits, such as in 2009 when the manufacturing sector shrank by more than half, tenants could pull out or go under, leaving the investor with a hefty mortgage to pay.
The key question is then what needs to be done to cool down the sector in the light of a possible bubble.
The Government is an old hand when it comes to cooling the property market. Tighter financing rules, greater land supply and new stamp duty have all been used to cool home prices.
But the industrial sector is a different animal altogether. Measures used for home purchases cannot be simply applied to factory and warehouse units.
Industralists, many of them small and medium enterprises (SMEs), often buy more than one industrial unit - one for their own use and the other possibly either to rent out or for expansion. Harsh measures that over-correct the industrial sector could end up hurting the economy as SMEs are the No. 1 employers here.
Some SMEs are cash-strapped and if the Government were to introduce measures that adversely affect their cash position such as lowering the loan-to-value ratio for industrial units, it could lead to lower job creation or higher job losses.
Still, the Government has already taken some steps to put a lid on prices and to weed out speculative investor demand.
For instance, since Jan 1, some new developments cannot be subdivided into strata units within 10 years of the temporary occupation permit being issued.
There is also a minimum size of 1,615 sq ft - said to be the minimum size needed for genuine industrial activities - imposed on strata-titled units and units in multi-user industrial developments.
Industrial land supply has been boosted in the government land sales programme. And in a bid to crack down on the unauthorised use of industrial space, the Government said developers selling non-residential properties - shops, offices and industrial units - must stipulate clearly the approved use of the unit sold.
These measures are mostly aimed at raising awareness among investors and preventing developers and agents from misleading investors unsure about the rules governing the industrial sector.
But these policy shifts require time to filter through so industrial prices and rents will not soften immediately.
Already, URA's data shows that there is a supply of a whopping 3.7 million sq m of gross floor area of factory space from projects in the pipeline, which will eventually take some heat out of the market.
Despite rents climbing 1.8 per cent in the first quarter, some experts expect declines of up to 3 per cent this year.
In the short-term, however, the industrial market is expected to be hot. The Government will have to decide how hot is too hot before taking some action that could have a big impact on the hard- earned savings of ordinary investors.
Source: The Straits Times
» Industrial units buck trend
Straits Times: Sat, Apr 28
PRICES of factory and warehouse space have defied the slowing real estate market to shoot up 7.3 per cent in the first quarter, almost double the pace of gains in the previous three months.
Rents were also up, gaining 1.8 per cent compared with the 0.4 per cent increase in the last quarter of 2011.
The robust numbers are in contrast to the residential and commercial sectors where prices and rents have either dropped or are flatlining.
Industrial prices are now 35 per cent above the peaks hit in the third quarter of 2008 and are close to 15-year highs, noted Colliers research and advisory director Chia Siew Chuin.
The fast pace of growth in this once-overlooked sector comes on the back of strong demand from end-users and investors keen on capital gains and high yields.
Industrial prices are also responding to the continuing interest in the sector from investors deterred by a slew of residential cooling measures.
Prices of shoebox industrial units - some as small as 50 sq m to 80 sq m - in particular have set benchmark prices over the past year, say experts.
Savills Singapore research head Alan Cheong cautioned that industrial prices appeared 'speculative' as they skyrocketed 26 per cent compared to a year ago, while rents surged 10.6 per cent. He said rising prices, which are being driven by liquidity flows in the market, low interest rates and residential cooling measures, will eventually compress yields.
But Colliers' Ms Chia also pointed to the recent tightening of development guidelines for industrial sites acquired through the government land sales programme as fuelling industrial demand.
One rule prohibits new developments from being subdivided into strata units within 10 years from the issue of the temporary occupation permit. The rule applies to selected sites near MRT stations and those decided by the Government.
There is also a minimum size of 1,615 sq ft imposed on strata-titled units and units in multi-user industrial developments. '(These) provided a temporary boon to the industrial property sales market, as some buyers brought forward their purchasing plan of new strata industrial units near MRT stations or new small-format industrial units before the supply becomes limited,' she said.
Businesses clearly remain positive about prospects despite the economic uncertainty, given that the net new industrial space leased hit a seven-quarter high of 2.98 million sq ft in the first quarter.
Rents were supported by relatively healthy occupancy rates of 93.5 per cent in the first quarter, according to the Urban Redevelopment Authority yesterday.
In sharp contrast to the industrial figures, private home prices dipped 0.1 per cent in the first quarter - the first fall in almost three years.
The decline had been tipped for a while, given the slowing pace of price increases over the past two years as the Government introduced five rounds of cooling measures. Prices have risen about 55 per cent from mid-2009 to now.
Housing Board (HDB) resale prices are stabilising, with a 0.6 per cent increase in the first three months of the year, slowing from the 1.7 per cent gain in the fourth quarter. Cash-over-valuation was also lower.
ERA Realty key executive officer Eugene Lim said resale prices have hit a ceiling and home buyers are attracted by the HDB's continued Build-to-Order (BTO) launches which offer a variety of flats in different locations.
The recent policy shift to allow 15 per cent of BTO flats in non-mature estates to be set aside for second-time HDB flat applicants has drawn more home buyers to this segment, he added.
Office rents dipped 0.5 per cent while prices remained unchanged, but shop space prices rose 0.2 per cent and rents inched up 0.1 per cent.
Nominated MP Teo Siong Seng is worried about a bubble forming in the industrial sector. He said: 'Many SMEs are being hit hard by the higher rentals and I really hope the Government looks into this issue of setting aside land for businesses. Market forces do not always work.'