Buoyant strata sales raise challenges

  ⋅ June 1, 2012 ⋅

 

The industrial property segment probably benefited more than the office and retail segments after investors were diverted to non-residential sales following the Government’s measures to cool the housing market last year.

A record 1,822 industrial units were transacted last year and the buying momentum continued into the first quarter of this year. The quarter saw 478 strata factory transactions, up about 21 per cent from the previous three months.

The popularity of industrial property as an investment derives from sound economic fundamentals and lower costs of entry compared to other property types.

The implementation of the residential property cooling measures has also made housing market transactions more illiquid and motivates investors to consider industrial properties.

As many strata industrial properties can also be used partly for offices, it appears that the demand base is fairly wide. Although the office use should be for related businesses or in approved office-cum-industrial spatial portions, there are some who may have bypassed the rules, creating a perception that such uses can be explored for new property owners and investors.

The past decade has nurtured numerous industrialists who are more financially confident in buying their own properties for business operations. In light of rising rentals, many businesses are looking to purchase industrial properties to have better control over business costs.

Conversely, there are some businesses that seek opportunities for “sale and leaseback”, such that the cash can be used for their core businesses. For some industrialists who want to expand regionally, this may free up funds tied up in local fixed assets to venture abroad.

Together these have contributed to ample buying interest and sellers’ willingness to part with their property.

Sound economic fundamentals, a lack of restrictions like those in the housing market and the low price quantum set the stage for strong strata industrial property buying last year and the first quarter of this year. But the run-up in prices may have superseded economic fundamentals in the short term, as the rents envisaged by investors may not pan out as the economy experiences challenges in an increasingly jittery global environment.

Also, any tightening in industrial property regulations will defeat the investment objective of those who are considering renting to non-legitimate users to maximise returns. These landlords will have to switch back to a smaller pool of tenants and may not see their investments justified, as the price paid for the property was in anticipation of renting to tenants with bigger budgets.

As such, investments in industrial properties are unlikely to result in supernormal profit.

Over the longer term, competition is also expected to increase among industrial properties as the cluster gains more market attention.

The “awakening” also sets the premise for new innovation and rejuvenation of industrial property offerings, especially those that have excellent primary attributes, such as proximity to new MRT stations completed along the Circle Line.

More industrial estates are also expected to be considered for possible rejuvenation. New buildings, especially those that create a niche for selected industry clusters and which may be able to achieve economies of scale by providing added infrastructure, will add on to the competition.

To attract or retain industrialists, owners of generic industrial properties will have to adopt flexible or competitive rental pricing.

An intent industrial property investor should critically examine the demand base of the property, be prepared to lease fundamentally to conventional technology-related tenants and understand competing new developments that may subsequently become “industrial property hotbeds’”.

Source : Today – 1 Jun 2012