High industrial rents due to shortage of commercial space

⋅ July 13, 2012 ⋅

 

The debate over industrial property has been consistently grabbing the headlines in recent months.

Earlier this month, a news report highlighted a gap in data for industrial property. Apparently, some transactions were not captured in the Urban Redevelopment Authority’s Realis database due to incomplete information provided in the caveats lodged. As a result, they were not used in the compilation of official industrial price indices, which could mean an under-reporting of the actual price increases for such properties.

The missing data has to do with strata areas and usable floor areas, which are not the same. Strata areas, which can include void spaces within the unit, are usually provided by the seller but not the usable floor areas. That’s why the data for floor area is usually left unfilled.

The information gap is the latest of the many issues facing the industrial property sector. Since the middle of last year, many small and medium enterprises (SMEs) have been complaining of the high rents and prices for industrial space.

The debate continues until today even as there are early signs that rents for business park space and high-tech industrial premises are starting to fall, although they have held for conventional industrial space.

However, for many SMEs, rents cannot come down quickly enough. The dip in rentals is marginal compared to the run-up over the past two years. On the other hand, prices have continued to rise as cooling measures in the residential sector have encouraged cash-rich investors to divert more monies into the once unglamorous market of industrial real estate.

As the sector attracts investor interest, the Government has moved in to put a lid on prices and weed out speculative demand, pledging to keep a tighter rein on how industrial property is used.

A circular was sent to developers and lawyers stating that developers selling non-residential properties must insert in the option to purchase and the sale-and-purchase agreement a clause stipulating clearly the approved use of the unit sold.

Earlier media reports cited examples of unauthorised use of industrial space that included tuition centres, retail outlets and even churches. However, if we place ourselves in the shoes of some of these tenants, you will soon come to realise that the majority are driven to occupy industrial properties simply because there is a dearth of affordable commercial premises or cheaper alternatives.

This may be the reason why we do not hear of too many evictions.

In all my work travels within the South-east Asian region, I realise that in terms of real estate, Singapore is so unlike many cities in the region in one major respect.

These other cities have a lot more commercial space – of the type required by small businesses – as a percentage of the whole real estate sector. Rows and rows of shop houses or small offices usually line both sides of all major roads.

A quick glance of the Singapore’s Master Plan 2008 shows that the dominant colour in our land use map is dark purple – meaning that they are reserved for B2 heavy industrial use.

You can hardly see any patches of dark or light blue – the colours for commercial use.

While the plot ratios for commercial land are many times higher, meaning more floor space can be built on the same land size, most of the space designated for commercial use is still to be found mainly in the central areas where land costs are the priciest.

The data confirms this. Excluding hotel rooms, office space accounts for about 15 per cent of non-residential space in Singapore. Of this, about 92 per cent is in the Central Region, which occupies about a fifth of the land area in Singapore. Within the Central Region, 62 per cent of all office space is in the Downtown Core and Rest of Central which I estimate, occupies about a twentieth of the land area in the Central Region.

If we do not address this shortage of affordable commercial space – especially in the suburban areas – we can expect the unauthorised use in our light industrial premises to continue, short of a sharp crackdown and strict enforcement action. But will this do anyone any good? And where will all these bona fide businesses and organisations go?

Last month, under the Industrial Government Land Sales programme for the second half of this year, the tenures for all recommended sites were reduced to a maximum of 30 years from 60 years. The purpose of the cap is to help to make industrial property more affordable for industrialists.

How effective will this cap be in bringing down prices and subsequently rents? As highlighted by some, rents and prices are determined by demand and supply and not tenures. The absolute price quantum may come down but the price per sq ft price will may be unaffected. Actually, it is likely to go up as the product is now brought into the affordability range of a larger market.

At the same time, seasoned investors will prefer properties with longer tenures. They are investors after all. Isn’t property a long-term play? This will eventually result in higher demand for existing properties with longer tenures and so even higher prices.

By Colin Tan – Head, Research & Consultancy at Chesterton Suntec International

Source : Today – 13 Jul 2012