Navigating the soft industrial property market

Singapore

GOVERNMENT intervention measures and Singapore's ongoing economic restructuring are softening the industrial property market acutely, and AIMS AMP Capital Industrial Reit (AA Reit) is feeling that impact, CEO Koh Wee Lih told reporters after a short property tour on Tuesday.

Which is why the real estate investment trust has taken measures to safeguard its bottom line and distributions to unitholders - by trying to pre-commit and lock in leases for longer periods, adding more profitable ventures such as data centres to its tenant mix and proactively renovating facilities to utilise untapped gross floor areas.

Singapore's productivity drive to move up the value chain and wean itself off unskilled foreign labour has been a slow, arduous and sometimes expensive process for companies here.

"The jury is still out on where (the economic restructuring) will go. We do hear from a lot of our customers that it's causing them a lot of challenges," Mr Koh said.

This is one reason why companies have become cost-sensitive and are taking a longer time to evaluate their business space needs, he added.

"There are still enquiries for space. It's just that compared to two to three years ago when our phones were constantly ringing off the hook, enquiries have slowed down somewhat. We still go out to market our properties, but we reach out six to nine months before (leases expire), in anticipation that businesses might need a longer time to decide," he said.

The other thing the Reit does to retain tenants is to roll out asset enhancement initiatives (AEI) - industry jargon for major property spruce-ups - to update its buildings to meet changing requirements and to keep the properties investment-grade.

"Everyone likes to work in a nice working environment. Particularly in a soft market, there is always this flight to quality. A few years ago, we already anticipated that there would be a slowdown, so we made an effort to slowly upgrade some of our properties. We can't do all 25 (in Singapore) at one go, but every year we pick a few and upgrade them. This year, it's 30 & 32 Tuas West Road's turn."

The S$42 million redevelopment plan is major. It will transform the two three-storey detached industrial buildings into a five-storey ramp-up warehouse facility. When completed, the occupancy rate will jump from 33 per cent to 100 per cent, with SGX-listed logistics solutions provider CWT as a master tenant. Its asset value will quadruple to S$61 million. Annual rental income will grow five-fold to S$4 million.

The pre-commitment of the space reduces uncertainty in the oversupplied market, where tenants may look elsewhere for cheaper alternatives. AA Reit said it tries not to build speculatively.

CWT is AA Reit's biggest tenant, contributing to over a fifth of its rental income. The Reit's strategic partnership with CWT, which also has master leases at 20 Gul Way, is one reason why warehouses make up about 35 per cent of its portfolio - making it the second largest ramp-up warehouse landlord here after Cache Logistics Trust.

Mr Koh believes that while many companies such as Ceva, Kerry, Keppel, DHL and DB Schenker have built or are building their own warehouses, the market is big enough for many players, especially with the e-commerce boom.

"In the long term, I am still pretty optimistic (about warehousing prospects). In the short term, a bit of supply has come up last and this year and will probably continue into next year, but come 2017, the supply really falls off a cliff," he said.

According to JTC, some 1.2 million square metres (sqm) of warehouse space will be completed from 2015 to 2016. This drops to 378,000 sqm in 2017.

The Reit is also looking to grow through acquisitions - including build-to-suit opportunities where it builds customised facilities for companies that prefer an asset-light strategy that allows them to use capital to grow their businesses instead. The Reit then leases the buildings to them on a long-term basis.

Then there is the traditional type of acquisition, which AA Reit is also seeking in Singapore and Australia, where its two sponsors - AIMS Financial Group and AMP Capital - are based. So far, its only Australian asset is a 49 per cent stake in Optus Centre in New South Wales, acquired in late 2013.

"It is always difficult to find new assets, but it's our job to look for them. Our sponsors also help us to look Down Under," he said. "There are deals in Singapore but we have nine Reits here (including stapled business trusts), so obviously there is intense competition."

The incentive to acquire local assets has also been slightly dampened by the removal of stamp duty concessions for the purchase of local properties from April this year.

Perhaps in this soft market, the little well-meaning actions count even more. Mr Koh believes in supporting small and medium-sized enterprises, and still meets tenants to understand their needs, hoping to retain them for the long haul. He said he considers this "one of the pleasurable parts of my job".