THE bulls and bears of Singapore's industrial property market often reflect the pace of economic growth and the composition of the manufacturing sector. Since its post-independence days, the manufacturing sector in Singapore has evolved to be a key contributor to gross domestic product (GDP) at approximately 20 per cent with strong support stemming from the chemicals, electronics and precision engineering clusters in 2014.
In recent times, however, the Republic's manufacturing activities have slowed down due to the external and internal headwinds which this export-reliant nation is highly susceptible to.
The government has long recognised the need to boost the island's overall productivity and export competitiveness in the region to maintain economic growth. To this end, Singapore's manufacturing sector has been undergoing economic restructuring to shift the value-chain upwards to focus on higher value-added industries. More emphasis is placed on higher automation and less labour-intensive manufacturing activities as firms grapple with rising labour costs and lean manpower.
Post-Global Financial Crisis, the rapid recovery in GDP in 2010 was accompanied by a spike in manufacturing output. As one of the underlying demand drivers for industrial space, the increase in manufacturing activities propelled the demand for industrial space, as indicated by the positive net absorption islandwide. On the back of limited net supply, this translated to occupancy rates hovering above the range of 93 per cent until 2011.
Subsequently, demand for space began to soften from 2012. The softening is primarily attributed to three key factors - the hike in labour costs, rising competition from neighbouring countries that offer an alternative cheaper manufacturing base and weakening external demand from Asian economies, especially China. Cost containment became a top priority, which led to existing demand being mainly driven by renewals and consolidations.
On the back of rental and capital value escalations in 2011, the government introduced a slew of industrial property measures such as tighter occupation requirements for industrial space, seller's stamp duty, shortened land tenures, and ramped up supply through the Industrial Government Land Sales (IGLS) Programme to cool the market. This eventually resulted in a surge of supply which far surpassed demand from 2013 onwards.
Furthermore, a strong supply of industrial space is expected to be completed in 2015 and 2016. In the face of decelerating economic growth and contracting industrial output, it is likely that demand for industrial space will remain subdued in the near term, as the surge in supply corresponds to twice the amount of the 10-year average demand of 10.42 million square feet (see chart).
Given this supply overhang situation and less favourable economic conditions, it is imperative to explore other complementary uses for industrial space while adhering to existing JTC Corporation and Urban Redevelopment Authority (URA) guidelines.
Under URA guidelines, industrial properties are segregated for use by a 60 per cent-40 per cent quantum, where 60 per cent is predominantly used for core industrial activities and 40 per cent for ancillary uses. To obtain Written Permission for the 40 per cent ancillary use such as industrial canteens, showrooms and selected commercial uses, occupiers have to comply with the following requirements:
- Capping industrial canteens at 5 per cent of total proposed gross floor area (GFA) or 700 square metres, whichever is lower.
- Showrooms are only allowed to display products which are typically not transacted over the counter and are predominately delivered and installed off-site.
- Selected commercial uses include clinics, banking hall/ATMs, minimarts and fitness centres and are capped at 10 per cent of total proposed GFA per development or 200 sq metres, whichever is lower, on the first storey of the building only.
As long as the proposed ancillary uses conform to the above guidelines, it provides landlords with the flexibility to revamp the use of existing industrial space and widen the pool of potential occupiers.
In the past, industrial spaces were primarily used for core industrial activities namely, manufacturing and warehousing. However in 2004, the Economic Development Board (EDB) introduced the Warehouse Retail Scheme - an initiative which ended in 2007 - which led to megastores such as Ikea, Giant, Courts and Big Box operating in industrial locations.
Notwithstanding the short-lived three-year tenure of this initiative, in 2015, Gain City and NTUC FairPrice incorporated retail components into their industrial developments under the 40 per cent ancillary use.
While adhering to the 60 per cent allocation for warehousing, Gain City's Sungei Kadut development, for instance, sets aside 20 per cent for retail, and incorporates other uses such as offices, café, sky terraces, a children's play area and a diesel pump area. Consolidation of uses into one location enables industrialists to enjoy cost-saving benefits, which have been passed on to consumers. Gain City, in fact, reported 20 per cent in cost savings with its consolidation exercise.
Through a similar re-adaptation of industrial spaces, it is plausible to extend the same cost-saving benefits to entrepreneurs. For one, e-retailers could potentially benefit from a re-think on warehouse space usage. By designating 60 per cent to store e-retailers' inventories in self-storage, the remaining 40 per cent can be further proportioned to develop an all-encompassing pro-business environment with courier services, serviced offices, Wi-Fi-equipped cafés and showrooms.
A development that has adopted a similar concept is the Entrepreneur Business Centre, a self-storage and serviced office facility with ancillary uses, namely baby-care retail and delicatessen.
The purpose of incorporating Wi-Fi-equipped cafes and showrooms in industrial developments is to transform industrial estates into a one- stop e-commerce hub for startups.
Firstly, business operations and logistics are supported through having 24/7 wireless access, storing inventories in self-storage and having shared in-built courier services. Secondly, it attracts clientele as displaying products in showrooms creates an experiential retailing concept for consumers to touch and feel e-retailers' products prior to purchasing them online.
One retailer that offers this omni- channel retailing experience through the online-to-offline (O-2-O) concept is Decathlon, a sporting goods firm which only had an online presence in Singapore. The introduction of the Decathlon eXperience showroom has encouraged customers to have more hands-on interaction with the products before proceeding to purchase them online. Undeniably, this creates a cost-friendly working environment as it promotes the growth of e-commerce by compressing e-retailers' risks through reduction of overhead costs and lock-in periods.
GATEWAY FOR E-COMMERCE
There is strong support for Singapore to grow as an entrepreneurial hub. Firstly, more industrial spaces are being slated for entrepreneurial activities such as at JTC Launchpad @ one-north, and secondly, there is rising investment interest in Singapore's startups, especially in the e-commerce sector.
According to Techlist, 80 per cent of venture funds raised by Internet companies are being invested in Singapore where the beneficiaries are predominantly e-commerce players such as Lazada, Zalora and Reebonz.
This is not surprising as Singapore is ranked 14th on the 2015 Global Retail E-commerce Index, indicating the strong fundamentals which have established Singapore as the gateway for e-commerce.
According to Euromonitor International's June 2015 study on retailing in Singapore, Internet retail sales grew 12.5 per cent year-on-year to S$1.08 billion, while mobile Internet retail sales expanded even more significantly by 53.9 per cent to S$280.9 million.
All these indicate that Singapore's e-commerce sector is poised to expand further, which could potentially be the next underlying demand driver for the industrial market.
Leveraging on the aforementioned opportunities, the pool of end-users for industrial space may be extended further to include e-commerce startups. Previously, this group of users was hindered by barriers of entry such as high occupancy costs and inability to occupy the minimum GFA requirement in industrial developments. However, by consolidating uses and re-adapting the 40 per cent ancillary use, this creates a win-win situation for landlords, consumers and entrepreneurs.
In addition to injecting fresh demand for a muted industrial market, it creates a viable operating business environment for startups, thus promoting the development of the e-commerce scene.
Instead of depending on external trade and manufacturing to propel demand for the industrial market, widening the list of potential occupiers to startups may potentially inject life into industrial estates. That may be the solution to cost containment which businesses are seeking.
- Desmond Sim is head of CBRE Research (Singapore and South East Asia), and Yuki Suzuki is an analyst at CBRE Research