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The case for private investment in S'pore's industrial properties

Private developers can team up with end-users to propose innovative industrial space solutions and to seek lease flexibility options for government-owned leases.

AMID stringent government policies, private property owners require astute advisers to hunt for viable investment opportunities in a tight industrial property market. Singapore's industrial landscape has undergone notable shifts in ownership and policies over the past decade, as the economy progressed in diversity and value-added activity.

In the decade from 1997 to 2006, an average 34.3 per cent of island-wide available industrial stock was owned by public entities, and this proportion has fallen to around 24.9 per cent over the period from 2007 to the first half of 2016.

The asset divestment initiative by JTC Corporation to some private owners in 2008 and 2011, as well as the increased supply of industrial land for private investment from 2010 to 2013 have led to an increased proportion of private industrial stock island-wide. The initiatives back then provided more investment and development opportunities for the private sector.

To quell the escalation of industrial property rentals and prices that surged 27.2 per cent and 60 per cent respectively between 2010 and 2012 amid the buoyant property market (according to JTC's All Industrial Rental and Price indices), and to protect the needs of industrial end-users, the government has imposed more stringent policies in the purchase and sale of industrial properties, lease management, and assignment of JTC and HDB-owned industrial leases in recent years.

Following the implementation of the seller's stamp duty on industrial properties since Jan 12, 2013 and the Total Debt Servicing Ratio (TDSR) ruling from June 29, 2013, overall industrial prices have fallen 6.5 per cent from the peak in Q2 2014 to Q2 2016.

The marked fall in the total transaction volume of strata-titled industrial properties, especially for shorter leases of 60 years or less, is testament to the effectiveness of the policies to moderate industrial property prices.

While the government has been successful in curbing the speculative behaviour of retail-type investors who were active in the strata industrial market and HDB business space domains, the other tightened policies governing JTC-owned leases and the supply of industrial land may not have fully met the changing needs of a wider spectrum of end-users.

This has limited the investment and development proposition of such properties for private industrial developers and investors.

Current policies stifle regeneration prospects

The revised JTC sub-letting policy, since Oct 1, 2014, now only allows JTC end-user lessees to sublet up to 50 per cent of gross floor area (GFA) to non-related companies within five years after obtaining the first Temporary Occupation Permit (TOP) for the site, and up to 30 per cent thereafter.

The search for anchor end-user lessees to meet this sub-letting requirement has not been straightforward for existing and potential industrial owners, as such anchor lessees would also need to fulfil other assessment criteria. These include occupying a minimum 1,000 square metres (sq m) of gross floor area (GFA) - previous ruling was 1,500 sq m - and meeting JTC's assessment of value-added, remuneration per worker and skilled worker profile.

The pool of qualifying "anchor" end-users to fill the 70 per cent space could be under threat of shrinking in the medium term, as Singapore's manufacturing sector faces continuing headwinds in terms of demand, performance and appeal. More enterprises are said to be relocating out of Singapore in search of a bigger market potential and more affordable spaces.

Another case in point that reveals the current limitations for private investment opportunity would be lease assignment rules.

Top-up applications for certain JTC leases have met with onerous requirements from the authorities, such as having to pay high building premiums, having to increase the plot ratio to intensify land use, and perform further construction works which will result in significant investment cost outlays.

These lease obligations have somewhat stifled re-investment and regeneration opportunities, leading to lower land optimisation of some industrial land pockets.

The supply of new land sites under the Industrial Government Land Sales Programme (IGLS) over the last two years are viewed to be geared towards meeting the needs of end-user industrialists rather than for private developers seeking multiple-use industrial schemes. The increased proportion of smaller-plot, shorter-lease and B2-use type industrial sites available for tender under the IGLS has reduced multiple-use and higher-density development options for private developers.

The ramped up supply of shorter lease industrial spaces, if not receiving strong demand from the market for an extended period, could be seen as an under-utilisation of land resources. Demand for "smallish" and shorter tenure land plots under the IGLS programme are observed to be weakening, as evidenced from a fall in the number of bidders for sites that are B2 and below 10,000 sq m GFA (average 5.1 bidders per plot in 2014 versus 2.8 bidders in H1 2016).

Furthermore, the smaller shorter-lease tenure sites are not allowed to be strata sub-divided within the first five years from TOP and the space can only be sublet up to 50 per cent of total GFA. This added restriction reinforces JTC's support for large-occupier end-users, leaving little room for investment opportunities for the private developers.

Competition for tenants is also coming from the public sector, with the proliferation of large-scale industrial hubs developed by JTC, such as the JTC Furniture Hub @ Sungei Kadut, JTC Chemicals Hub @ Tuas South, and JTC Food Hub @ Senoko, which are positioned to draw specialised trades under one roof.

JTC's potentially higher participation as a developer in the near future could put greater pressure on private developers amid a tight market.

Opportunities for private owners

Against the onslaught of existing policies, limited land supply and the possibility of rising public industrial ownership, the strategy to acquire longer tenure or freehold private industrial properties could be a viable proposition for private owners with a long-term investment horizon, to ride out cyclical market movements and preserve capital asset value. An example is 38 Alexandra Terrace, a freehold factory space, which has changed hands four times within less than 10 years.

Private developers could also explore teaming up with industrial end-users to propose innovative industrial space solutions and to seek lease flexibility options with the authorities for government-owned leases. Such strategies could be better executed through the appointment of experienced property advisers who have the expertise and networks to forge winning partnerships between the public and private sectors.

  • The writers are, respectively, executive director and head, industrial; and director and head, consultancy & research at Knight Frank Singapore.