Analysts say JTC price, rental indices give inadequate picture

Industrial prices, rentals continue to moderate in Q2 as occupancy slides

[SINGAPORE] Prices and rentals of industrial space continued to moderate in the second quarter, as occupancies hit lows not seen since 2007 amid an increased land and space supply.

JTC data released yesterday showed prices rising marginally by 0.7 per cent from Q1, compared to the preceding quarter's gain of 3.8 per cent. Year-on-year, prices rose 3.9 per cent in Q2, slower than the average increase of 18.8 per cent annually over the past four years.

Rentals have stabilised, dipping by 0.1 per cent in Q2, after registering a slight 0.4 per cent growth in Q1.

Year-on-year, they rose 5 per cent, still slower than the average 10.2 per cent increase annually over the past four years.

The increase in industrial prices in Q2 was partly driven by multiple-user factory space, whose prices rose by 2.5 per cent because a larger proportion of those transacted in the quarter were freehold properties compared to Q1.

This led several analysts to flag problems with JTC's price index which does not distinguish between different lengths of tenures. This may pose problems in future as industrial land tenures have been capped at 30 years, down from up to 60 years before, and shorter-tenure spaces tend to have lower selling prices.

Savills Singapore research head Alan Cheong said: "The index is still not satisfactory. We have to wait until JTC starts stratifying the index according to tenure and backtrack it."

Meanwhile, industrial occupancy rates fell for a third consecutive quarter by 0.9 percentage points to a seven-year low of 90.7 per cent from Q1.

Year-on-year, they were also down by 1.7 percentage points, from 92.4 per cent a year ago.

This came as industrial space released exceeded the rise in occupied stock during the quarter, which will likely continue. In the second half of this year, about 1.8 million sqm of space is estimated to come onstream.

After that, between 2015 and 2017, an average of around 1.6 million sq m of industrial space will come on every year, representing 3-4 per cent of the current available stock. It is also higher than the average annual supply of 1.3 million sqm and demand of 900,000 sqm over the past three years.

Chia Siew Chuin, director of research and advisory at Colliers, said the dip in occupancies of multiple-user factories to 87.3 per cent in Q2 - itself also a seven-year low - is cause for concern.

This happened because completed redevelopment projects in the private sector, from the red-hot 2010-2012 period when developers were plunging headlong into building strata-titled factories to feed speculators' appetite, have started coming onto the market, she said.

The government has since moved to clamp down on their permissible uses. "Now landlords, agents, occupiers want to be careful not to flout the regulations, so they go through a more stringent and lengthy process, which affects the lead time to a successful deal and eventual occupancy."

JTC's recent moves to limit the amount of space that can be sub-let may lead to similar caution and stringent checking processes for JTC premises and properties on JTC land, she added.

Savills' Mr Cheong believes that occupancy rates are more reflective of the state of the market, over rentals.

This is because a lot of vacancies are coming from some "speculative grade factories" boasting manufacturing-unrelated "extras" like air-con ledges, planter boxes, high ceilings and private enclosed spaces and which ask for rents north of S$3 psf. Most conventional spaces do not charge above S$2 psf.

The rental index, however, does not reflect their higher asking rents because transactions are not being closed at those prices, he said. He expects vacancy rates to further widen to double digits.

As more supply comes onstream, it will be the "run-of-the-mill" multi-tenant light industrial factories, properties without a strong positioning, or shorter-tenure factories that will suffer as there is already an ample supply of them in the market, analysts say.

But prices for buildings with better locations or specifications or with longer tenures will likely hold up better due to their scarcity.

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