Wave of asset rejuvenation to come in Singapore industrial real estate
Underutilised industrial developments are likely to undergo redevelopment or asset enhancement to capture new and high-quality occupier demand
DESPITE a heightened interest rate environment and slower economic growth, the Singapore industrial property market continues to see healthy growth. Sentiment in the manufacturing sector has picked up on the back of a pick-up in global manufacturing demand.
Singapore’s Manufacturing Purchasing Manager’s Index, a barometer of manufacturing activity, continued to expand in September, reaching 51 points. This marks the 13th straight month of expansionary activity and the highest reading in over three years.
In the third quarter of 2024, overall industrial prices and rents grew by 0.5 per cent and 0.3 per cent quarter-on-quarter respectively, based on JTC’s price and rental index.
This marks 16 consecutive quarters of rental growth, one of the longest consecutive streaks of growth since Q3 2008. For prices, 15 out of 16 quarters saw positive price growth.
Overall, industrial prices and rents have grown by a cumulative 20.8 per cent and 22.5 per cent, respectively since Q4 2020. While the growth in prices and rents is significant, it pales in comparison to the past – during the 17-quarter period of Q3 2004 to Q3 2008, industrial prices and rents cumulatively rose by 47.3 per cent and 59.5 per cent, respectively.
The run-up in prices and rents may continue as the global economy transitions to a lower interest rate environment, coupled with increasing intent and action from China’s government to revive its troubled economy.
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Lower interest rates should boost industrial rental demand, as occupiers would feel more confident to expand and relocate as capital expenditure constraints are lifted. Lower borrowing costs would also be positive for industrial capital values.
In September 2024, China recently unveiled its most aggressive stimulus measures since the pandemic to revive growth. While more work must be done, market confidence has grown.
“Chinese outbound investments are expected to grow as domestic conditions in their home market recover, and a portion of this is expected to arrive in Singapore.”
Chinese outbound investments are expected to grow as domestic conditions in their home market recover, and a portion of this is expected to arrive in Singapore. Since the pandemic, Chinese manufacturers have been looking to diversify their supply chains and explore new growth markets.
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And many regional industrialists and investors continue to use Singapore as a launchpad for their South-east Asia operations.
Industrial prices and rents not expected to spike
While Singapore’s interest rates are influenced by global interest rates, the rate of decline here is expected to be gradual. Singapore interest rates have already fallen in anticipation of rate cuts and are still significantly lower compared to the US.
New occupier demand is expected to increase, but this will be offset by falling demand from some industries, particularly from general manufacturing.
Some industrialists are opting to optimise their manufacturing footprint and relocating to other markets, where costs are lower.
“Industrial markets in key emerging South-east Asia markets are growing more competitive with developing infrastructure and fast-rising levels of modern industrial stock. This has attracted some industrial occupiers to streamline operations, which may lead to full relocation, or right-sizing in Singapore.”
Singapore remains attractive as a regional headquarters for high-value manufacturers, with a deep talent pool, robust intellectual property regulations and developed logistics infrastructure.
However, industrial markets in key emerging South-east Asia markets are growing more competitive with developing infrastructure and fast-rising levels of modern industrial stock.
This has attracted some industrial occupiers to streamline their manufacturing operations in the region, which may lead to a full relocation or right-sizing in Singapore.
Rejuvenation and value creation
We anticipate a wave of rejuvenation in the Singapore industrial market, fuelled by a few trends.
First, over the past decade, the bulk of industrial rent growth has been concentrated over the last four years, where overall industrial rents cumulatively grew 22.5 per cent from Q4 2020 to Q3 2024. This compares to only 6 per cent from Q4 2014 to Q3 2024.
This dynamic has resulted in a widening difference between existing passing rents at industrial buildings and current market rents. This is particularly pertinent for older industrial buildings with outdated specifications.
Secondly, occupiers are focusing on sustainability, where they seek energy-efficient buildings with green credentials to meet their sustainability objectives.
For example, Hong Kong-based real estate services and investment firm ESR Cayman has partnered with real estate investment and financing giant PGIM Real Estate to jointly redevelop beverage giant Pokka’s single-storey regional headquarters into a state-of-the-art five-storey building with sustainability features, designed to achieve a zero-carbon footprint.
Thirdly, with interest rates on a downward trajectory, financing costs are expected to come down as well, leading to lower cost of capital and more viable investment options. Also, more investors and developers are likely to enter the market with a view for value creation, and this could be met by asset owners who are looking to divest as they seek to recycle capital and deleverage.
Against this backdrop, we anticipate an incoming wave of rejuvenation where underutilised industrial developments undergo redevelopment or asset enhancement to capture new and high-quality occupier demand, particularly in new economy industries such as high-value manufacturing, technology, and life science, and to increase the productivity of the land.
Already, industrial investment sales volumes are poised to hit a three-year high, driven by Lendlease and Warburg Pincus’s acquisition of a S$1.6 billion portfolio of Singapore industrial assets. This marks one of the largest industrial deals in Asia Pacific.
As of Q3 2024, Singapore industrial investment volumes (for significant transactions greater than S$10 million) have reached S$3.2 billion, surpassing 2023’s full-year sales of S$2 billion.
Opportunities and limitations
Industrial plots with land tenure of more than 30 years are prime targets for value creation. Longer tenure industrial sites of more than 30 years are rare and may be able to attract a market premium. Over the last decade, JTC has released new industrial land of 30 years leasehold and below to keep industrial land costs affordable to end-users.
Private or non-JTC industrial land would have an added plus, as JTC industrial land may entail strict sales and leasing restrictions which can make it tricky to navigate for asset owners looking to divest.
The attractiveness of private leasehold land can be observed from recent transactions which includes 10 Toh Guan Road East and Admirax.
Industrial land suitable for strata subdivision would be highly sought after, especially those approved for food factory use. In a recent Industrial Government Land Sales exercise, a 32-year leasehold industrial food factory site attracted four bids, with a top bid of S$300 per square foot per plot ratio.
Opportunities can surface from sales-and-leaseback deals where the end-user can partner with a developer to redevelop an ageing facility to meet their operational and sustainability targets. Many industrial sites occupied by end-users may not have fully utilised their plot ratios as they were planned and designed years ago.
Investment stock can also come from industrial owner occupiers who have right-sized their operations in Singapore, due to a variety of reasons, such as changing work trends, cost considerations or streamlining of operations in the region.
However, some of these sites which were directly allocated by JTC could potentially face leasing and tenant restrictions which were put in place a long time ago in a different business environment.
With such restrictions in place, asset owners would be hesitant to invest in the asset, which increases the likelihood of the asset being “stranded” over time.
Given the ongoing rejuvenation and digitalisation in the manufacturing landscape, it might be timely to relook these industrial policies, as the value chain and cost considerations of many traditional manufacturing industries has changed.
Doing so would meet multiple goals: increasing the productivity of Singapore’s scarce land resources, greening 80 per cent of Singapore’s buildings (by GFA) by 2030 and ensuring that industrial buildings are retrofitted with technology to meet the long-term requirements of high-value industrialists.
Brenda Ong is head of Logistics & Industrial, Singapore, and Wong Xian Yang is head of Research, Singapore and South-east Asia, at Cushman & Wakefield
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