Industrial property market growing from strength to strength

SINGAPORE'S manufacturing sector looks well on target to grow by 50 per cent by 2030, in line with the republic's manufacturing 10-year plan. Last year, the manufacturing sector expanded by 13 per cent, outpacing expansion in the information and communications, and finance and insurance sectors which grew by 12 per cent and 7 per cent respectively.

However, manufacturing growth remains 2 -speed, characterised by pandemic-accelerated trends such as digitalisation and the life science boom. Sectors such as biomedical manufacturing, electronics and precision engineering have grown from strength to strength since the start of the pandemic whereas general manufacturing industries and transport engineering only started to recover in 2021 and remain below pre-pandemic levels.

Nonetheless, the Singapore industrial property market posted a strong performance in 2021, amid a tight supply situation as completion of new supply got delayed to 2022 due to pandemic complications. The overall industrial vacancy rate tightened to 9.9 per cent in 2021, a 6-year low. The overall industrial rent has continued to edge higher, rising by 2.0 per cent in 2021, the strongest growth in annual rents since 2013.

Singapore industrial property investment sales reached S$4.4 billion in 2021, more than double 2020's sales of around S$2.1 billion, reflecting strong investor demand for new economy assets.

Market outperformance to continue in 2022

Going forward, we expect another stellar year for the Singapore industrial property market.

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On a macro level, regional trade growth is expected to get a boost as the Regional Comprehensive Economic Partnership (RCEP) agreement takes effect in 2022. The RCEP is expected to increase world trade and world incomes by nearly US$500 billion and US$263 billion annually, respectively.

Ongoing geo-political tensions and an ongoing focus to diversify supply chains have also raised the attractiveness of South-east Asia as a manufacturing hub. China's zero-Covid policy could exacerbate supply chain disruptions, and we may see an acceleration of supply chain diversification.

Singapore, as the regional high-value manufacturing hub, provides a strong value proposition with its robust global connectivity, open economy and regional trade links, and is expected to flourish amid stronger regional trade flows.

Disparate performance across property types

Given favourable macro conditions, we anticipate broad-based rental growth for the industrial market, though growth prospects across assets will differ depending on factors such as property type, location and specifications.

City-fringe business parks, high-tech factories and prime logistics assets are expected to outperform in 2022, with rents expected to grow by 2-4 per cent. On the other hand, older factories, warehouses and outlying business parks would see slower rent growth of up to 2 per cent.

Below, we discuss some of the trends shaping the industrial market.

Business parks, high-tech factories to benefit from digitalisation, biomedical boom

A tech-fueled economy and ongoing digital transformation bode well for tech growth in Singapore. Indeed, tech companies are expanding headcounts rapidly and their property footprint is expected to increase in tandem.

Given the limited supply of Grade A offices in Singapore, some demand could gravitate towards the industrial market especially city-fringe business parks and high-tech spaces, where tech companies are eligible tenants.

Areas to watch would be Alexandra/Harbourfront, one-north, Science Park, Tai Seng and Kallang which are already underpinned by concentrations of tech, electronics and biomedical science (BMS) tenants.

The BMS sector will be another driver of demand. The sector has been growing even before the pandemic due to prevailing megatrends such as an emerging middle class in Asia, increasing populations, ageing societies and political pressure to expand healthcare services. The pandemic accelerated demand, and supply is rushing to catch up. Occupancy rates are especially tight at Biopolis, the BMS research & development hub in Singapore, estimated at over 95 per cent.

Given strong demand, future supply looks tight. Only 2 new major multi-user BMS developments will enter the market in the near term, namely Solaris @ Tai Seng (estimated to be completed in H2 2022) and Elementum in one-north (estimated for completion in H2 2023). Over the longer term, new BMS supply will come from the redevelopment of 1 Science Park Drive, which is scheduled for completion in 2025.

The growth potential of the BMS sector may encourage conversions of industrial properties into BMS-ready developments. Such opportunities would be more viable at Business Parks or Business 2-zoned spaces. As BMS lab spaces need to cater for the possible handling of hazardous materials, industrial developments near residential catchments may face more restrictions.

Besides existing business parks, industrial clusters with a strong BMS presence such as Kallang and Tai Seng would be potential candidates for BMS redevelopments. For example, American biotech company 10x Genomics has opened its manufacturing and commercial hub in Singapore, taking up more than 53,000 sq ft of space at the Solaris @ Kallang 164. Also, Kolam Ayer 2 cluster, an upcoming high-tech industrial precinct located in Kallang, will be anchored by a German medical device multi-national company.

Data centres remain red-hot

Singapore is one of the tightest DC markets globally with vacancy rates below 2 per cent. According to Cushman & Wakefield's Global Data Center Market 2022 report, Singapore ranks 2nd globally in terms of data centre attractiveness.

Underpinned by a high concentration of global tech companies and strong connectivity, Singapore is the premier data centre hub in the region, serving both local and regional demand.

While the moratorium on new DCs is expected to be lifted in Q2 2022, the tight supply situation could persist, with limited new supply coming into the market.

Singapore faces land and grid constraints as well as limited renewable energy options. This would be a limiting factor on new DC supply, given the global sustainability push. As such, Singapore DC assets will remain highly sought-after with strong capital value appreciation prospects.

Strong e-commerce growth to drive prime logistics demand

Since the pandemic, Singapore's online retail sales have soared, with S$5.7 billion clocked last year. This compares with only S$2.6 billion in 2019.

As online sales continue to grow, e-commerce and logistics players continue to look for prime logistics space suitable for their needs. Such space in Singapore remains limited and is estimated to be around 10-15 per cent of total warehouse stock. Overall vacancy rates for prime logistics properties have also remained tight at approximately 5.5 per cent as of 2021.

Given continued supply chain disruptions, business inventory stockpiling could persist which would fuel warehouse demand. We expect stronger demand for warehouses near key transport infrastructure such as Changi Airport and the future Tuas Mega Port in view of an expected growth in regional trade and demand for faster time-to-market.

Sustainability push to fuel flight to quality, redevelopment, sales

Though prospects for the Singapore industrial market look favourable, industrial landlords should not rest on their laurels. There is a flight to quality as demand gravitates towards newer and better-specification industrial properties.

An increasing focus on sustainability will accentuate this trend.

Towards this end, Singapore is increasing its carbon tax from S$5 per tonne currently to S$25 per tonne in 2024 and 2025 and S$45 per tonne in 2026 and 2027, with a view of reaching S$50 to S$80 per tonne by 2030.

However, the increase in carbon tax from S$5 to S$25 is a significant leap and would lead to higher energy costs. This would result in higher property service charges and higher operating costs for tenants. This is especially so for data centres, which have very high levels of energy consumption.

Faced with higher costs, tenants at older industrial properties may vote with their feet.

As such, building owners are expected to do more to lower their carbon footprint and future-proof their assets to cater to "green-conscious" demand. Developers and end-users holding ageing industrial assets with under-utilised gross floor area, would consider redeveloping or revamping their assets to achieve higher rents and mitigate the rise in operating costs.

On the other hand, end-users with no development experience may consider cashing out. Industrial precincts with ageing industrial stock and well-served by transport infrastructure, such as Tai Seng, Kallang, Ang Mo Kio and Jurong, could see heightened activities in 2022 and beyond.

Another bumper year for the industrial market

In sum, 2022 is expected to be another bumper year for the Singapore industrial market. While interest rate hikes and a potential China slowdown could dampen growth, ample liquidity and strong long-term growth prospects would propel industrial capital values and investment volumes further in 2022.

We could see more sale-and-leaseback as well as capital recycling opportunities as industrial end-users and owners look to catch the wave of euphoric energy in the industrial market. Private freehold industrial assets will be in greater demand, given their very limited supply. However, a widening gap between buyers' and sellers' expectations could limit successful deals. After all, it takes two hands to clap.

Brenda Ong is Head of Logistics & Industrial Singapore. Wong Xian Yang is Head of Research Singapore at Cushman & Wakefield.