Industry / Real Estate

Industrial Real Estate (Singapore)

Group Research / March 06, 2018

Photo Credit - AFP

Overall Outlook

We believe the outlook for Singapore’s industrial sector will remain soft in the immediate term and will only start to bottom out from 2018 onwards on the back of abating supply risk. The manufacturing sector’s recent recovery is fuelling expectations that demand could pick up in 2018 and bottom out in 2019, just as supply abates. However, the recovery is uneven as firms are still looking to consolidate or downsize their space requirements to remain cost efficient. Vacancy rates are expected to rise to 11% and bottom out only from 2019.

Manufacturing sector has been expanding. Singapore’s manufacturing sector is showing signs of a rebound in activity as the purchasing managers’ index (PMI) continued to record an expansion in December 2017. December PMI stood at 52.8, which indicates more robust business activities going forward and the 16th consecutive month of expansion in factory activity. The Singapore Institute of Purchasing and Materials Management (SIPMM), which compiles the PMI, said the latest reading was driven by a faster rate of expansion in new orders, new export demand, and employment.
Although the electronics sector recorded a dip of 0.3 point from November to 53.2 in December, it was still its 17th straight month of expansion. The dip, according to the SPIMM, was due to a slower rate of expansion in new orders, new export demand, output, inventory, and employment.

Demand

Demand surpassing supply. As of 4Q17, take-up for industrial space has exceeded the rise in supply, with a net increase in occupied space of close to 1.3mn square feet (sqft). It is expected that most of this space will be taken up progressively by end-user occupiers in the coming quarters.

We believe that demand for industrial space comes on the back of consolidation of operations to achieve higher operational efficiency. Hence, we expect the increased take-up in the single-user factory space to be at the expense of higher vacancy rates emerging from existing multi-user factory space, which some of the end-users are expected to vacate. The take-up rate should start to rise in 2018 if the expansion in manufacturing activities continues.

Supply

Year of consolidation in 2017; stabilisation in 2018. The industrial market is at the tail end of a spike in supply completions starting from 2014 and peaking in 2017. As such, landlords still face a competitive operating environment, but that should abate in 2018 when competition from new supply eases. We believe 2018 will be a year of stabilisation on expectations that the rise in new supply that came onstream in 2017 will need time to be absorbed.
Based on the latest JTC Corporation statistics, a total of 3.8mn square metres (sqm) or 40.9mn sqft of new industrial space is either under construction or in planning and projected to complete over the next four years, from 2018 to 2021. Of this, more than 40% of the space will be completed and operational by end-2018.
Among industrial types, the single-user factory space will see close to 1.5mn sqm increase in new supply representing a c.6% increase, the multi-user factory space will see close to 1.3mn sqm of new supply (c.12% increase), followed by warehouse space at c.7% (or close to 0.7mn sqm). The business park space will add another 0.2mn sqm; most of the space is pre-committed and thus, not an issue for existing landlords.

Forecasts

Industrial sector’s overall vacancy rates to remain at 11% in 2018; bottoming out from 2019 onwards. Taking into account assumed pre-commitment rates and projected new demand, and faced with an increasing supply outlook, the average vacancy rate is now 11.1% (as of 4Q17) and we expect further weakness until end-2018, before it bottoms out from 2019 onwards.

As the influx and pace of completions were skewed over 2016-2017, spot rentals fell 3% on average in 2017, except for business park space which grew c.3% in 2017. We expect rentals across the industrial, warehouse, and business park sectors to start turning up in 2018.

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Our In-House Experts

Derek TAN
+65 668 23716
derektan@dbs.com

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