Industrial properties back in play

By
/ EdgeProp Singapore
|
May 7, 2021 6:00 AM SGT
SINGAPORE (EDGEPROP) - Despite bumps in the road to economic recovery over the past few months, buying interest in the property auctions market has been relatively buoyant. Property auctioneers say that buying interest in industrial properties has rebounded over the past two quarters.
“Interest levels for industrial and commercial properties have returned to pre-pandemic levels. Last year, the industrial and commercial sector was greatly hit by the effects of the Covid-19 pandemic which saw many businesses gutter and employment rates rise [in Singapore],” says Joy Tan, head of auction & sales at Edmund Tie.
This caused many property investors to hold back on acquiring these assets. They were not deemed as good investments at the time amid difficulties in securing new tenants, and concerns over whether SMEs could sustain their business through the pandemic, says Tan.
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For now, B1 (pictured) and B2 industrial properties are more attractive investments compared to strata retail units, says PropNex’s Goh. (Picture: Samuel Isaac Chua/The Edge Singapore)
Sharon Lee, head of auctions at Knight Frank Singapore, notes that following the gradual easing of safe-distancing restrictions, and the return of physical auctions in 4Q2020, there was some pent-up demand which translated to seven industrial properties sold at auctions during that quarter.
“These seven industrial properties were each below 2,500 sq ft, making for relatively more affordable quantums of below $1.5 million. This likely appealed to end-users who bought the properties for owner-occupation,” she adds.
She points out that even during the two years before the pandemic, successes for industrial and commercial properties at auctions were few and far. According to research by Knight Frank, six industrial properties were sold at auctions in 2018, and this declined to four in 2019.
“The time taken for a bid to meet the reserve price was typically lengthy with prospective buyers preferring to wait and see, in order to get the best possible price,” says Lee.
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In 1Q2021, while only one industrial property was sold at auction for $808,000, six other industrial properties were sold outside of auction after pre-auction publicity, she says.

Spotlight on factory assets

Clarence Goh, head of corporate sales & auction at PropNex Realty, says savvy property investors have turned their attention to Business 1 (B1) and Business 2 (B2) factory units which have recorded relatively stable property values over the past few years, and tenancy demand has been picking up as businesses and industrialists search for space to operate in Singapore.
Under URA’s land zoning and development controls, clean and light manufacturing industries are allowed on plots that are zoned under B1, while general and special industries are zoned under B2.
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According to Goh, land that is zoned for B2 use typically comes with a 30- or 60-year leasehold tenure. The built-up space per unit also ranges from 1,400 to 1,700 sq ft, and has an average price of about $400 to $500 psf.
“As a result, the absolute prices for most of these tend to be within the comfortable range for owner-occupiers and investors,” he says.
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The industrial property at 17D Tuas Road was on the auction block at Knight Frank. (Picture: Knight Frank Singapore)
The auctions team at Knight Frank is marketing a B2 factory development at 17D Tuas Road. Based on the property listing, it has a guide price of $1.8 million ($110 psf). A mortgagee sale, the development is a JTC-built factory on a 5,292 sq ft plot with a 30-year leasehold tenure that started in 2006.
The building has a built-up area of 16,242 sq ft and comprises 20 units across two terraced factory buildings. The site is currently approved for use for marine heating, ventilation, and air-conditioning; as well as storage, warehousing and supply of marine equipment.

Industrial auction listings on the rise

PropNex’s Goh says: “Over the past few months, there has been an increase in the number of industrial properties appearing on auction lists and in private treaty sales. Owners have turned to auctions as the mode of sale because they are a more transparent means to transact these assets.”
This sentiment is echoed by Edmund Tie’s Tan, who notes that a few growing businesses may be keen on purchasing their own properties to save on rental costs in the long run. “With some B1 factories also allowing for partial office usage, businesses may decide to move some of their office functions from a commercial space into a B1 factory space, as the price for the latter is lower and thus makes more economical sense,” she says.
However, Goh says repeated occurrences of Covid-19 community transmissions within foreign worker dormitories have encouraged some business owners to search for factory space that can also double up as dormitory space for their own foreign workers.
“In some cases, subject to approvals, when a business buys an industrial space for their own use, they may also apply to accommodate some of the space for their employed workers as dormitory space,” he says.
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Some business owners are hunting for industrial spaces to double up as private dormitories for their foreign workers. (Picture: Albert Chua/The Edge Singapore)
He adds that it is a win-win situation for business owners — they acquire a business space for production and operations, and they get a relatively secure accommodation for their foreign workers without exposing them in the larger shared dormitories.
Tighter border restrictions between Singapore and Malaysia also means that many Singapore businesses with production operations in Johor must accommodate workers in Singapore to keep their businesses running. Non-essential travel between Singapore and Malaysia has stopped since March last year.
“As a result, it is boosting the demand for B1 and B2 factory units in Singapore among companies involved in light industrial works such as carpentry, tiling, plumbing and air-con maintenance,” says Goh.
He adds that the uptick in demand has encouraged many owners and investors holding onto factory properties to put up some of their assets for sale, since many believe that it is a good time to capitalise on buying interest.

Too early to call?

Despite the pick-up of buying interest in factory units at auctions, Knight Frank’s Lee says “it is premature to consider the buying interest as strong at the moment”.
However, there are some reasons for optimism given the heightened demand for factory space from the electronics cluster, against the backdrop of a chip shortage and the increasing use and maturing application of technology post-Covid-19.
Lee points out that some 25.7 million sq ft of industrial space is expected to be completed in the remaining nine months of 2021, of which single-user and multiple-user factory spaces make up 75% of completions. “With so much upcoming new supply in the market, it remains to be seen whether the buying momentum of industrial units at auction will continue, especially if asking prices of factory units are more than $1 million,” she says.
BLD-CIRCUIT-BREAKER-TOH-GUAN-DORMITORY - EDGEPROP SINGAPORE
With some 25.7 million sq ft in new industrial supply coming on stream this year, it remains to be seen whether the buying momentum of industrial units at auctions will continue, says Knight Frank’s Lee. (Picture: Albert Chua/The Edge Singapore)
Based on JTC’s industrial statistics for 1Q2021, both single-user and warehouse occupancy fell marginally by 0.1 percentage point. “This was contributed by project completions in the quarter, including six single-user factory completions in 1Q2021, although all were relatively small-scale, each below 0.2 million sq ft,” according to research by CBRE.
The consultancy estimates the upcoming supply of single-use factory space for the rest of the year to be at 8.58 million sq ft, the highest since 2017 due to completion delays in 2020 caused by the pandemic.
Lee notes that in 1Q2021, industrial listings across the auctions market declined to 38 listings, down from 60 listings in the previous quarter. “It is possibly due to successful auction sales in the previous two quarters, as well as several industrial properties that were sold outside the auctions market,” she says.
Of the 38 industrial auction listings last quarter, 25 were mortgagee-sale listings while 12 were owner-sale listings. “Based on these listings, it is currently a probable mixture of both forced and opportunistic selling,” says Lee.

Freehold or leasehold?

According to PropNex’s Goh, most industrial property auction listings over the past few months have been leasehold assets, and despite an increase in investment demand for industrial space, most owners are listing leasehold industrial properties for sale at auctions.
“Freehold industrial properties still tend to be favoured by investors over leasehold assets. Freehold factory spaces and developments are rare in Singapore, especially B1 properties that can be converted to B2 use. Owners of these assets are more likely to hold on to such properties,” he says.
Total units sold at auctions - EDGEPROP SINGAPORE
An example is a freehold industrial building at 11 Mandai Estate called Eldix which was developed by EL Development and completed in 2014. The commercial building is listed as a B1 industrial space for light industrial use, but according to the latest Master Plan, the plot is zoned for B2 use.
“In the case of Eldix, the development used to accommodate a nursing home on the ground floor — which is why it is listed as a B1 space — but the nursing home moved out a few years after completion. If the building can be converted to B2 use in the future, it is likely to attract higher resale premiums,” says Goh.
When Eldix was completed, units were priced at about $500 psf. Goh reckons that if the development is successfully converted, factory space there could fetch $700 to $800 psf if sold as B2-approved spaces.
Edmund Tie’s Tan says: “As it is with residential freehold properties, which can command a price premium of 10% compared to leasehold residential property with a balance lease of 78 years or less, freehold industrial units also tend to command a price premium.”
As an example, she says caveats lodged for commercial units sold at Oxley Bizhub, a 60-year leasehold commercial property along Upper Paya Lebar Road, have an average price of $364 psf. Just two buildings away is the freehold Paya Lebar 178, a commercial property that was completed in 2006, and is commanding an average price of $950 psf on the resale market.
But she points out that it is not true that leasehold properties may not have the same demand as freehold ones. “Investors looking to rent out their units will be more concerned about the sale price quantum rather than the tenure of the property, since rental rates are based more on location than on the balance lease,” says Tan.

Less attractive investments

According to Goh, some of the demand for attractively priced industrial properties has come from investors of strata retail units. “Given current market conditions, it makes more sense for investors to invest their capital in B1 and B2 strata factory units compared to strata retail units,” he says.
He adds that rental yields and capital gains for some strata retail units have been declining over the past few years, as many of these units were acquired at relatively high prices and there is a large supply of available strata units on the market.
Knight Frank’s Lee says while the broader retail market has picked up slightly compared to a year ago, recovery is uneven across submarkets and many retailers still face potential distressed sales, depending on their location and proximity to transport nodes.
She adds that potential investors and retailers are likely to “wait on the sidelines” for retail performance to recover islandwide to pre-Covid-19 levels, before considering purchasing small-sized, strata retail units due to the current price expectations of sellers.

Uneven recovery for strata retail

However, Tan says that so far this year, she has witnessed better demand for shop units, especially those priced below $600,000, because they are deemed to be relatively affordable for new investors, especially if the location and tenure are appealing.
For example, Edmund Tie’s auctions team sold two ground-floor retail units at the freehold mixed-used Le Regal in March 2021. The development is in Geylang and close to Aljunied MRT Station. A mortgagee sale, the pair of 108 sq ft units were vacant and came with in-built water point.
According to commercial resale caveats, one unit fetched $180,000 ($1,672 psf) when it was sold on March 25, while the other fetched the same price on March 30.
“Though recent transactions suggest the potential rental may be in the range of $700 to $800 a month, it is nothing to look down on because, due to its bite-sized quantum of below $200,000, the new owners will be looking forward to more than 4.5% rental yield while avoiding ABSD (additional buyer’s stamp duty) or GST (goods and services tax) for these units,” says Tan.
However, the market for strata retail units still faces an uphill recovery. “It is true some of these strata units have been a challenge to market, as the shopping mall they are in does not command good flow of human traffic without an anchor tenant. Such strata malls do not have a leasing manager to determine the tenant mix and thus lack a good mix of tenants to draw in regular footfall,” says Tan.

Mixed outlook

Edmund Tie’s Tan notes that in 1Q2021, the auctions market as a whole “has definitely shown improvement” in the sales volume compared to 2020, which was significantly affected by the disruptions caused by the effects of Covid-19.
Looking ahead, despite the economy being on the mend, Knight Frank’s Lee expects more listings will surface over the rest of the year, especially for the sectors hardest hit in last year’s recession.
“At the same time, some distressed commercial properties might be bought by corporate and private wealth investors in search of attractive opportunities for more unique properties, such as strata office space or landed homes, and SMEs buying business space for their own use,” says Lee.
In contrast, PropNex’s Goh expects auction listings for the whole of 2021 to be about the same as the year before. “The sales volume could be on a par with 2020. But as to the types of properties going under the hammer this year, we will see more retail units, followed by industrial units and residential properties,” he says.