Manufacturing slowdown to temper rental growth, but demand for high-quality industrial assets to stay resilient

/ EdgeProp Singapore |
City-fringe business parks such as one-north (pictured) continue to be sought-after industrial spaces, along with prime logistics assets and high-tech factories (Picture: Samuel Isaac Chua/The Edge Singapore)
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SINGAPORE (EDGEPROP) - The Singapore industrial property market saw a broad-based increase in rents throughout 2022, continuing the upward momentum established last year. Rental indices of all industrial space rose by 2.1% q-o-q in 3Q2022, marking the eighth consecutive quarter of growth and bringing the total rental increase for the industrial market to 4.7% across the first nine months of the year, according to JTC data.
The steady growth comes amid an emerging emphasis on supply-chain resilience, says Sally Tan, managing director, industrial & commercial, at Savills Singapore. While the pandemic has prompted the need to stockpile necessities including food and medical supplies such as masks and gloves, protracted supply-chain disruptions have also prompted a broader shift in inventory management. “Manufacturers have switched from a ‘just-in-time’ inventory approach, aimed at keeping storage costs low, to a ‘just-in-case’ model, where higher quantities are produced to have a buffer of supply available,” Tan explains.
That, in turn, has supported healthy demand for warehouses. Year-to-date, warehouse rents have grown 5.5%, notes Lam Chern Woon, head of research and consulting at Edmund Tie. Similarly, multi-user factory spaces have chalked up rental growth of 5.4% year-to-date, bolstered by Singapore’s resilient manufacturing sector, particularly in the first half of the year. The industrial real estate market also saw sustained demand for higher-quality, modern industrial stock. “Amid a flight to quality, prime logistics assets, high-tech factories and city-fringe business parks continued to be sought-after, with rents and capital values rising in tandem,” Lam observes.
Savills’ Tan concurs, adding that the pandemic has accelerated the need for manufacturers to embrace automation and digitalisation, which has further supported the demand for higher-quality industrial assets.

Softer manufacturing outlook

Following a robust first half-year, Singapore’s manufacturing outlook has dimmed in recent months on the back of a slump in the electronics and chemicals sectors, as well as a volatile biomedical manufacturing industry. In October, Singapore’s manufacturing output contracted on a y-o-y basis for the first time in a year, falling 0.8%, according to data released by the Economic Development Board on Nov 25. The slower manufacturing output is expected to persist in the coming months, notes Lam.
Correspondingly, he anticipates softer industrial leasing demand from the impacted sectors. “The overall industrial sector’s growth is likely to be weighed down by the manufacturing slowdown,” he adds. Catherine He, director and head of research, Singapore, at Colliers, also points out that economic headwinds, such as inflationary pressures and rising interest rates, are propelling more industrialists to be cautious about their leasing plans.
To that extent, industrial rents are expected to exhibit a more tempered pace of growth in 2023. He is projecting overall rental growth of around 2%-3% next year, easing from the 5%-6% forecast for the whole of 2022.

‘Divergent performance’

Despite the softer manufacturing outlook, demand for industrial spaces, especially high-quality assets, is anticipated to remain healthy, resulting in a divergent performance across industrial property types, notes Cushman & Wakefield in its 2023 Singapore market outlook report. The consultant anticipates prime logistics, warehouses and city-fringe business parks to see full-year rent growth of 2%–3% in 2023, amid tight supply conditions and resilient long-term demand from e-commerce, life science and technology.
Meanwhile, conventional factories and outlying business parks are expected to see slower growth of up to 1% in 2023, given a higher supply pipeline. “Nonetheless, performance will bifurcate, as newer, higher-specification buildings outperform older stock,” Cushman & Wakefield adds.
Annual rental growth - EDGEPROP SINGAPORE
Source: Cushman & Wakefield
Growth industries such as the logistics, precision engineering and biomedical sectors are also anticipated to drive sustained growth for high-quality assets. In addition, food security has emerged as a key focus, propelling growth in industrial demand from food-related sectors.
Grame Bolin, CBRE’s head of occupier and leasing, industrial and logistics services, Singapore, notes that the government and supermarkets have been diversifying food import sources, contributing to an increased demand for food and cold-storage facilities. Savills’ Tan has also observed more leasing interest from food manufacturers and adjacent industries such as food packaging.

Tight supply to support market

Apart from resilient demand from various growth industries, a tight supply of industrial space will continue to bolster the market. While JTC is projecting an average annual supply of 1.2 million sq m (12.9 million sq ft) to come online from now until end-2025, Savills’ Tan notes that for 2023, the bulk of the supply is only expected to come in towards the end of the year, which she believes will support rents entering the new year.
In addition, Edmund Tie’s Lam highlights that rising cost pressures may lead to pushbacks in completion for some projects. Projects that have been pushed back include Bulim Square (from 2024 to 2026), JTC Space @ AMK (from 2023 to 2024), and Mapletree Industrial Trust’s multiple-user factory at Kallang Way (from 2022 to 2023).
A growing emphasis on supply chain resilience has bolstered demand for modern warehouse and logistics spaces (Picture: Samuel Isaac Chua/The Edge Singapore)
In any case, the continued lack of supply will bolster rents for high-quality assets, highlights Tricia Song, head of research, Southeast Asia, at CBRE. “In particular, for the prime logistics segment, near-full occupancy rates in existing properties and strong pre-commitment for upcoming projects will likely result in stronger rental performance,” she explains.
In response to the tight supply of high-specification industrial space, Colliers’ He believes more asset enhancements to ageing industrial stock could take place, which would involve improving the buildings’ efficiency or upgrading to meet green credentials.
Lam adds that such moves to future-proof properties are already being carried out by some landlords. In April, ESR-REIT began the $38.5 million redevelopment of its industrial property at 21B Senoko Loop, while Mapletree Industrial Trust is currently redeveloping flatted factories at 161,163 and165 Kallang Way into a high-tech industrial precinct.

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