Odd figures in industrial segment

Ku Swee Yong
Feily Sofian
/ Century 21, The Edge Property
November 6, 2015 4:00 PM SGT
Economic figures for the industrial and manufacturing sectors released in the past few months have been poor. Year-on-year, Singapore’s total trade has been declining every month for the last 15 months, since July 2014.
In terms of GDP, the manufacturing sector shrank 2.6%, 4.9% and 6% year-on-year in the first, second and third quarters of 2015 consecutively (Note: The third quarter drop is based on the flash estimate released by the Ministry of Trade and Industry on Oct 14).
The forward outlook is also gloomy. The Singapore Purchasing Managers’ Index (PMI) points to a contraction in the manufacturing sector for four consecutive months from 49.7in July, 49.3 in August, 48.6 in September and48.9 in October. A PMI reading above 50 indicates that manufacturing activities are expanding and a reading below 50 signals a contraction.
The index, published by the Singapore Institute of Purchasing and Materials Management (SIPMM), shows a reading of below 50, that is, a contraction, in nine of the last 12 months. As the PMI measures new orders, new export orders, inventory levels and production output, it provides an indication of manufacturing activities in the coming months. We can therefore expect fewer Christmas cheers from the manufacturing sector this year.
How is the industrial property sector?
Against a backdrop of declining manufacturing activities, the stock of vacant industrial space continues to increase, reaching 43.5 million sq ft of net lettable area in 3Q2015, a level not seen since the prolonged economic downturn in 2003. If you would like to have a sense of how much vacant space that is, you can try to imagine 43½ VivoCities.
A significant one-third of the vacant lettable area, or 14 million sq ft, lies in the category of “Multiple User Factory”, translating into a vacancy rate of 12.7%. This is the category in which many individual investors, handcuffed by the tough policies in the residential segment, have ploughed their monies into thousands of overpriced tiny industrial units since 2011. In other words, the vacant space in multiple user factories adds up to the equivalent of 14 VivoCities. That is a lot of space competing for small industrial tenants.
While macro indicators such as manufacturing GDP and manufacturing PMI look weak, data released by JTC for 3Q2015 showed a negligible 0.3% year-on-year decline in overall industrial property prices and a frictional drop of 1.6% year-on-year in industrial rentals. The increased vacant space and the weaker macro outlook have yet to translate into significant price discounts. As for rentals, perhaps landlords are willing to extend longer rent-free periods to maintain headline rents as high as possible. Somehow, official data seems to be unable to capture the price movements on the ground.
While the official data may run counter to our ground observations, what we do know is that the supply of new industrial space is increasing. We may expect 66.4 million sq ft of additional industrial space in the next three to four years, and almost half of that will be completed in 2016.
And interest rates are rising. So, many of the financially stretched landlords are going to get edgy. Coupled with a weaker global environment, it is a matter of time before official indices for transacted prices and rentals drop more significantly. In the meantime, optimistic landlords taking reference from official data will find it tough to secure tenants without discounting from the prices of one or two years ago.
Competitiveness of Singapore
After several years of rising costs associated with real estate, both SME and MNC industrialists are looking forward to some respite from increasing industrial prices. Lower industrial property prices might allow Singapore to regain some competitiveness in the international markets.
But on the other hand, our assumptions that the authorities prefer to maintain low prices for industrial properties might be wrong. Perhaps the authorities might be trying to keep prices steady instead. On Oct 29, HDB rejected the tender for an industrial site on Ubi Avenue 1, which saw five competitive bids, as “the prices offered were too low”. The land tender was launched on June 30and closed on Aug 25. In a long detraction from the norm, possibly owing to careful consultation among various government bodies and valuation experts, HDB announced its decision two months later to reject the bids.
Three questions come to mind: (a) Does this action overturn all the years of the government’s good work in maintaining Singapore’s integrity and transparency of land sales? (b) What happened to the oft-repeated lines by senior government officials that we need a strong land sales programme to temper runaway land prices to keep Singapore competitive? (c) Will government bodies reject land bids that are above valuation (as deemed by professional licensed valuation experts)?
We are uncertain about Singapore’s competitiveness, given current valuations. Our neighbours may be getting off to a slow start, but several are catching up with us on manufacturing and industrial policies and trying to swing more MNCs’ direct investments their way.
The Thai military junta, without having to fend off political bickering, has been hard at work improving economic policies. Thailand’s Board of Investment is constantly pushing for reforms to attract foreign companies to set up headquarters in the country. This year, the International Headquarters scheme replaces the Regional Operating Headquarters scheme. Fiscal incentives under the new scheme include 15 years’ corporate tax exemption on non-Thai income sources and lower income tax rates for expatriates. Non-tax benefits include allowing total foreign ownership of land and an unlimited number of expatriate hires.
In March this year, the Vietnamese government issued Resolution 19/2015 to reduce red tape and enhance business environment and competitiveness. The resolution aims to improve the processing time for the clearance of exports and imports of goods, business establishment, bankruptcy and tax payment period. It also aims to reduce the procedures and processing time for commercial disputes and registration of property ownership and place Vietnam in the top 50 countries for investor protection in 2016.
Vietnam will also be a key beneficiary of the Trans-Pacific Partnership trade deal, which was concluded on Oct 5. The terms agreed upon, which include a reduction in import duties in participating countries such as the US and Japan, are expected to boost exports and, in turn, benefit the garment, fishing, electronics and logistics industries.
Chart 1

Source: IE Singapore Media Release “Singapore’s External Trade – September 2015”

Chart 2

Source: IE Singapore Media Release “Singapore’s External Trade – September 2015”

What’s next for Singapore?
The slower growth in China’s economy and the weak growth in the US and our neighbours may cause further contraction and restructuring of the local manufacturing sector.
One certainty: Our manufacturing sector will upgrade to higher value products and activities to keep up with cost pressures and competition from our neighbours. These days, we are more likely to see investments in a $500 million pharmaceutical facility or a $100 million software development centre, but these high-value investments require very different types of industrial space. They are unlikely to take up space in existing multi-user factories. In fact, as we push for higher and higher value-added manufacturing activities, we will also be employing fewer and fewer workers per dollar of investment. For example, a data centre costing $150 million to build will require only 30workers, including engineers and technicians.
Then, what do we do with all the empty industrial space? And, as a possible extension to that, given the small numbers of high-value workers, what happens to the vacant residential space?
Going back to the Ubi Avenue 1 industrial land tender, which was rejected by HDB, could the reserve price have failed to capture ground sentiment, as evidenced by all five bids being lower than the reserve price? We believe the official numbers, which may be adopted in policymaking, may lag the situation on the ground. The numbers are expected to soften further in the next few quarters, reflecting year-on-year rental declines of around the 4%-to-8% level, or quarter-on-quarter declines of about 1.5%.
In any case, not awarding the land tender runs against the government’s intention to keep Singapore’s land prices competitive and relieve the pain of cost pressures on manufacturers.
Chart 3

Source: www.tradingeconomics.com, SIPMM

Chart 4

Source: URA, The Edge Property

Ku Swee Yong is a licensed real estate agent and CEO of Century 21 Singapore. His third book Real Estate Realities — Accommodating the Investment Needs of Today’s Society is a nominee for the Popular Readers’ Choice Awards.
This article appeared in The Edge Property Pullout, Issue 702 (November 9, 2015) of The Edge Singapore.