Economic headwinds may moderate industrial rents in 2020

Economic headwinds may moderate industrial rents in 2020

SINGAPORE (EDGEPROP) - Industrial real estate rents in Singapore were generally stable in 2019, although the sector was weighed down by oversupply from preceding years, says Christine Li, head of research, Singapore and Southeast Asia, at Cushman & Wakefield (C&W).

Tricia Song, head of research for Singapore at Colliers International, agrees. She says that compared to 2018, the overall industrial property market has shown “clearer signs of stabilisation, with both rents and vacancy rates remaining relatively stable in the year to September”. Both net demand and net supply are expected to have increased in 2019.

Top industrial investment deals in 2019

 

But looking ahead, Li says the industrial outlook for 2020 could be gloomier compared to this year. She says global macroeconomic factors, such as slowing economic growth in the US, the EU and China, is likely to have a negative impact on Singapore’s economy in 2020. The subdued global economy is expected to moderate industrial rents next year, she adds.

 

This year, close to 12.5 million sq ft of net new industrial space is expected to have been completed, which is more than twice the 5.84 million sq ft of net new completions in 2018, says Song. Net new demand is also expected to have increased by 50% y-o-y to 11.0 million sq ft in 2019, she adds.

For 2020, the largest new industrial development that will be completed is the Defu Industrial City at Defu Street 1. JTC’s flagship stackup complex at Defu Industrial Park will have a total gross floor area (GFA) of 3.52 million sq ft. Other sizeable new industrial developments in 2020 include JTC’s TimMac @ Kranji boasting 1.54 million sq ft in GFA, and JTC Bedok Food City with 1.13 million sq ft in GFA.

Selected upcoming multiple-user factory & warehouse projects for 2020

 

Over in the one-north business park district, homegrown gaming hardware company Razer is expected to open its purpose-built, 207,743 sq ft headquarters building next year, while ride-hailing giant Grab is due to move into its 387,000 sq ft purpose-built headquarters building by 4Q2020.

Based on CBRE Research’s basket of industrial properties, factory and warehouse rents remained steady at $1.57 psf per month (pm) and $1.58 psf pm respectively in 4Q2019. “Looking ahead, warehouse rents are expected to be more resilient, supported by a tight supply pipeline,” says Desmond Sim, head of research, Southeast Asia, at CBRE.

But he adds that industrial occupiers were looking for premises with higher specifications and better efficiency. This contributed to a two-tier leasing performance by the factory segment in 2019, as industrial developments with higher specifications outperformed older, conventional industrial buildings.

“The 10.5% vacancy [in the factory segment] in 3Q2019 included a growing pool of vacant, ageing industrial stock of about 53.85 million sq ft. This spurred several landlords to undertake asset enhancement initiatives on older industrial stock in a bid to unlock value by repositioning and redeveloping assets with under- utilised gross floor area,” he says.

According to Colliers, these enhancements include increased power capacities, high-floor loading capability, modern ventilation and cooling systems, higher ceilings and better loading bay facilities. Redevelopment could also enhance connectivity between adjacent buildings and to transportation nodes.

According to Song, landlords feel it is the right time to adopt smart features such as automation and artificial intelligence to improve productivity and space efficiency, and reduce operating costs.

In general, leasing demand in 2019 was driven by renewals and relocations of companies in the third-party logistics, high-tech manufacturing, and chemicals sectors. The electronics sector took a backseat in 2019 when the US-China trade war escalated, and the sector was also hit by an economic dispute between Japan and Korea, CBRE’s Sim says, adding that some industrialists are taking a cautionary stance and limiting expansion plans.

According to Colliers, third-party logistics companies, transport agencies, e-commerce, and manufacturing companies were the top occupiers of warehouse logistic spaces this year. Companies in these sectors accounted for close to 74% of occupied islandwide warehouse space.

 

High-spec premises such as business parks also recorded a two-tiered leasing performance in 2019 as the market split between city-fringe and suburban submarkets. City-fringe business park rents climbed 0.9% y-o-y to $5.85 psf pm, but suburban rents fell by 1.3% y-o-y to $3.75 psf pm, based on JTC statistics.

“We continue to see a flight to quality in the business parks sector,” says Colliers’ Song. “We observe that new business park spaces near MRT stations in the city fringe continued to attract healthy demand, while those older and further away from MRT stations located in the suburbs faced more difficulty in finding tenants, despite lower rents.”

The biggest deal of the year was Mapletree Commercial Trust acquisition of Mapletree Business City II from its sponsor Mapletree Investments for $1.55 billion. (Picture: Samuel Isaac Chua/The Edge Singapore)
The biggest deal of the year was Mapletree Commercial Trust acquisition of Mapletree Business City II from its sponsor Mapletree Investments for $1.55 billion. (Picture: Samuel Isaac Chua/The Edge Singapore)

 

She adds that the rent disparity could widen going forward, as centrally-located business parks with good amenities are expected to record rental growth, while rents in older business park spaces could remain flat over the next few years.

C&W’s Li says that “with office rents near the peak, cost-conscious occupiers are choosing to locate at business parks as an alternative to the CBD”. The segment saw improved absorption of 452,000 sq ft during the first three quarters this year, she says.

“The specs of newly completed business parks are almost no different from that of Grade-A offices which can compete for the same tenant pool if such tenants qualify for both business park and office spaces. That could help to put a lid on the rental upside should there be more decentralised office supply in the pipeline,” Li adds.

However, decentralised office supply does not necessarily cannibalise the business park demand, as they offer different specifications, eco-systems and different value propositions for different types of tenants, says Colliers’ Song.

 

Industrial investment activity has been relatively healthy in 2019, clocking in deals worth about $2.99 billion. The biggest deal of the year, in terms of transacted prices, occurred in November when Mapletree Commercial Trust acquired Mapletree Business City II, a premium campus-style business park development, from its sponsor Mapletree Investments for $1.55 billion.

The second largest deal was in September, when Keppel DC Reit acquired a 99% stake in Keppel DC Singapore 4 for $381.1 million. The Reit also acquired a second data centre, 1-Net North DC, for $201.8 million. In November, Ascendas Reit acquired two business-park properties, Nucleos and FM Global Centre, from its sponsor CapitaLand for a combined value of $380 million.

In April this year, CapitaLand sold the group of companies that own and manage the self- storage business StorHub, for $179.5 million. This comprises StorHub’s portfolio of 12 self-storage properties with a total lettable area of about 800,000 sq ft.

The largest industrial leasing deal in 2019 was Google’s expansion into Alexandra Technopark, taking up 344,100 sq ft (Picture: Samuel Isaac Chua/The Edge Singapore)
The largest industrial leasing deal in 2019 was Google’s expansion into Alexandra Technopark, taking up 344,100 sq ft (Picture: Samuel Isaac Chua/The Edge Singapore)

 

Meanwhile, the largest industrial leasing deal in 2019 was Google’s expansion into Alexandra Technopark, taking up close to 344,100 sq ft of industrial space. The development is adjacent to Google’s Asia-Pacific headquarters in Mapletree Business City II.

Another notable leasing deal occurred in January when e-commerce firm Shopee leased all 240,000 sq ft at 5 Science Park Drive, a redevelopment of the former Fleming and Faraday buildings by Ascendas-Singbridge, for its expansion needs.

 

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As construction moves to factories, builders deal with new costs and tech

As construction moves to factories, builders deal with new costs and tech

(Oct 9): When construction company BBR Holdings (S) embarked on the building of the North Hill residential halls in 2014, there was a lot of scepticism that the company would be able to complete it.

"Some of our own staff thought it was not possible. We had a project engineer who thought we were doing something crazy and said he had better not get involved,” says John Mo, managing director of BBR’s wholly-owned subsidiary BBR Construction Systems.

North Hill is a cluster of high-rise dormitories in Nanyang Technological University. It is also Singapore’s first high-rise public project built using the Prefabricated Prefinished Volumetric Construction method. PPVC is a Lego-like building method that involves manufacturing free-standing modules — complete with finishes for walls, floors and ceilings — in factories.

In BBR’s case, entire rooms were produced in a manufacturing facility. These modules were installed in a building at the construction site.

PPVC can reduce the time needed to build a high-rise apartment by about 15% while raising labour productivity by about 40% and improving efficiency. But as Mo’s story illustrates, companies face resistance initially when they adopt the technology.

Even for BBR, which has since proved its critics wrong, challenges persist. PPVC is about 15% more expensive than traditional on-site construction, Mo estimates.

Depreciation costs for PPVC factories have also weighed down the company’s most recent earnings, partly contributing to a 20.4% y-o-y rise in administrative costs for 2QFY2017 ended June 30.

Mo is gung-ho enough to endure the short-term pain of embracing PPVC. And more firms have started coming on board as the Singapore government pushes for greater adoption of technologies like PPVC.

However, companies have also voiced concerns about steep upfront costs amid weaker construction demand.

 

Factories the way forward

Globally, construction companies are already embracing this trend, called Design for Manufacturing and Assembly (DfMA). It involves bringing contractors and designers together to plan the manufacture of the units required for assembling the entire building.

The shift involves an alphabet soup of technologies. Instead of 2D drawings, architects and contractors use Building Information Modelling (BIM) to visualise a building in 3D for advance planning.

The Building and Construction Authority (BCA) is also encouraging contractors to use advanced precast technology to mass-produce elements such as beams and walls. And it wants more projects to use mass engineered timber and structural steel, both of which can be assembled in factories.

Speaking to The Edge Singapore at an industry seminar in August, BCA CEO Hugh Lim estimates that 10% to 15% of construction companies have adopted DfMA technologies so far. He aims to raise this to 40% by 2020.

Currently, about half of Government Land Sale sites require the use of PPVC. In September, the Housing and Development Board announced that it would adopt concrete PPVC in 35% of its projects over the next two years.

Such targets should help push local firms to invest in and adopt new technologies. But companies point out that it is being implemented at a difficult time. The construction sector contracted 5.7% y-o-y in 2Q2017 due to a fall in both private and public sector construction output.

 

Mixed reactions amid challenging outlook

Pek Lian Guan, CEO of construction firm Tiong Seng Holdings, is optimistic about the shift to DfMA. “We can’t call our work construction anymore; I think we have to call it ‘manufacturing construction’.”

Like BBR, Tiong Seng was an early mover in DfMA. A former BCA board member, Pek started looking into precasting technologies in the 1990s. In 2012, his company spent $36 million building Singapore’s first Integrated Construction and Prefabrication Hub (ICPH) specialising in precast. Two years later, it started building its own PPVC solutions.

  

Tiong Seng Prefab Hub

Source: Tiong Seng Holdings

 

Pek acknowledges that the transition can be challenging. “In Singapore, it’s not that easy to build a factory. Even if you have the money, you may not get the land. The [construction] process you are trying to bring to the factory must also have sufficient volume for you to justify this move,” he says.

Pek predicts that while contractors will have to spend more on R&D to prepare for the future of construction, the overall outlook matters too. “Can you spend money on studying if your income is not sufficient to feed yourself? You must have spare money. [Likewise], if you want to encourage R&D, the construction industry has to be healthy.”

Nevertheless, he believes there are sufficient projects to go around.

Jeffrey Teo, construction director of Lian Beng Construction, is less enthusiastic. At his company, which is part of locally listed Lian Beng Group, employees have been undergoing training in PPVC for some time. Also, Lian Beng has just taken on its first project involving PPVC: the Defu Industrial City.

But Teo says that if PPVC had not been a requirement of the tender, the company might not be using the technology at this point in time. A shortage of projects makes it more challenging for companies to get on board DfMA, he says. Also, Lian Beng does not have its own PPVC manufacturing facility and therefore has difficulty controlling its costs.

At private construction firm Woh Hup, director of engineering Wong Keam Tong says the adoption of BIM software in 2009 required high upfront costs for retraining staff. “Right now, in our organisation, we have two groups of BIM modellers and three [BIM] managers. There is a set-up cost for that,” he said at an HSBC industry roundtable last month. “And furthermore, you have to buy different software.”

Because DfMA is so new, many firms are unfamiliar with the exact costs involved. And they sometimes bid for projects at unrealistically low prices. BBR’s Mo says this puts experienced firms like his at a disadvantage “when the client is looking primarily at the price”.

 

Short-term pain, long-term gain

The government is not blind to the challenges the industry faces. It has announced plans to move towards a more holistic assessment of bids for public projects, taking into account the quality of the bid and the company’s safety track record.

"This is good news for the industry because we can sift out those unrealistic bids by companies that think they can just bid first and figure out how to do the technologies later,” Mo says.

At the launch of a new ICPH facility on Oct 3, Finance Minister Heng Swee Keat acknowledged that cyclical factors can affect contractors’ willingness to innovate. “The boom-and-bust cycle in the sector incentivises companies to rely more heavily on variable factors of production such as labour and less on capital investments in new technologies,” he says.

However, Heng emphasised that DfMA is critical for improving productivity in construction. ICPHs can optimise land use and improve the quality of prefabricated components. DfMA also improves labour productivity and creates new and higher-skilled jobs.

Heng said construction firms should tap the Land Intensification Allowance scheme to defray the upfront capital costs of developing ICPHs. Other financial aid schemes available are the Public Sector Construction Productivity Fund and the Construction Productivity and Capability Fund.

Heng also announced that BCA will start to provide a forecast of the number of tenders with specified DfMA technologies to be called in each year.

A spokesperson at construction firm China Construction (South Pacific) Development welcomes the government’s initiatives in promoting DfMA. “Government support for such improvements will only benefit the industry in the long run as better benchmarks are set across the board,” the spokesperson says.

Expectations of a recovery in the industry could also bolster innovation. James Cameron, Asia co-head of the infrastructure and real estate group at HSBC, expects the number of residential construction projects to increase.

“The market expectation is for the Singapore residential market to bottom out by 2018 at the latest. We are already observing increased investment with both new build and replacement of older developments, both of which will drive demand for construction activity,” he says.

Meanwhile, the government is pumping money into the sector. In a Sept 28 Facebook post, Minister for National Development Lawrence Wong announced that the government would bring forward some $700 million worth of public sector construction projects. This is in addition to the $700 million worth of projects announced in the 2017 Budget.

To Lian Beng’s Teo, the availability of more projects will mean that builders can finally focus on testing DfMA technologies rather than competing solely on price. “When more of us are using things like precast elements and PPVC, then the price will come down. And the smaller players can get on board too,” he says.

For some contractors, the move towards DfMA also represents a revitalisation of the image of construction among young Singaporeans.

“When I was a board member at BCA, we once joked that we should tell Mediacorp to stop producing Phua Chu Kang,” Tiong Seng’s Pek recounts. The sitcom centres on a comically inept contractor. “It misleads people on what contractors really do, and the low-tech image really stays with people.”

BBR’s Mo agrees, saying that factory conditions will also counter perceptions of construction being a dangerous job.

“Some young people think that if you work in a construction site, you don’t know what’s going to fall on your head at anytime and you don’t know if you’ll return home at the end of the day,” he says. “But maybe when young people see that the sector is now high-tech, they’ll join the industry. We need to make construction hot again.”

 

This article, written by Sharanya Pillai, appeared in The Edge Singapore, Issue 800 (Oct 9, 2017). The article first appeared online here.

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