Contrary to common perception, Singapore is not short of space. Across the spectrum from residential to commercial and industrial property, the volume of vacant space is turning out to be a blessing for tenants, who now have much better bargaining power than before.
The latest official data show a total of 21,268 private residential units were unoccupied in the second quarter of this year, translating into a vacancy rate of 7.1 per cent. Landlords are under pressure, but as long as interest rates remain very low, they have holding power.
In the retail segment, the overall vacancy rate of 5.9 per cent reflects a mixed situation where space is tight in certain neighbourhoods, such as the Orchard Road shopping belt and most Housing and Development Board town centres, and is in excess in other locations, such as several of the new mixed-development projects. The vacancy rate translates to about 3.7 million sqf of lettable area, which when spread across Singapore, does not cause much downward price pressure.
The 7.7 million sqf of vacant office space is a cause for concern, but the vacancy rate of 9.6 per cent is still well below the 12 to 13 per cent experienced during the last recession.
The most alarming numbers are in the industrial segment. Broken down into business park, factory and warehouse space, the combined vacant lettable area in the industrial segment is a staggering 44 million sqf. On top of that, there is another 81 million sqf of gross floor area (GFA) that will be completed in the next few years.
The construction of industrial buildings is generally faster than building condominium blocks because developers do not need to fit out the interiors of each unit like they do for condominiums. Therefore, we can expect a large portion — about 80 per cent — of the 81 million sqf to be ready in about two years, i.e. by the end of 2016.
As a point of reference, VivoCity has about 1 million sqf of lettable area and about 1.5 million sqf of GFA. For those who find it difficult to imagine what 44 million sqf of vacant lettable area looks like, picture 44 empty buildings, each equivalent in size to VivoCity. As for the 81 million sqf of industrial GFA under construction, we can visualise 81 buildings, each one with floor space equivalent to a VivoCity.
Of particular concern is the proliferation of small strata-titled industrial units since four years ago. Investors constrained by the prices of new residential launches and restrictive cooling measures turned to small-sized industrial units due to the low quantum of investment and the potentially lucrative 5 per cent rental returns. The prices of 60-year leasehold small-sized industrial units crossed S$800 per sqf and freehold ones went above S$1,300 psf.
The thousands of small industrial units that were completed in the past two years have contributed to the increase in vacancy rates. Several projects that sold like hot cakes during their launches in 2010 to 2012 were completed recently, but many of the investors now face difficulty finding tenants. A few lucky ones could have achieved rental yields of about 4 to 5 per cent on their purchase prices, but many investors have held on to their empty units for more than a year, since the projects were completed.
Having no rental income for more than a year after the new industrial unit is handed over is a major negative for investment returns, especially where many of these industrial units have a 30- or 60-year lease. And as we can see from the chart, vacancies are climbing as supply — including competition from the supply in Iskandar — exceeds demand. In addition, the massive new supply will add downward pressure to rentals and prices.
Those who say that Singapore is landlocked and therefore property prices can only go up probably assume that: (1) Economic and population growth are givens; (2) space-users do not optimise and rationalise while demand for space increases, i.e. demand for space grows in direct proportion to economic and population growth; and (3) we are much limited by the height and depth that we can build our buildings.
The above assumptions do not always hold true. Singapore has ample space to grow for many more decades.
By Ku Swee Yong – a licensed property agent and chief executive of real estate broker Century 21 Singapore. An author of two bestsellers, Real Estate Riches and Building Real Estate Riches, he has just released his third book, Real Estate Realities.
Source : Today – 29 Aug 2014