Rents for industrial properties could drop by as much as 30%

The rental cost for industrial properties in Singapore could come down by as much as 30 per cent this year. Property consultants said this is due to a drop in demand as companies scale back their space as well as increased supply.

A slump in demand for Singapore’s exports has led to factories running at excess capacity and this has prompted companies to either put expansion plans on hold, or even scale down plant sizes.

Tay Huey Ying, director, Research & Advisory, Colliers International, said: “I guess it’s really a combination of both. On one hand, the global downturn has really affected the demand for exports for the regional countries and that includes Singapore.

“And with that, we have seen lots of manufacturing concerns operating at excess capacity and this has encouraged or prompted a lot of these firms to either scale back their expansion plans, or to even put their expansion plans on hold, or even scale down their manufacturing plants altogether.

“A combination of these would really have affected demand. And for the first quarter of this year, demand for industrial properties had softened by 50 over per cent as compared to the demand for last quarter of last year.

“And if we do a year-on-year comparison, demand for industrial space have really declined by around 70 per cent compared to the same period last year.”

On top of falling demand, a strong supply pipeline is compounding the situation. Colliers is expecting about 11.5 million square feet of space coming on board this year compared to about 10.6 million square feet last year.

However, a steep rental decrease is unlikely.

Ms Tay said: “I would also like to highlight that perhaps about 40 per cent of this upcoming supply is attributed to single user industrial space, which most of the time is purpose-built.

“So I think this scenario would really help to cushion rental decline for this year and then the other scenario would be that increasingly, Singapore’s industrial properties are being ‘REITed’ and a lot of these are being leased back for long periods at incremental rental contract being fixed into the contracts.

“And again, these are some of the factors that will help to cushion rental decline for this year.”

Average rents for manufacturing plants have come down by about 12.8 per cent in the past six months, compared to an increase of 6.4 per cent previously. On the other hand, rents for warehouse space have declined by about 13 per cent.

Still, while rents are trending down, some companies renewing their leases may see higher rates. This is especially so for firms who signed their current leases in 2006.

Ms Tay continued: “For a tenant or a company which has committed to a two-year lease, they would probably have committed to their rental contracts sometime in 2007.

“And for this group of tenants, there is a high likelihood that they could look at lower renewal rate when they are negotiating their lease renewal during this period. But for those companies which have committed to a three-year lease, that would mean that they have committed their lease sometime in 2006.

“That would be the period when industrial rent started to pick up. And this group of tenants may still have to contend with about 10 to 30 per cent … rental increase upon renewal. It very much depends on when the rental contract was entered into in the earlier phase and at what kind of rates it was entered into.”

PestBusters, which has an office at A-Z Building in Paya Lebar, saw rents go up by five per cent.

Thomas Fernandez, chairman & CEO, PestBusters, said: “Times are bad and they actually increased the rent by five per cent. In fact, they wanted to increase more but we had to negotiate and beg them to look at the fact that we are long-term tenants and the entire situation of the financial crisis.

The landlord Ascendas said the lease was renewed at a time when rents were still relatively positive, hence the rate. However, it said that it plans to give rebates to its tenants.

In a statement, Ascendas said: “Upon renewal of every tenancy agreement, it is Ascendas’ practice to engage each tenant in dialogue to negotiate rental rates. All the leases in AZ building were due and renewed last year when the Singapore property market was still relatively positive.

“We always ensure that our rental rates are pegged to the market and priced appropriately as other similar buildings in the same location.”

Analysts said an uptick in industrial rents will only occur in 2012 after bottoming out in 2011.

Source : Channel NewsAsia – 29 May 2009

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