Rising prices of industrial property not sustainable: analysts

Prospects of higher investment yields are driving demand and prices of industrial properties.

The robust economic growth since the rebound from the US debt crisis in 2008 has generated a lot more economic activity. This has boosted demand for industrial space in Singapore in the last two years.

Latest URA data shows industrial property prices have bucked the general downtrend and grew by 7.2 per cent in the first quarter this year, compared to the previous quarter. Prices of residential property meanwhile, dipped marginally by 0.1 per cent from the previous quarter.

Donald Han, special advisor to real estate company HSR, said: “In the last two years, rentals have gone up an average of 12 to 15 per cent per annum. This year in the first quarter, we saw a rental increase of 1.8 per cent quarter-on-quarter – even that is probably not sustainable.

“We expect rents to flatten in the second quarter, and may potentially dip by as much as about two to three per cent, making the increase for the entire year not more than five per cent.”

Experts said low-interest rates and high liquidity in the market have kept industrial property prices on the high. Analysts also said that a “healthy” occupancy rate of industrial properties at 93 per cent suggest that a price correction is not on the cards yet.

Alan Cheong, head of research at Savills, said: “For the first quarter of this year, the strength of the price and rental increases will push that momentum into the second quarter. We expect to see prices for multi-user warehouse and multi-user industrial space to rise by six to eight per cent, a similar strength to what we saw for the first quarter of this year.”

Meanwhile, analysts are cautious, saying that the uptrend may not be sustainable.

The slowing economy may cause demand for industrial properties to slacken and cause prices to dwindle lower as well. While rentals may come down, yields could still be attractive at five per cent. This is because an industrial unit could cost an investor as low as S$400,000, although the use of CPF is not allowed.

Some have even suggested that the elevated prices have raised concerns of a potential bubble forming.

Chia Siew Chuin, research director at Colliers, said: “The higher prices we see now is probably the result of a skew, because of higher prices that we have achieved due to smaller units for industrial premises being sold. The government has already put in subtle measures, but they are just development guidelines, in a way, to achieve a more stabilised market going forward.”

Analysts do not believe that authorities will implement measures to cool the industrial property market, which makes up only about one-tenth of property transactions. They said any measures may need to be targeted on investors so as to protect businesses that have bought industrial property as a hedge against future rental increases.

Source : Channel NewsAsia – 8 May 2012

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