THE vacancy rate of warehouses in Singapore could hit close to 12 per cent in the coming quarters – around global financial crisis levels and up from the current 9.6 per cent in Q1 2016.
It is no secret that the industrial property market is now soft, but global property investment management firm TH Real Estate believes that a severe supply overhang will cause the vacancy rates to spike.
That said, this will be “very short-term” and is no cause for alarm.
According to JTC, about 578,000 square metres of warehouse space is due to be completed in 2016, and 775,000 sq m in 2017.
TH Real Estate believes that supply pressures should start to ease off after that, and will provide breathing space for stabilisation. Rentals should adjust upwards in tandem.
In fact, TH Real Estate is building an investment case for buying warehouses in Singapore, given long-term fundamentals such as the country’s strong global interconnectivity, world-class infrastructure, efficient supply chain and import/export procedures, and easy access to financing.
Twenty of the top 25 global logistics players, such as DHL, Kuehne + Nagel, Sankyu, Schenker, Toll, UPS and Yusen Logistics, have set up regional or global headquarters functions in Singapore.
Singapore is also the logistics and supply chain management hub for manufacturers across various industries. They include Avaya, Diageo, Dell, Hewlett Packard, Infineon, LVMH, Novartis, ON Semiconductor, Panasonic, and Siemens Medical Instruments.
In an interview with The Business Times, Harry Tan, head of research, Asia Pacific, said: “There will always be property cycles. It’s a matter of how deep or shallow those cycles are, but we want to be investing in cities that are going to be very viable over next 30-50 years . . .
“For Singapore at the moment, from a cyclical perspective, we are looking at quite significant headwinds, but we look beyond short-term cyclical volatility to focus on longer-term economic growth drivers.”
Mr Tan joined the firm only six months ago. He is part of the group’s efforts to ramp up its presence in Asia, as it also looks to boost its Asia-Pacific headcount from the current 22 staff.
“If you look at what the Singapore government has done over the past 25-30 years, it has been really proactively managing the economy . . . There is strong evidence that Singapore will remain a very viable and attractive hub for logistics for a long time,” he said.
“This is why we don’t think there will be an immediate transfer of facilities to other South-east Asian markets, because they would not provide this kind of combination with the same degree of conviction.”
Singapore warehouses currently yield 5.5-7 per cent. Investors can achieve leveraged returns of 8-10 per cent on warehouse assets.
But warehouses have limited potential for capital growth, given their shorter lease structures implemented by the government to weed out speculation on industrial assets. In a way, such industrial property cooling measures also help to remove volatility in the sector, Chris Reilly, managing director of Asia Pacific, said.
On fears of rising vacancy in warehouses, Mr Tan noted that the government was also cutting back on industrial land sales to ensure the adjustment process evens out.
“It should also be noted that more than 70 per cent of the new stock set to enter the market in the coming three years consists of single-user developments with pre-tenant commitments. Only a small percentage of this space will be available for sub-lease under the new JTC regulations.
“This will help assuage fears of an oversupply situation, assuming that some of these single users intend to fully occupy their properties and not sublet a portion of the space.”
These are all signs that future industrial supply growth could be under control, he said.
The year 2015 had proven to be a challenging one, as uneven global economic conditions led to weakness in both manufacturing and external trade.
Manufacturing output fell 5.2 per cent last year – the first negative growth since 2009 – while non-oil domestic exports contracted 0.1 per cent, as Singapore’s economy was exposed to risks from an extended downturn in global output.
In Singapore, TH Real Estate owns a 5.6 per cent stake in JEM, a shopping mall in Jurong. Right now, it has nine assets in the Asia-Pacific, including four luxury outlet malls in China. It has also worked with Mirvac in Australia on co-investment in prime grade office assets in Sydney and Melbourne, including 20 Hunter Street in Sydney and 699 Bourke Street in Melbourne.
It has offices in Sydney, Shanghai and Singapore, and may look to expand into Japan and Hong Kong, though there are no firm plans as yet.
Of its total assets under management (AUM) of over US$96 billion globally, the bulk is in the US, about a third in Europe and the UK, and just below US$2 billion in the Asia-Pacific, though the group hopes to grow this slice significantly.
It is eyeing further investments in Japan, Australia and China on behalf of its institutional investor clientele.
And following the launch of a 3-5 billion euro (S$4.65-7.75 billion) open-ended European Cities Fund in March this year, in which the group has invested 200 million euros, Mr Reilly said: “Obviously, a follow-on consideration to that would be an Asian Cities Fund.”
The fund would invest in key cities across the region and use research to spot where the next waves of growth may be.