Weaker demand, gloomy economic outlook may see industrial rentals fall

Industry watchers said rentals for industrial properties could fall by three to five per cent in the first quarter this year, due to weaker demand and the dismal economic outlook.

On the whole, analysts did not expect landlords to cut rents outright. Instead, the landlords might choose more innovative measures to help their tenants cope with the tough times.

Manufacturers and exporters had been seeing slow sales, and were looking for ways to lower their business costs.

But apart from seeking lower rentals, an increasing number of companies were also hoping to sublet their premises to lower their overheads.

Managing director of Cushman & Wakefield, Donald Han, said: “I think the ability for private landlords to allow subletting rights… to be able to restructure the leases to make it more palatable, (will help) to reduce expenses (of the tenants) particularly in terms of occupancy cost.”

Restructuring of leases is something that a landlord like Mapletree Investments might consider doing on a case-by-case basis.

It might also allow tenants to pay rentals in instalment, and find replacement tenants to take over their space.

Mapletree made known its position when rejecting a second petition from its tenants to lower their rent.

The company had said it could not cut rentals because it too faced business constraints.

Mapletree had already said it would pass on the full benefits of the 40 per cent property tax rebate introduced by the government during the Budget in February.

Observers said private sector landlords like Mapletree might have their hands tied on rentals because they had to answer to investors and shareholders.

Mapletree said its effective ownership in Mapletree Industrial Trust is 30 per cent, with 70 per cent owned by other investors such as Arcapita Bank B.S.C and Itochu Corporation.

Director of consultancy and research at Knight Frank, Nicholas Mak, said: “With the emergence of more REITS where they are more profit driven, there will come a time where some of the tenants in these properties may not see terms that are as favourable. They do want to retain tenants as far as possible, but they will try to resist cutting rent across the board.”

Market watchers said there is still room for industrial space rentals to come down, perhaps by 10 to 20 per cent this year. The correction would not be massive given that rents in the industrial property sector did not rise as steeply compared to the office sector over the last 18 months.

On average, office rents went up from about S$6 to S$22 per square foot over the past 12 to 18 months, while rentals for industrial properties climbed from S$2 to S$4.50 per square foot.

Going forward, analysts said there would be more pressure on rentals with close to 2.5 million square feet of high-tech industrial buildings and business parks set to be completed this year.

Among them, half of the space would likely be leased out to third party tenants.

Source : Channel NewsAsia – 9 Mar 2009