Singapore industrial rents to plummet from growth highs

Industrial rents and capital values performed strongly in 2011, with the URA’s reported Multi-User and Warehouse price and rental indices rising by between 16-22% and are currently at multi-year highs. Looking ahead, moderating global PMI figures and slowing manufacturing growth are expected to put a cap on further rental growth, as tenants rationalize their space requirements as production levels fall to below optimal capacity.

We believe that Industrial landlords will start to lose bargaining power in rental negotiations. The backdrop of moderating manufacturing activities in the coming months is likely to cast a pall on manufacturers’ profitability, expansion plans and potentially, even in some cases, their ability to continue operating. This will likely translate to weaker demand for industrial space, both from new step-ups and current tenants as they rationalize their future space requirements as production levels fall below optimal capacity. Our channel checks with various industrial landlords indicate that there is indeed a general slowdown in terms of enquiries for space / waitlist for new space take-ups compared to a quarter ago. However, they continue to see expansionary demand from selective industries such as bio-medical, precision engineering and telecommunications (datacenters).

No big drop in rents forecast; logistics warehouse space to remain most stable. We believe that the impact of a slowdown on the different industrial subsectors will differ, depending on their demand/supply outlook. In general, we do not anticipate a big fallout in terms of asking rentals and occupancy as real estate cost is a small component in a manufacturer’s overall cost structure - understood to be <10% of total costs, in general. Hence, we believe that manufacturers’ first strategy to combat a slowdown is to cut back on production/workers rather than space as it might be difficult to expand again once the space is given up. Nevertheless, we expect rental negotiations going forward to remain tough, with bias towards tenants as the impact of a slowdown is felt in their operations.