What does the future look like for Singapore’s industrial property sector?

The single-user factory supply is expected to surge to 10.7sq ft this year.

The global economy is expected to recover this year as inflation eases and improved supply chain conditions drive consumer expenditure and other economic activities, said Savills in a report. However, the recovery is likely to be modest as numerous headwinds continue to raise uncertainty levels, impacting investment and consumption decisions. 

“Geopolitical tensions remained the primary upside risk to global inflation, and thus could potentially weaken the economic recovery momentum this year. Singapore’s manufacturing and trade-related sectors are projected to post a gradual pickup in growth in tandem with the expected turnaround in global electronics demand,” the report added.

Here’s more from Savills:

The various metrics representing the industrial property market are therefore also expected to see further growth, though at a slower rate. Rents are projected to continue to climb for some segments, led by new and quality developments. 

While prime warehouse and logistics are likely to lead growth, it could be tempered by the bulk of the supply pipeline slated to come onstream this year (estimated at around 3.7 million sq ft NLA), compared with the average historical completion of 2.5 million sq ft NLA in the last four years. 

The upcoming supply for single-user factory space is also expecting a surge to 10.7 million sq ft NLA this year, compared with the four-year average completion of 4.5 million sq ft NLA. The ramp-up in supply is likely to put pressure on the vacancy rate and hinder rental growth. 

On the other hand, upcoming supply for multiple-user factory space will taper to 558,000 sq ft NLA this year, down from the four-year average of 3.2 million sq ft NLA. Although this is not expected to translate to robust rental growth, the tapered supply could help to ease vacancy. 

With the expected completion of Punggol Digital District by 2024 (which will bring about 3.2 million NLA of new business park space), the business park vacancy rate is likely to hit a new high. However, modern and well-managed business parks and high-spec industrial space are expected to see further rental growth. 

The question remains why, despite rising vacancy levels, are rents still rising? We believe that this seemingly illogical phenomenon has a rational explanation, namely that of tenancy of last resort. As business conditions become more and more challenging, if a company decides not to wind up, the need to contain costs then becomes paramount. 

SMEs, be it those in the traditional industries or software developers, downshift from larger and more expensive industrial building types to lower cost ones. Also, some SMEs who require small storage space but cannot find those sizes in warehouses - since their lettable area offered is often much larger - resort to storing it in factories. 

Therefore, factory space renting for S$1.90 psf pm has now become the backstop for the SMEs who are still not giving up the fight in this difficult environment. Over time, if business conditions do not improve, we believe that rents may ultimately have to reflect that. 

For now, we are maintaining our rental change forecast for multiple-user factories at 0% YoY while those for warehouses are expected to rise between 0% and 3%.