Investing Industrial Properties in Singapore
Snapping up investment apartments has become something of a national sport but investors are now increasingly training their sights on the far trickier area of industrial property.
Trickier because the returns are harder to gauge, the capital gains can be thin on the ground and well, how does someone who has dabbled in only a bit of residential real estate know what an empty warehouse in Jurong might be worth?
The rental yields can be good at about 4 to 8 per cent – beating that of residential at between 2.5 and 3.5 per cent – but the sector still looks like a minefield for the inexperienced. Far easier to plonk your cash in a tidy two-bedder in Bishan and watch the capital gains go through the roof.
Sadly, those days seem to be over, with a series of tough cooling measures taking the heat out of the residential market in recent months. Canny investors have been targeting industrial land in the wake of these policy moves, which do not apply to that part of the market.
Developers responded by pushing out a string of strata-industrial projects last year, including North Spring Bizhub, CT Hub, 9@Tagore, Oxley Bizhub and T5@Tampines, all with price tags below $1 million to cater to investor demand.
Some of these projects even come with condo-like amenities such as gyms and swimming pools for tenants.
Inevitably, prices have shot up in response. They surged 27 per cent last year while rents have increased 16 per cent to their highest level in 14 years.
The rocketing values have prompted the Government to look at the sector and make policy changes, a recognition that pricey industrial land has huge consequences for small firms trying to keep costs under control.
That Bishan two-bedder still looks a breeze by comparison, but industrial property has been a winner for smart investors in recent years so it may be worth chancing your arm. Here are some pointers.
Recent changes in the industrial sector
The Government has tried to quell rising prices with a series of policy changes, including new rules determining how developers deal with industrial sites.
One prohibits new developments from being subdivided into strata units within 10 years after the temporary occupation permit is issued.
The rule applies to selected sites near MRT stations or as decided by the Government.
There is also a minimum size of 1,615 sq ft imposed on strata-titled units and units in multi-user industrial developments. The industrial landlord JTC estimates that this size is the minimum needed for genuine industrial activity.
Colliers International Director (industrial) Tan Boon Leong noted that the minimum size will likely bring better specifications and design for industrial properties.
But investors should also note other specifications such as the number of goods lifts and loading bays, minimum floor load, ceiling height and electrical provisions as these may affect its rental potential.
Industrial sites released this year will also be smaller and come with shorter leases – a move the Government said will make space more affordable.
National Development Minister Khaw Boon Wan has indicated on his blog that the Government will keep a tighter rein on how industrial property is used.
This puts landlords and tenants on notice and highlights the need for investors to familiarise themselves with the industrial use definitions before they lease out the space.
Mr Png Poh Soon, head of research at Knight Frank, said that if the Government were to strictly enforce the use of industrial space and drive out unauthorised tenants, rents may drop due to increased vacancy and decreased demand.
‘The original projected yield or rental return at the time of purchase may no longer hold and eventual achievable rents will be significantly lower,’ he added.
In addition, the Urban Redevelopment Authority has made changes to ensure that investors are not misled into buying industrial units without knowing the use restrictions.
Developers selling non-residential properties – shops, offices and industrial units – must insert in the option to purchase and the sale-and-purchase agreement a clause stipulating clearly the approved use.
Industrial property is classified mainly into single-user and multi-user developments.
A single-user site is intended for use by only one occupier, while multiple-user developments are usually subdivided into strata-titled units.
At least 60 per cent of an industrial unit has to be used for industrial activity, say experts.
These include manufacturing, warehousing and production. Certain types of e-businesses such as IT infrastructure and software development are also allowed.
However, they cannot be rented to pure office or shop users such as tour or maid agencies or advertising companies.
There are exceptions. For instance, childcare centres and furniture showrooms are allowed within industrial developments if they support the main industrial activities if, say, parents who are working at the building need to leave their children at the centres.
Broadly speaking, non-industrial uses may occupy about 40 per cent of the industrial development. All industrial properties are also categorised into two zonings – Business 1 (B1) and Business 2 (B2).
B1 is usually intended for light and clean industrial use while B2 zoned sites may be used for heavy industries that have a greater environmental impact.
Investors will not be able to use cash from their Central Provident Fund savings to purchase industrial properties.
Mortgage rates also tend to be higher than for residential, with the loan-to-value ratio typically lower at 70 per cent to 80 per cent, depending on whether the unit is for a buyer’s own use or not.
Residential properties are exempt from goods and services tax but the levy applies to purchases of commercial and industrial property from a GST-registered company.
Investors can set up a company to buy units, paying GST at purchase and then claiming it back from the tax authorities, subject to certain requirements.
What industrial investors should know
It is important that the design of the industrial unit fits the purpose of the intended end-user, which might not be the buyer himself.
In essence, investors must know who their end-users are and their needs.
SLP International research head Nicholas Mak identifies a few key factors that a retail investor should note.
These include securing a good location such as a unit in an established industrial estate with good infrastructure and an experienced property agent who knows the rules and market trends.
‘There is a growing number of residential property agents who are trying to sell industrial properties,’ he said.
‘A very large number of these agents badly lack the experience and knowledge about industrial properties. In their eagerness to close the sale, the investors could easily be misinformed.’
Investors must also be aware of the rules and regulations governing industrial property, such as allowable uses and who their target end-user is for the specific type of space they are buying.
They must also check if the design and type of space fit the industrial zoning, Mr Mak said.
For example, space zoned B2 is meant for general industry that could be heavier, noisier and dirtier.
The users may be manufacturers, welders, furniture makers, possibly storing dangerous, corrosive or flammable chemicals on the premises.
Similar to the residential market, investors can then engage a property agent who specialises in the industrial sector to market their unit when it is completed.
What to avoid?
Beyond the basics of location, size, price and tenure, investors should be wary of developments that do not come with basic industrial facilities and amenities and that fail to meet the end-user’s needs.
A good industrial project should have service lifts, sufficient floor-to-ceiling height and adequate floor loading capacity.
Without these, investors may not be able to attract tenants who need these provisions for their business operations, added Mr Png of Knight Frank.
Colliers’ Mr Tan noted that retail investors should give projects that claim to have high projected rental yields a wide berth.
‘Typically, a leasehold industrial project would command a rental yield of about 6 to 8 per cent, so if the yield of an industrial project is unusually high, it is advisable that investors look for other similar developments in or around the vicinity for some apple-to-apple rental comparison,’ he added.
‘In this way, they would be able to determine the possibility of whether a project can deliver its promised returns.’
Can yields hold?
Experts say that yields are expected to be compressed slightly as industrial prices outpace rental increases.
Freehold industrial properties enjoy yields of about 3 to 4 per cent, while those for leasehold properties range from about 6 to 8 per cent, Colliers’ Mr Tan said.
‘In the light of lower rental forecast of about 5 to 10 per cent for the rest of 2012, yields are expected to be proportionately compressed,’ he added.
SLP’s Mr Mak expects yields to be sustainable at around 4 to 7 per cent.
Some investors may not be willing to accept yields of less than 4 per cent and so it is unlikely that industrial yields will fall below that, he added.
‘If the Government can attract new multinational corporations (MNCs) to Singapore and keep the MNCs that are already here from leaving, the demand for industrial space can continue,’ he added.
‘This is because many of the suppliers of MNCs are the users of industrial space. So as long as Singapore can attract the MNCs, the market fundamentals would be able to support the price and rentals,’ Mr Mak added.
Experts add that there is unlikely to be a bubble brewing in the sector as there is a healthy supply of industrial space in the pipeline.
The economy might also slow this year, leading to rents and prices dipping.
Potential investor Vincent Gan, who works in the IT industry, said that he goes to property talks to familiarise himself with the industrial sector. He does not expect the new rulings to impact the industrial sector much although he adds that it is good to know what they are.
‘I have invested in commercial and residential property before so industrial units are an option that I am considering now… I will probably get the help of an agent and do my own research before deciding on what to buy,’ he added.