Industrial properties as investment assets

Industrial properties as investment assets

by Ong Kah Seng
05:55 AM Dec 03, 2010

This year has been a rewarding year for the industrial property market. The overall momentum of the industrial property sector has been strong and more sustainable than that of the private residential sector. Besides continued rental recovery, factory units and multiple-user warehouses have received strong buying interest.

In the first 10 months of this year alone, a total of 1,491 factory units were transacted, a 45 per cent increase from the whole of last year.

A total of $3.58 billion worth of factory units were transacted this year to date, 96 per cent more than that transacted in the whole of last year.

Similarly, the sales activity of multiple-user warehouses was buoyant.

A total of 112 warehouse units were transacted this year to date, more than double the total number transacted last year. Some $90 million worth of warehouse units were sold this year to date, far surpassing the total of $28 million last year.




Factories

Primarily, the keen buying interest for industrial properties was driven by the strong recovery of the manufacturing sector, which encouraged industrialists to expand. Investors were hence confident of the investment potential of industrial properties, as the underlying demand for these properties was strong.

The improved sale of industrial units was also supported by the gradual price increase of such properties. With prices of factories still some 10 per cent lower than the historic high, investors felt safer with buying factory units where prices seemed reasonable. A factory unit with a shorter tenure can also be a more affordable purchase, requiring a lower initial capital outlay than office, retail and residential units.

The popularity of industrial properties is also underpinned by the maturing of the Singapore property market over the past 20 years, with investors now increasingly opportunistic.

The current property buyer is usually one who is open to any form of property investment as long as there are potential returns and the risks can be mitigated.

For a typical investor who is insensitive to the property type and looking at optimising his or her return, industrial property investments may seem attractive. For one, yields of industrial properties are typically higher, usually at least 6 per cent, whereas residential property yields are about 3 per cent.

The attractive yields of industrial properties are critical for the investor, as they are traditionally less physically impressive than other properties such as retail, office and residential properties.

The industrial sector is the only sector other than residential where the product offerings of a single-owner and multiple-owner buildings are similar.

The majority of the new office and retail developments are single-owner and buyers of commercial units can invest mostly in older strata buildings.

Although strata office buildings and shopping centres still have their relevance, they are generally inferior in terms of the facade, positioning and building specifications to the newer office and retail buildings.

However, multiple-ownership continues to be seen in all industrial developments, whether new or old.

An investor of factory units can expect to purchase properties in new and well-specified industrial developments.

A big leap in the industrial property market has taken place in the past few years, which have seen the success of various industrial real estate investment trusts, such as Mapletree Logistics Trust, Cambridge Industrial Trust and, most recently, the Mapletree Industrial Trust.

The emergence of industrial REITs has raised the profile of industrial properties and their appeal to investors.




Warehouses

Warehouses have benefited from the increasing sophistication of property market participants in their buying, selling and space usage strategies.

In addition to the standard use where products are stored for sale, warehouses are seeing increased interest from businesses which have to free up space for core business activities.

Storing excess company items, including archived printed information, in warehouses also presents the business with a neater office working environment.

Warehouses are also increasingly being used for personal storage, such as by families requiring a place for items that cannot be stored in their living premises.

Some families that have capitalised on the rising prices of residential properties by selling their homes and seeking temporary accommodation in smaller premises are seeing warehouses as a solution to their space needs. These families which are waiting for an opportunity to purchase better-value homes will require warehouse space to store their secondary assets.



How Sustainable?

The demand drivers for factories and warehouses are clearly in sight.

The price recovery will be incremental and underpinned by a stable manufacturing outlook and increasing awareness of the attractiveness of industrial properties.

The mature two-decade Singapore property market has seen pronounced rental and price cycles.

Market participants will continue to be opportunistic and open to new property ventures, and hence they will be receptive to industrial properties.

The industrial landscape has also modernised significantly, radically enhancing the perception of such properties.

Industrial REITs, which consistently report asset performance, will also increase the market transparency of industrial properties.

However, with a number of industrial properties having been transacted recently, potential buyers, including those who are seasoned residential but not industrial property investors, will be more thorough in evaluating the investment potential of the remaining industrial properties available for sale.

Potential buyers of industrial properties are likely to be increasingly cautious, as the growth of the manufacturing sector is also expected to moderate.



The writer is Senior Manager, Research - Asia Pacific at Cushman & Wakefield.

Source: www.todayonline.com