The price of industrial real estate in Singapore has fallen consecutively over the past three years. As we move into 2019, here are three macro factors that may impact Singapore industrial real estate investment trusts (REITs) within the next few years.
One, demand for industrial sites remain soft.
Two out of four confirmed industrial tenders in the second half of 2018 were not awarded because their bids were deemed too low by JTC Corporation, which overlooks the industrial real estate sector in Singapore.
JTC also recently trimmed the amount of industrial land to be offered under the Industrial Government Land Sales (IGLS) programme from 12.59 hectare in 2018 to 11.86 hectare in the first half of 2019. Overall, new supply of industrial land has tapered off sharply from nearly two million square meters in both 2016 and 2017 to only one million square meters in 2018. The current project pipeline for new industrial land space in 2021 is less than 500,000 square meters.
Rental and vacancy rates
Two, rental and vacancy rates appear to have bottomed out in 2018.
The quarterly rental index for all industrial space has only fallen slightly from 91.1 in the first quarter of 2018 to 90.9 in the 2018 third-quarter (3Q 2018).
More encouragingly, the occupancy rate for all industries rose to 89.1% in 3Q 2018, a 0.5% increase from one year ago. While I do not expect Singapore industrial REITs to be able to raise rental rates in 2019, the apparent bottoming out in rentals and a gradual increase in occupancy rates should ensure overall higher income across the board in 2019.
Three, Singapore industrial REITs with a focus in business parks are likely to do better than others.
Among all types of industrial space, business parks have been the most resilient, and they have been the only industrial space with rising rental rates.
Business parks’ quarterly rental index, as of 3Q 2018, remains at 112. This contrasts starkly with the worst performer – warehouses – where the rental index languishes at 85.1.
Only 80,000 square meters of business parks are expected to come onstream in 2019 and 2020, compared to 2.35 million square meters of single-user factories, multi-user factories, and warehouse spaces available in both the years. Focusing on industrial REITs with a larger portfolio in business parks that tend to have pre-committed tenants could be a smart choice for investors.
The Foolish takeaway
Overall, the supply overhang for industrial real estate in Singapore appears to be bottoming out, and this could mark a turning point and buying opportunity for Singapore industrial REITs.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.