SINGAPORE - Industrial property has enjoyed a red-hot year but whether this can continue next year remains a question mark.
Analysts point to an increase of new supply next year that could cool the sector that has logged one of its best years in recent times.
Take prices. Industrial property values easily overtook residential prices in terms of growth rate.
They shot up a startling 26.7 per cent from the start of the year to the end of the third quarter, based on the Urban Redevelopment Authority's (URA) industrial property price index.
Prices in the July to September quarter were 31.7 per cent higher compared with the corresponding period a year earlier.
Multi-user factory prices shot up 32.7 per cent in the third quarter compared to the same period last year and they are up by at least 27.9 per cent since the start of the year.
Prices for multi-user warehouses followed closely, climbing 27.9 per cent in the three months to Sept 30 over the preceding period last year. Prices in this segment rose 20.9 per cent in the first nine months of this year.
The contrast with the private residential market could not be starker with prices for new housing units up a minuscule 0.6 per cent year-on-year in the third quarter.
Office sector prices rose 1.9 per cent in the third quarter year-on-year while shop values were up 1.1 per cent.
The story for industrial rents was more subdued. They rose 6.4 per cent in the third quarter from the preceding year, and have climbed 6 per cent over the first three quarters of this year.
Sky-high industrial property prices mean rental yields have been severely compressed.
They used to range from 5 per cent to 7 per cent but have now fallen to between 3 per cent and 5 per cent, said Mr Lee Sze Teck, senior manager for training, research and consultancy at Dennis Wee Group.
Despite industrial property's apparent popularity, the number of strata industrial transactions in the first 10 months of this year was lower than that in the corresponding period last year.
This was probably because of some price resistance, said Mr Lee. "Some new industrial developments were going for more than $1,000 per sq ft, which could have caused some investors to baulk. These investors could have gone over to the residential or commercial markets," he added.
Notable industrial developments across the island include the 15ha Paya Lebar iPark, a pilot project by JTC that incorporates green spaces and specially designed buildings. There are also Alexandra Technopark and Mapletree Business City in the west, and projects such as UE Bizhub at Changi Business Park in the east.
Who is buying
The "unabated" growth in industrial prices was largely due to investor purchases, said Ms Chia Siew Chuin, director of research and advisory at Colliers International.
R'ST Research director Ong Kah Seng noted that non-residential property such as industrial was once the domain of more seasoned investors but it is now beginning to appeal to more "mum and dad" investors.
Based on caveats lodged with the URA, around a quarter of the purchases made this year were by individual Singaporeans.
Companies accounted for 70.6 per cent of industrial property purchases as of October this year.
The URA caveats do not include transactions with incomplete information.
Mr Lee noted there was no significant increase in the number of purchases made by Singaporeans, according to the data, but such purchases could have been carried out under the guise of companies.
Some individuals use a goods and services tax-registered company to acquire strata industrial units so as to claim tax relief, he said.
Why prices are rising
The steep price rises for industrial property occurred as several rounds of cooling measures in the residential property market directed investors to look at alternatives.
But analysts say there were other reasons why investor demand for industrial properties has soared.
"The pick-up in interest in the strata industrial market was also in part due to an increase in the supply of industrial land from the Government and the private market, better designed developments and the possibility of better returns," said Mr Lee.
It is not just investors who are buying. Industrialists also want to purchase their own premises to gain more control and certainty over their real estate costs in the face of rising rentals when their leases expire.
"Usually, lease renewals are unlikely to be favourable for tenants as landlords can take into account their relocation costs should they not renew," said R'ST Research's Mr Ong.
The surge of interest from both investors and genuine industrialists has allowed sellers and developers to demand higher prices.
Mr Png Poh Soon, head of research at Knight Frank, also noted that an increasing number of smaller strata industrial units - ranging from 60 sq m to 150 sq m - are sought after by investors due to their more affordable total price.
"Developers have capitalised on the growing demand of this niche segment by pricing these units at attractive and affordable quantums albeit at higher per sq ft rates," said Mr Png.
"The high price rate had pulled prices upward in the surrounding developments leading to an overall rise in prices."
He added that some newer industrial projects such as Oxley Bizhub, launched in the second quarter last year, also likely commanded higher prices because of their superior location, better technical specifications as well as the inclusion of non-traditional facilities such as gyms and swimming pools.
The pace of price increases may slow next year if the Government acts further to rein in the runaway market, analysts noted.
The Government said in June this year that units must be at least 150 sq m in multi-user developments released under state tenders.
Another factor to watch out for is the upcoming supply, said Mr Lee, noting that more than 10 million sq ft of multi-user industrial space is expected to go on the market in the next few years and most of that will be completed next year.
The weak global economy could also weigh down manufacturing and exports, and make industrialists more cautious in buying up more factory space.
Still, Mr Png expects industrial prices to rise faster than those in other sectors.
"We would expect the price increase for attractive industrial properties in good locations, with superior building specifications and longer land tenures to have a 10 per cent to 15 per cent increase for the full year 2013," he said.