Watch the froth in industrial property

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The Straits Times
Apr 28, 2012
NEWS analYSIS
Watch the froth in industrial property


By Esther Teo

AFTER a series of tough government measures to quell fast-rising prices in the residential property sector, suddenly all eyes are turning to industrial property.

The latest figures released by the Urban Redevelopment Authority (URA) yesterday have raised fears among property watchers that a bubble might just be forming in this once low-profile sector.

Prices jumped a robust 7.3 per cent in the first three months of the year, well up on the already notable 4 per cent increase in the fourth quarter of last year.

This strong demand has been attributed to the plentiful funds in the market and the series of residential cooling measures introduced since September 2009, diverting some investors to buying up factory and warehouse units instead.

And with prices surging at twice the pace of rental increases in the past year - which experts say hints at speculative froth - this is an area that the Government will surely keep a close eye on.

There are two clear groups buying industrial property. First, of course, are business operators looking for premises.

But the biggest concern if indeed a bubble does form - and burst - are small- time investors plonking their life savings into a factory space on the promise of capital gains and high rental yields. Should prices crash, they could get burnt badly, especially since prices are at their highest in almost 15 years.

Moreover, the industrial segment is known to be more volatile that the residential sector. If a sharp recession hits, such as in 2009 when the manufacturing sector shrank by more than half, tenants could pull out or go under, leaving the investor with a hefty mortgage to pay.

The key question is then what needs to be done to cool down the sector in the light of a possible bubble.

The Government is an old hand when it comes to cooling the property market. Tighter financing rules, greater land supply and new stamp duty have all been used to cool home prices.

But the industrial sector is a different animal altogether. Measures used for home purchases cannot be simply applied to factory and warehouse units.

Industralists, many of them small and medium enterprises (SMEs), often buy more than one industrial unit - one for their own use and the other possibly either to rent out or for expansion. Harsh measures that over-correct the industrial sector could end up hurting the economy as SMEs are the No. 1 employers here.

Some SMEs are cash-strapped and if the Government were to introduce measures that adversely affect their cash position such as lowering the loan-to-value ratio for industrial units, it could lead to lower job creation or higher job losses.

Still, the Government has already taken some steps to put a lid on prices and to weed out speculative investor demand.

For instance, since Jan 1, some new developments cannot be subdivided into strata units within 10 years of the temporary occupation permit being issued.

There is also a minimum size of 1,615 sq ft - said to be the minimum size needed for genuine industrial activities - imposed on strata-titled units and units in multi-user industrial developments.

Industrial land supply has been boosted in the government land sales programme. And in a bid to crack down on the unauthorised use of industrial space, the Government said developers selling non-residential properties - shops, offices and industrial units - must stipulate clearly the approved use of the unit sold.

These measures are mostly aimed at raising awareness among investors and preventing developers and agents from misleading investors unsure about the rules governing the industrial sector.

But these policy shifts require time to filter through so industrial prices and rents will not soften immediately.

Already, URA's data shows that there is a supply of a whopping 3.7 million sq m of gross floor area of factory space from projects in the pipeline, which will eventually take some heat out of the market.

Despite rents climbing 1.8 per cent in the first quarter, some experts expect declines of up to 3 per cent this year.

In the short-term, however, the industrial market is expected to be hot. The Government will have to decide how hot is too hot before taking some action that could have a big impact on the hard- earned savings of ordinary investors.
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