Singapore Industrial Real Estate: Going Strong

The uptrend in occupancy and rents is expected to be sustained, underpinned by healthy demand on the back of strong manufacturing output.

16 Sep 2021

By Rimon Ambarchi, Head of Industrial & Logistics, Southeast Asia and Goh Jia Ling, Senior Manager, Research, Southeast Asia, CBRE

Singapore Industrial Real Estate Market Going Strong

Against a challenging economic backdrop over the past year, industrial rents have bucked the trend and seen significant improvement in recent quarters. The JTC All Industrial Rental Index rose for the third straight quarter; while ground-floor factory and warehouse rents tracked by CBRE Research also registered increases in Q2 2021. The uptrend in occupancy and rents is expected to sustain, underpinned by healthy demand on the back of strong manufacturing output.

In particular, demand for industrial space is likely to stem from an increase in activity from the following: semiconductor manufacturing, the pharmaceutical and biomedical industry, and the rising trend of e-commerce and online grocery shopping.

The hotspots

SEMICONDUCTOR MANUFACTURING: The ongoing global shortage in semiconductor chips has been exacerbated by stronger demand for chips from cloud services and the 5G market, along with supply chain disruptions. That said, the current shortage could benefit industrialists in the electronics sectors, as Singapore accounts for about 5% of global wafer fabrication capacity and 19% of the global semiconductor equipment market share, according to Ministry of Trade and Industry.

Semiconductor manufacturers have been committing to higher capital expenditure to add more capacity to increase production volumes, which could lead to an increase in space requirements for both factories and warehouses.

U.S. semiconductor maker, GlobalFoundries, announced in June 2021 that it would invest over S$4 billion in Singapore to expand its wafer plant. In addition, we are seeing an uptick in renewals and expansion activity among the smaller semiconductor companies. Many of them are located in well-known electronics clusters in the North and North-east region (i.e. Yishun, Ang Mo Kio, Woodlands). Other firms in the downstream segments of the value chain are also looking to high-tech space in these areas as proximity to point of production and suppliers could help to reduce overall costs.

PHARMACEUTICAL AND BIOMEDICAL INDUSTRY: Over the past few quarters, trade in COVID-related sectors has been strong, particularly in the pharmaceutical and biomedical segments. In Q2 2021, output in the medical technology segment posted growth of 31.3% y-o-y on the back of export demand for medical devices, while the pharmaceutical segment expanded by 10.9%.

A pro-business environment, thriving R&D ecosystem, skilled talent and quality infrastructure in Singapore, have attracted some of the world’s largest biomedical and pharmaceutical companies.

According to Singapore Economic Development Board, 8 of the top 10 pharmaceutical companies have facilities in Singapore, manufacturing 4 of the top 10 drugs by global revenue. For their real estate needs, the build-to-suit model has allowed businesses to construct a facility suitable to their needs with a lower upfront capital.

For example, French pharmaceutical giant, Sanofi, is set to build its vaccine production site at the Tuas Biomedical Park which provides manufacturing and laboratory space. Meanwhile, multi-user developments, such as JTC Space @ Tuas Biomedical Park, can cater to MNCs and SMEs with smaller space requirements. This will, in turn, create a clustering effect and enhance the biomedical manufacturing ecosystem of R&D centres, technology partners, building factories of the future.

E-COMMERCE & ONLINE GROCERY: Changing consumer patterns stemming from the pandemic have accelerated e-commerce. In Singapore, online retail sales accounted for about 6% to 7% of retail sales (excluding motor vehicle sales) in 2019, before the pandemic, but this ratio surged to as high as 26.2% during the COVID-19’s “circuit breaker” when mobility was affected. According to Euromonitor International, Singapore’s online sales volume in 2021 increased by as much as 80% over pre-COVID-19 levels and is expected to increase by a CAGR of 13.3% from 2021 till 2025. This will inevitably lead to higher demand of warehouse space.

In recent quarters, take-up of new or upcoming warehouse facilities have been strong, with commitment rates averaging 50%-70%. Although the majority of warehouses are already located in the West, this area will gain further prominence as about 91% of future warehouse supply will be located in this region (i.e. Tuas, Pioneer). Some notable projects include the LOGOS Tuas Logistics Hub, which is a modern ramp-up facility with access to the Jurong/Tuas Industrial Estate, and the LOGOS EHub which serves to accommodate a wide spectrum of e-commerce usages, providing high density storage and automated sortation systems to its users.

CBRE Research shows that volume of cold storage space leased in selected major markets in Asia in H1 2021 were three times that in H1 2019. Activity was led by grocery retailers backed by e commerce platforms, traditional grocers going omni-channel, and specialist cold storage service providers. With today’s consumers demanding groceries of higher quality and of wider variety, along with the rapid expansion of the pharmaceutical industry, requirements for cold chain logistics are expected to grow.

Given the current undersupply of specialised cold storage against the potential growth, we are seeing more developers considering building up specifications to tap on this demand. To ensure greater flexibility, developers could allow for enough power provision for occupiers who require temperature-controlled space to retrofit according to their needs.

Optimistic outlook

In the near to mid-term, CBRE Research expects market sentiment among occupiers in Asia Pacific to improve on the back of economic recovery. According to market sentiment survey findings by CBRE Research released in July, leasing sentiment among APAC industrial occupiers were the most optimistic, ahead of the office and retail sectors.

Asia Pacific Leasing Market Sentiment strongest in industrial sector

Leasing sentiment among occupiers (on a scale of 1-5, 1 being the worst and 5 being the best)

Asia Pacific Leasing Market Sentiment Survey July 2021Table

Source: Asia Pacific Leasing Market Sentiment Survey, July 2021

In particular, the economies of China and United States are expected to be the main drivers of global growth. This will, in turn, have a positive effect on Singapore, given her exposure to global trade. According to Oxford Economics, Singapore is due to benefit from a trade rebound, where export growth is expected to grow by 18.6% cumulatively from 2022 to 2025.

That said, occupiers are concerned about cost escalation from fuel, transport and labour, amidst economic disruptions from COVID-19. According to an analysis by CBRE Supply Chain Advisory, transport cost makes up 45% to 70% of total logistics costs for occupiers. Hence, choosing the right location for their logistics facilities will be crucial, as it will determine the proximity and costs to their entire value chain – customers, labour, suppliers and logistics partners.

Developments which are of modern built (ramp-up warehouse developments) and of high specifications in ceiling height and floor loading will help to facilitate operations. However, vacancies among such buildings remain extremely low. According to CBRE Research, prime logistics buildings in Singapore registered a strong occupancy of 99.6% as at Q2 2021. Furthermore, warehouse supply pipeline remains subdued, with an average future supply at 2.24 million sq. ft. per annum, which is below the 10-year historical average of 3.86 million sq. ft. per annum. Thus, choices for occupiers looking for prime logistics space will remain extremely limited.

As such, occupiers should plan and commit to their space requirements early, while owners should consider upgrading their older assets to higher specifications in line with Industry 4.0 standards.

With supply chain disruption set to continue, companies will need to enhance their supply chain resilience, leading to long-term demand for warehouses. Against a backdrop of tight prime logistics vacancy, strong rental reversions are expected to continue within the prime logistics or high-spec assets segment. CBRE Research forecasts rents of prime logistics to grow by 5% to 6% in 2021. This strong rental performance should drive more investments as investors seek growth and diversification.

Boosted by the resilience of the manufacturing and logistics sectors during the pandemic and projected growth, demand for industrial assets, both globally and in Singapore, has been on the rise since H2 2020. According to CBRE Research, between July 2020 to June 2021, investment sales volumes for the industrial sector have overtaken the office sector, to be the second highest, at S$3.9 billion, after the residential sector.

Some significant deals include the acquisition of The Sandcrawler building in one-north by Blackstone Real Estate for S$176 million, Admirax, a high-specification Business-1 facility, by AEW Fund for S$142 million, and Global Trade Logistics Centre, a warehouse facility, by ESR REIT for S$112 million. These investment deals demonstrated strong institutional interest in the sector, which has been gaining momentum since the pandemic.

Indeed, the industrial real estate sector has been going through an exciting time, of which we are confident that it will continue to have a strong growth momentum and remain as one of the most active real estate sectors to watch.

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