Thinking To Invest In Industrial Space
In wake of tough cooling measures and government policies to take the heat out of the residential market, canny investors have been seen to shift their attention to invest in industrial space. These policy moves which does not apply to the industrial land have shown to yield higher capital gains.
A good rental yield will fetch 4 to 8 percent, much higher than a residential property of only 2.5 to 3.5 percent. Despite having said that, diving into industrial investment is a far more tricky business and could pose a minefield for the inexperience. One could be better off placing his bets on a tidy two-bedder in Bishan and watch a steady stream of capital gains.
Nonetheless, with more investors training their sights on a new lucrative, developers have also responded by pushing out a string of strata-industrial projects last year. This includes North Spring BizHub, 9@Tagore, Oxley Bizhub and T5@Tampines, all with price tags below $1 million to cater to investor demand. Some of these projects were also equipped with value added facilities such as gyms and swimming pools for tenants.
In response, the prices shot up. There was a 27 percent surge last year while rents have increased 16 percent to their highest levels in 14 years. Indubitably, the rocketing prices have prompted the Government to relook into the industrial sector and possibly make some policy changes. Pricey industrial land will pose consequences for small firms to keep costs under control.
At the end of the day, the two bedder in Bishan is still an easier option in comparison, but smart investors have been the winner for placing good industrial property investments in the recent years. Should you choose to join the tide, here are some pointers.
Thinking To Invest In Industrial: Changes in the industrial sector
In a move to quell rising prices and to make space more affordable, industrial sites released this year will be smaller and tagged with shorter leases.
New developments are prohibited from being subdivided into strata units within 10 years after the temporary occupation permit is issued. (Applicable to selected sites near MRT stations or as decided by the Government.)
A minimum size of 1,615 sq ft is imposed on strata-titled units and units in multi-user industrial developments. The quoted estimation was brought about by industrial landlord JTC for minimum size needed for genuine industrial activity.
It was noted by Colliers International Director (industrial) Tan Boon Leong that the minimum size will possibly encourage more specifications and detailed designs for industrial properties. However, it is speculated by investors that specifications such as the number of goods lifts and loading bays, minimum floor load, ceiling height and electrical provisions could affect its rental potential on the whole.
With emphasis by the Government to keep a tighter hold on the use of industrial property, investors need to educate themselves with the industrial use definitions before they lease out the space.
Developers selling non-residential properties – shops, offices and industrial units – must insert in the option to purchase and the sale-and-purchase agreement a clause stipulating clearly the approved use.
On the flip side of the coin, strict enforcement on the use of industrial space to drive out unauthorised tenants by the Government may cause rents to drop due to increased vacancy and decreased demand said Mr Png Poh Soon, head of research at Knight Frank.
Achievable rents will be significantly lower if the original project yield or rental return at the time of purchase no longer holds, Mr Png added.
The Urban Redevelopment Authority (URA) has also exercising due vigilance that investors are not misled into buying industrial units without prior knowledge of the use restrictions.
Thinking To Invest In Industrial: Allowable uses
All industrial properties are categorised into Business 1 (B1) and Business 2 (B2). B1 is usually for light and clean industrial use while B2 to be used for heavy industries that may have a greater environmental impact.
An industrial property unit has to have 60 percent utilized for industrial activity. The properties are then classified mainly into single-user and multi-user developments in which it is intended for the use of only one occupier or subdivided into strata-titled units respectively.
Manufacturing, warehousing, production as well as certain types of e-businesses; IT infrastructure and software development are allowed. However, rents to pure office or shop users such as tour or maid agencies or advertising companies are forbidden.
Exceptions include supporting facilities of the industrial activity such as childcare centres and furniture showrooms. If say, parents working at the building who need to leave their children at the childcare centres. In other words, these non-industrial uses may occupy about 40 per cent of the industrial space.
Thinking To Invest In Industrial: Financing
Residential properties are exempted from goods and services tax (GST) but the levy applies to purchases of commercial and industrial property from a GST-registered company. Investors can set up a company to buy units, paying claimable GST at purchase but subject to certain requirements as per stated from tax authorities.
Loan-to-value ratio for residential units is typically lower at 70 per cent to 80 per cent with higher mortgage rates, depending on the purpose of the unit; for use or rent. Also, cash from investor’s Central Provident Fund (CPF) savings are not valid to purchase industrial properties.
Thinking To Invest In Industrial: What industrial investors should know
The design of the industrial unit should fit the purpose of the intended end-user, which might not be the buyer himself. It is imperative that investors are informed of the end-users needs.
Besides having secured an established industrial estate with good infrastructure, an experienced property agent who knows the rules and market trends is also called for. Similar to the residential market, investors can then engage a property agent who specialises in the industrial sector to market their unit when it is complete.
SLP International research head Nicholas Mak expressed his concerns that there are some property agents out there that are too hasty in closing industrial property sales and misinforming eager investors.
Individual responsibility have to be taken by investors to be aware of the rules and regulations governing industrial property, such as allowable uses and who their target end-user is for the specific type of space they are buying. Also, the design and type of space must fit the industrial zoning.
For example, space zoned B2 is meant for general industry that is commonly catered to manufacturers, welders and furniture makers. It is heavier, noisier, dirtier and may even be used to store dangerous, corrosive or flammable chemicals on the premises.
Thinking To Invest In Industrial: What to avoid?
A good industrial project should have service lifts, sufficient floor-to-ceiling height and adequate floor loading capacity. To attract tenants, these basic provisions for business operations is a necessity added Mr Png of Knight Frank.
Apart from the location, size, price and tenure, investors should be wary of developments that do not come with basic industrial facilities and amenities and hence failing to meet the end-user’s needs. Also, retail investors should not give in so easy to projects that claim to have high projected rental yields.
Collier’s Mr Tan added that a typical leasehold industrial project would command a rental yield of about 6 to 8 per cent. Should the yield of an industrial project is unusually high, it is wise to look for other similar developments in or around the vicinity to determine the possibility of whether a project can deliver its promised returns through other rental comparisons.
Thinking To Invest In Industrial: Can yields hold?
Many of the suppliers of MNCs are the users of industrial space. Mr Mak added that so as long as the Government can continue to retain and attract new multination corporations (MNCs), the market fundamentals would be able to support the price, rentals and demands.
A slow economic year did lead to rents and prices dipping. Although yields are expected to be compressed slightly as industrial prices outpace rental increases, experts say that there is unlikely to be a bubble brewing in the sector as there is a healthy supply of industrial space in the pipeline.
Potential investors such as Vincent Gan, who works in the IT industry expressed his interest in the industrial sector. He does not expect the new rulings to have a significant impact and added it is definitely important to know the changes. Having experience in the commercial and residential properties, Mr Gan readies himself by doing his own research and attending property talks to familiarise and consider its worth in the industrial sector.
Freehold industrial and leasehold properties enjoy yields of about 3 to 4 per cent and about 6 to 8 per cent respectively. In light of the low 5 to 10 percent rental in 2012, yields are expected to compress proportionately, said Colliers’ Mr Tan.
Despite having said that, SLP’s Mr Mak expects yields to be sustainable at around 4 to 7 per cent as some investors may not be willing to accept yields of less than 4 per cent. He added that is unlikely that yields will fall below that.
(Adapted from Sunday Times 1st April 2012)
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