SG Industrial Property Market – August 2016

A few days ago, a CNA news headline caught my attention:

“Quarterly industrial property prices, rentals fall; more supply coming onstream”

“…… JTC said that in the second half of 2016, about 1.6 million sqm of industrial space is estimated to come on stream. This is higher than the average annual supply and demand over the past three years.”

155) garage-891802__180.jpg

My portfolio actually had substantial exposure to the industrial property sector, and is probably still rather exposed to it, albeit much less so after the divestment of Hock Lian Seng.

Still, this is a sector that I’ve paid attention to closely previously, but has recently not been very updated.

Boustead Singapore, via it’s stake in Boustead Projects, has exposure to the industrial sector. LTC Corporation owns 4 blocks of industrial properties and marks the value to market annually, so for sure, it’s exposed to the general market prices. Hock Lian Seng (which I may re-enter in the distant future) also has substantial exposure to the industrial sector, and is currently building an industrial project that’s slated to TOP in 2018. If the trend continues, it looks like HLS is getting the timing wrong this time round.

The data sure does not look good:

156) Industrial property vacancy rate 2Q2016.jpg

All forms of industrial properties have seen the vacancy rates rise compared to previous quarter, as well as comparing to the previous year.

Looking at Figure 1, the vacancy rates of all the industrial properties are generally at their highest since 2013.

The business park sector in particular, has seen a massive rise in vacancies of 4.3% compared to last year. These are usually the “light industrials”.

More importantly, is this the bottom?

To answer this question, we’ll need to have visibility on the demand, as well as the supply. Based on the general local corporate earnings in related sectors, as well as my view of the global economy, unfortunately, IMO, the demand is just going to continue dropping.

The retail sector (commercial) is getting whipped and the trend looks set to continue. I think the industrial sector is not far behind, and will have much more to fall.

Trying to catch the bottom based on demand predictions though, is a fool’s game. This is inevitably tied to the global economy and subsequently demand for industrial properties.

The supply though, is something that’s more substantiated by data.

157) Industrial property supply 2Q2016.jpg

Here we can see a gradual supply coming on-stream in the coming years. The upcoming 1.6mil sqm of industrial property in 2H2016 is likely to come on at the wrong time though. I just don’t see this bumped up supply getting occupied.

158) Industrial property occupany rate 2Q2016.jpg

As we can see from the data, the newly built/TOP industrial property in 2016, has only had an occupany rate of 9.9% as of 2Q2016.

This is excluding the 1.6mil sqm in 2H2016. While the vacancy rates have been rising, we have yet to see a precipitous fall in industrial property prices. With this bumper crop coming up, the headwinds present in the industrial sector is only going to get stronger.

My opinion is that the industrial property market is going to continue to fall, most likely in a gradual descent.

This is something I’m keeping in mind as I relate this trend to my portfolio.

Boustead is likely to be relatively insulated, as BP has been spun off and BP is rather specialized and is moving into sectors that have stringent specifications for the property eg. aerospace sector.

BBR has no exposure to the industrial property sector.

HLS has rather substantial exposure, but that’s due in 2018 and it’s hard to say how markets will look like then. Still, although the project TOPs in 2018, they’ll probably be launching some time in 2017. If the trends continue, the launch would probably be done in a very competitive environment, and the selling price psf would be relatively low.

LTC Corp has exposure to industrial property sector not just locally but in Malaysia as well. I won’t be surprised to see annual writedowns in the value of the industrial properties, but this should have minimal impact on the share price due to the massive discount to BV.

CONCLUSION

The industrial property sector is the elephant in the room. In the near to mid term, having exposure to this sector is not a good thing. Even if demand stays constant, and this by itself is highly debatable, the upcoming supply will only serve to depress the general market more.

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