Industry Outlook Industrial Real Estate (Singapore)

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1 Refer to important disclaimers at the end of this report DBS Group Research Asian Insights Office 22 August 2017 Overall Outlook We believe the outlook for Singapore s industrial sector will remain soft in the immediate term and will only start to bottom out from end2017 on the back of abating supply risk Rental rates are expected to edge down by 5% in 2017 and bottom out in 2017 Demand for space has lagged supply growth over the past few years as firms consolidate or downsize their space requirements to save costs Vacancy rates are expected to remain on an uptrend, reaching 11% and bottoming out only from 2019 Industrial market summary Key Indicators 4Q16 1Q17 % Change (qoq) 2Q17 % Change (qoq) Price Index Industrial Property % % MultiUser % % Rental Index Industrial Property % % MultiUser Factory % % SingleUser Factory % % Warehouse % % Business Park % % Vacancy rate Industrial Property 105% 106% 10% 113% 66% SingleUser Factory 91% 94% 33% 96% 21% MultiUser Factory 127% 130% 24% 136% 46% Warehouse 103% 101% 19% 119% 175% Business Park 170% 160% 59% 143% 106% Pipeline under construction Industrial Property % % SingleUser Factory % % MultiUser Factory % % Warehouse % % Business Park nm 14 nm Source: Jurong Town Corporation Manufacturing sector expanded in 2017 Singapore s manufacturing sector has been showing signs of a rebound in activity, with the purchasing managers index recording an expansion in June 2017 The electronics, precision engineering, chemicals and biomedical, and manufacturing clusters registered an increase in output while the transport engineering and general manufacturing clusters contracted In addition, latest posturing from the government implies that 2017 growth could come in at the higher end of GDP estimate of 23% another positive sign Page 1

2 Demand Net surplus of space As of 2Q17, takeup for industrial space still lagged the increase in supply, with a net increase in unoccupied space of close to 30 million square feet (sqft) The majority of this space is expected to be taken up progressively by enduser occupiers in the coming quarters We believe that demand for space comes on the back of consolidation of operations to achieve operational efficiency, which is one of the key drivers for space in the industrial sector Hence, we expect the increased takeup in the singleuser factory space to be at the expense of higher vacancy rates emerging from existing multiuser factory space, which some of the endusers are expected to vacate Supply 2017 a year of consolidation The industrial market is at the tailend of a period of a spike in supply completions starting from 2014 and peaking in 2017 As such, landlords are facing an increasingly competitive operating environment and with the weak demand outlook on the back of a slowing economy, we expect downside risks to occupancy rates and market rents Based on the latest statistics from the Urban Redevelopment Authority (URA), a total of 43 million square metres (sqm) equivalent to 423 million sqft of new industrial space is either under construction or in planning and is projected to complete over the next four years, from 2017 to 2020 Of this, more than 75% of the space will be completed and operational by the end of 2018 Among industrial types, the singleuser factory space will see close to 16 million sqm in new supply (representing a 66% increase), the multiuser factory space will see about 13 million sqm of new supply (123% rise), and the warehouse space will add around 08 million sqm (up 83%) The business park space will add another 123,000 sqm However, most of the space is precommitted and thus, not an issue for existing landlords Forecasts Industrial sector s overall vacancy rates to increase to 1011% by 2017; bottoming out from 2018 onwards Taking into account assumed precommitment rates and projected new demand, and faced with an increasing supply outlook, the average vacancy rate is now 113% (as of 2Q17) and we expect further weakness until the end of 2017, before it bottoms out from 2018 onwards As the influx and pace of completions are skewed over , we believe that, on average, spot rentals are likely to see downside to the tune of 5% in 2017, with the exception of business park space which we believe will be resilient with around 03% growth Page 2

3 Key Charts Industrial Sector Business expectations improving 20% 16% 15% 10% 7% 7% 5% 4% 3% 1% 2% 0% AprSep'16 JulDec'16 Oct'16Mar'17 JanJun'17 AprSep'17 5% 1% 4% 10% 9% 15% General Business outlook Output forecast Supply tapering down from 2018F onwards m sqft A net weighted balance of 7% of manufacturers anticipate a favourable business situation for the period of Apr Sep 17, compared to 1Q17 2 A net weighted balance of 16% of manufacturers expect to see a 16% rise in output from Apr Sep 17 1 A dropoff in supply in 2018 will ease pressures on industrial REITs F 2018F 2019F 2 Downward pressures on rentals and occupancy rates are expected to taper off in the medium term Supply Demand Source: JTC Corporation, DBS Bank Net absorption remains negative but significant improvement expected from 2018F m' sqft % 106% 103% 60 91% 94% 97% % (20) F 2018F 2019F (40) (60) (80) Net Absorption Rate Market Vacancy Rate (%) 110% 100% 90% 80% 70% 60% 50% 1 Net absorption is projected to turn positive in 2019F Source: JTC, DBS Bank Page 3

4 Rental reversion trend to remain negative over % 40% 30% 1 Rental reversion trends are expected to turn from flattish to negative from 2016 onwards 20% 10% 0% F 2018F 2 The factory and warehouse space is expected to see a larger drop in rental reversions 10% Business Park Warehouse Factory 20% 3 Business park space is expected to buck the trend Rental trends (forecast) Industrial Segments F 2018F S$ psf/mth S$ psf/mth S$ psf/mth S$ psf/mth Factory Warehouse Business Park % Change % Change % Change % Change yoy yoy yoy yoy Factory 2% 7% 5% 3% Warehouse 3% 8% 5% 3% Business Park 1% 0% 2% 2% 1 Rentals for the factory and warehouse segments are forecast to decline by 5% over the next two years We believe the warehouse space will see the largest declines given supply competition 2 The business park segment is expected to increase by 2% in 2017 to 2018, supported by a lack of supply completions Page 4

5 F 2018F 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Industry Outlook Industrial Subsector MultiUser Factory Multiuser factory supply: Supply spike in 2016 to be an overhang 1 Supply completions to spike in ; resulting in vacancy rates increasing to more than 14% Potential shadow space from singleuser factory space might result in increased competition for tenants Million Sqft 2 However, we see risk emerging from the shadow space arising from the singleuser factory segment if endusers decide to sublease part of their space (bottom chart) 3 Rentals are expected to remain under pressure as competition heats up We project a 5% drop over 2017 followed by a more modest 3% fall in F 2018F 2019F MultiUser Space Potential Shadow space from SingerUser Factory segment Multiuser factory: Occupancy and rental rates to dip S$ psf pm MultiUser Factory 92% 91% 90% 1 Multiuser factory rents expected to decline 5% in % 88% 87% 2 Occupancy rates projected to dip to 85% going forward % 85% 84% Rental (LHS) Occupancy (%) (RHS) Page 5

6 F 2018F 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Industry Outlook Industrial Subsector Warehouse Warehouse: Oversupply situation to persist until 2018 m Sqft F 2018F 2019F Supply Demand Vacancy Rates 12% 10% 8% 6% 4% 2% 0% 1 Supply under construction remains one of the highest among industrial subsectors 2 While new supply appears to be precommitted, we believe the emergence of shadow space will create an overhang on landlords ability to raise rents Warehouse: Occupancy to dip below 90% S$ psf pm Warehouse 95% 94% 1 Warehouse rents expected to decline 3 5% in % 92% 91% 2 Occupancy rates projected to dip below 90% going forward 90% % 88% Rental (LHS) Occupancy (%) (RHS) Page 6

7 Industrial Subsector Business Parks Majority of business park space has been precommitted '000 sqft Global Financial Crisis ( ) Eurozone Crisis (2012) 100% 95% 90% 85% 80% 1 The sector is expected to see minimal increase in supply, which will be supportive of rental rates going forward We believe the high vacancy in the market can be absorbed slowly over time (001) F 2018F 2019F 75% 70% Demand for Private Business Park Supply for Private Business Park Occupancy Rate (%) Business parks: Rental differential currently above historical averages (S$ psf/mth) Business Park vs Grade A Office rents 1 Rents of business park spaces located in offcentral and rest of island areas tend to be at 50% and 60% discounts, respectively, to GradeA offices Q04 4Q05 4Q06 4Q07 4Q08 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 4Q15 4Q16 2 Current differential is above the historical average, but the softening outlook for the Central Business District office rents caps further upside Grade A Office Business Park Rest of Island Series3 Page 7

8 Appendix Rental Indices of Industrial Space Rental indices (by region) Multiuser factory Period All MultiUser SingleUser Business Warehouse Industrial Factory Factory Park 1Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Page 8

9 Rental indices (by region) Multiuser factory Period Rental Index of MultipleUser Factory MultiUser Planning Region LandUse Zoning Factory Central North West East Northeast Business 1 Business 2 Region Region Region Region Region 1Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Page 9

10 Price Index of Industrial Space Price indices of industrial space Period Price Index of MultipleUser Factory Multi User Factory 30 Years Remaining Tenure LandUse Zoning Region Years > 60 Years Business 1 Business 2 Central Region North Region West Region Other Regions 1Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Page 10

11 We Cover AIMSAMP Industrial Real Estate Investment Trust Ascendas Real Estate Investment Trust Cache Logistics Trust Cambridge Real Estate Investment Trust Mapletree Industrial Trust Mapletree Logistics Trust Sabana Real Estate Investment Trust Soilbuild Real Estate Investment Trust Viva Industrial Trust Our InHouse Expert Derek Tan Please note that DBS Bank Ltd may have research coverage in the companies mentioned in this industry report, that have been produced prior to or subsequent to its publication Please refer to the links below for the latest specific equity research reports published on belowmentioned companies and the accompanying disclaimer/disclosure of DBS s interest in the companies mentioned in the respective reports Page 11

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