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JLL News Flash | JTC Q1 2017

JTC’s latest statistics showed that the sustained recovery in trade and manufacturing output has yet to translate into higher demand for industrial space in 1Q17.  According to JTC, the islandwide industrial occupancy rate eased by 0.1-percentage point q-o-q to 89.4% in 1Q17, as net new supply (409,000 sq m) outpaced net new demand (312,000 sq m) which registered a sharp drop of 47% q-o-q during the quarter.

While the dip in the occupancy rate may be attributed partly to the time lag between tenants’ commitment to a space or completion of construction, and the physical occupation of the space, usually due to fit out works, industrialists are generally maintaining their cost-conscious stance with regards to their real estate requirements, given the still fragile economic and business conditions as shown by the slowdown in leasing transactions.

Based on data obtained from URA Realis as of 27 April 2017, there were a total of 1,826 leasing transactions in 1Q17, down 9.2% from the 2,010 deals in 4Q16.

Against this backdrop, it is thus unsurprising that the overall industrial rents continued to retreat in 1Q17, and at a slightly faster pace of 0.9% q-o-q, compared to 4Q16’s 0.5% q-o-q correction.  Since the downtrend started in 3Q14, the overall industrial rents have corrected by 11.7%, according to JTC’s statistics.

However, we are surprised by the 1.0% q-o-q slide in JTC’s business park rental index, which reversed the previous quarter’s 1.2% q-o-q rise, especially given the improvement in the average occupancy rate from 83.0% in 4Q16 to 84.0% in 1Q17, and no major business park supply for the rest of 2017. 

Based on JLL’s research, underpinned by the reduction in vacant stock, limited new supply and the general uplift in economic sentiment compared to the previous quarter, business park rents firmed and inched up a marginal 0.3% q-o-q  in 1Q17.

Islandwide industrial rents to face supply pressures, business park segment expected to outperform the general market in 2017

The outlook for the industrial property market is expected to be cautiously optimistic. While the recent sustained recovery in NODX and manufacturing output could boost sentiments among industrialists in some manufacturing segments, we expect this to be tempered by the continued presence of downside risks such as anti-globalisation, political tensions in the region and uncertainties arising from US President Donald Trump’s policies.

The Monetary Authority of Singapore (MAS) in its half-yearly macroeconomic review released today, also expected trade-related sectors, especially those associated with information technology (e.g. electronics) – to drive Singapore’s economic growth in 2017, with a patchy recovery foreseen for the rest of the manufacturing sector in the near term.

Meanwhile, competition for qualifying tenants is expected to stiffen on the back of the expected increase in supply in 2017. Net new supply is expected to rise from the 1.8 million sqm witnessed in 2016 to about 2.0 million sqm (based on estimated net floor area) in 2017.

Taking cognisance of the above, we expect industrial rents to face further downward pressure in 2017. However, we maintain our view that the business park segment could outperform the general market in 2017 given the dearth of major new space completions and the continued absorption of the available stock by the growth sectors that the Government is targeting, predominantly from firms in the science, technology and media industries.