JLL: investment sales set for bull run in 2017

According to consultancy JLL in a new report, property investment sales are set for a bull run after a spectacular start to the year. The positive outlook is being driven by the office, and possibly the retail and residential sectors.

The overall value of real estate investment deals soared 67 % in the first quarter to $4.99 B – of which $4.47 B was from the private sector.

Private investment sales of office property accounted for $2.12 B – the sector’s strongest first-quarter showing for the past 9 years. The $2.12 B figure was a 60.6 % rise from the fourth quarter, and more than treble that of a year ago. Last year’s private-sector investment sales stood at $19.06 B.

The top two office deals in the first quarter were entity sales. One was the sale of the entire interest in the holding company of PwC Building in Cross Street to an indirect unit of Manulife Financial Corporation for $760.6 M. The other was the divestment of the entire interest in Plaza Ventures – the owner and developer of GSH Plaza in Cecil Street – to Hong Kong-listed Fullshare Holdings for $725.21 M.

JLL noted the potential for the full-year sales of private office assets to surpass the $6.49 B recorded last year, considering the recent deal for One George Street and sizeable assets available in the market, including Asia Square Tower 2 in Marina Bay.

The residential segment, registered $1.69 B in private investment sales for properties valued at $5 M and above in the first quarter.
For retail and industrial sectors, private investment sales more than doubled that from the previous year in the first quarter: $280 M for retail and $390 M for industrial.

JLL predicts a bright investment sale outlook for the year, driven by the recent sale of the $2.2 B Jurong Point mall and upbeat sentiment in the private residential market. A growing appetite for collective sale sites by developers facing depleting land banks and limited supply of sites from the Government could also lend support to investment sales.

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Prices, rents of industrial space taper off

Prices and rentals of industrial space kept moderating in tandem with occupancy rates in the third quarter after a rise in supply of industrial land and space by the Government in recent years.

Tender prices for industrial government land sale sites targeting multiple-user developments have also declined, said state industrial landlord JTC yesterday.

Indicies for industrial space and multiple-user rental fell by 1.8 per cent and 2.2 per cent respectively, quarter on quarter.

Year on year, those two indices declined by 1.3 per cent and 2.3 per cent respectively.

This is the first year-on-year drop in rentals since early 2010, in contrast to the average increase of about 8 per cent a year over the past four years, said JTC.

Prices of industrial space also kept stabilising, with the industrial space and multiple-user factory space price indices falling by 0.9 per cent and 1.8 per cent respectively, quarter on quarter.

These falls reverse their respective gains of 0.7 per cent and 2.5 per cent in the previous quarter.

Colliers International director of research and advisory Chia Siew Chuin said the fall in multiple-user factory prices is not surprising, given the subdued state of strata-titled industrial property sales amid a price standoff between buyers and sellers.

Year on year, the industrial space and multiple-user factory space price indices rose by 0.2 per cent and 3.4 per cent respectively, significantly slower than their average rises of about 16 per cent per year over the past four years.

After a 0.9 percentage point decline in the second quarter, the occupancy rate of the overall industrial property market edged up by 0.2 percentage point quarter on quarter to 90.9 per cent in the third quarter.

This was on the back of a 1 per cent rise in demand, outstripping a 0.8 per cent increase in supply.

The better occupancy rate was driven by the warehouse segment, mainly due to the take-up of a few new single-user warehouses.

For multiple-user factory space, the occupancy rate fell by 0.5 percentage point to 86.8 per cent, the lowest level since late 2007, as a 1.5 per cent increase in supply outstripped the 1 per cent increase in demand.

Year on year, the occupancy rate of the overall industrial property market slid 1.8 percentage points to 90.9 per cent.

For multiple-user factories, the occupancy rate fell by 3.3 percentage points to 86.8 per cent.

Looking ahead, about 1.2 million sq m of industrial space, including 167,000 sq m of multiple- user factory space, is set to come onstream this quarter, bringing the full year supply of industrial space to 3.1 million sq m.

A further 2.6 million sq m and 1.9 million sq m of industrial space is tipped to come onstream in 2015 and 2016 respectively.

This is significantly higher than the average annual supply and demand of about 1.4 million sq m and 900,000 sq m respectively in the past three years, and is likely to exert further downward pressure on occupancy rates, JTC noted.

The Government will keep monitoring the industrial property market closely to ensure that the diverse needs of industrialists are met, it added.

“Appropriate measures will also be introduced where necessary to promote a stable and sustainable industrial property market.

“JTC will also continue to develop more specialised and innovative facilities with productivity- enabling features such as shared facilities and services, to support the growth of key industry clusters and catalyse new ones in the coming years.”

Ms Chia reckons sentiment is expected to remain mixed in the final quarter, given the uncertainties surrounding the global economic recovery.

– See more at: http://business.asiaone.com/news/prices-rents-industrial-space-taper#sthash.hzcNEEzf.dpuf

Industrial property in Q4 likely to stay mixed

SINGAPORE’S industrial property market is expected to remain mixed in the fourth-quarter of 2014, given the presence of persistent downside risks, which include uncertainties surrounding the global economic recovery and the traditional year-end holiday lull.

Colliers International on Thursday said in its report that replacement anchor sub-tenants will be harder to find when secondary industrial space becomes available from expiring sale and leaseback transactions.

Chia Siew Chuin, director of research and advisory at Colliers, said current anchor sub-tenants leasing space from third-party facility providers will enjoy stronger bargaining power in lease-renewal negotiations.

“This could hurt rents and yields achievable by the third-party facility providers in the medium term,” said Ms Chia, who added that rents for business parks and independent high-specs buildings are expected to hold steady in Q4, similar to Q3, mainly because of a tightening in supply.

But the prime conventional industrial segment, would probably have rents easing marginally further in Q4 on supply pressures, said Ms Chia.

Sale of strata-titled industrial properties is expected to remain slow, with the likelihood that the number of caveats lodged for the entire year will be below the 2,000-level.

The last time fewer-than-2,000 caveats were lodged for strata-titled industrial properties was in 2009 at about 1,500.

Ms Chia added that the average capital values of prime freehold conventional warehouse and factory space are expected to remain at their current levels in the next quarter.

The mixed outlook comes on the back of a muted industrial property market here in Q3, despite a stable stream of leasing activity.

Sale transactions of strata-titled industrial properties in Q3 fell by about 36 per cent quarter-on-quarter to 203, according to URA Realis caveats.

DTZ Research said this is way below the 672 strata-titled units that were sold in the same period last year. So far, there has been 842 transactions this year, much lower than the 1,986 in the same 2013 period.

DTZ said the decline in transactions was due to fewer new launches, seller’s stamp duty measures, as well as the implementation of the Total Debt Servicing Ratio (TDSR) framework last June.

Both average capital and rental values of conventional industrial space have also stagnated, while business park rents bucked the trend and continued to rise in Q3.

The average monthly gross rents for business parks continued to increase by 2 per cent quarter-on-quarter in Q3 to S$5.00 per sq ft, said DTZ.

Still, business park rents are lower than office rents and the former is drawing more office occupiers, said Cheng Siow Ying, DTZ’s executive director of business space.

“The difference in rents can be as high as 30 per cent, compared with the average office rents in the decentralised areas,” she said.

The downward pressure on rents for conventional industrial space might continue, said DTZ.

A total of 40.7 million sq ft of industrial space is expected to be completed by 2016, of which 27 per cent are multiple-user factories.

Lee Lay Keng, DTZ’s regional head (South-east Asia) research said the large supply in 2016 is “likely to restrain rental growth”.

“The older business parks may find it increasingly difficult to retain and attract tenants alongside these newer business parks,” said Ms Lee.

CBRE said in its report that the difference in rents between business parks located in the city fringe and those in the rest of the island has widened further in Q3 this year.

Michael Tay, executive director, office services at CBRE said: “Occupiers are more keen on higher specifications, quality developments which the city fringe has been able to provide. The location and connectivity are also important considerations which prompt occupiers to pay the premiums in rent. “

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Fancier Industrial spaces

WITH their tennis courts, swimming pools and barbecue pits, the new wave of industrial developments opening their doors in 2015 and 2017 almost resemble residential properties in terms of the facilities they offer.

One example is Tagore Lane’s Business 1-zoned Tag.A. Instead of projecting the utilitarian image associated with industrial properties, Tag.A has a glossy facade and houses a rooftop pavilion, swimming pool, basketball court, gym and barbecue pits, among various facilities.

New strata-titled industrial developments touting amenities such as those offered by Tag.A have been selling well and target ambitious young businesses, noted Oxley Holdings chief executive officer Ching Chiat Kwong.

Oxley is behind four such properties, three of which have sold all their units, said Mr Ching. He added that 65 per cent of units have been sold at Oxley’s most recently launched development with similar features, Eco-Tech @ Sunview, which comes equipped with a basketball court.

“Developers (want) to differentiate their products with these facilities,” said CBRE head of research Desmond Sim. “It’s the ‘Milo dinosaur’ effect. If you don’t put a heap of Milo powder on it, it’s ‘iced Milo’ – you can sell it for only half the price. (If) you can term it something special, then people will choose the product and pay more.”

The people choosing these products are a younger generation looking for alternatives to the “cold, clean kind of look” typical of industrial properties, he added.

Colliers International executive director Tan Boon-Leong agrees: “Nowadays . . . buyers are more sophisticated. Gone are the days when you’re selling a factory with smoke coming out of the chimney.

“You’re going to hire the degree holders. (With these facilities) your value-added quantum is higher. So the professionals are the ones you’re trying to attract,” he added.

In an increasingly competitive talent market, these facilities contribute “to companies being able to secure and retain the best talent”, said Cushman and Wakefield managing director Toby Dodd.

Another practical consideration is the boost in sales these facilities could offer upper floors. These are typically the hardest floors to sell in an industrial property, said Mr Tan, but a view overlooking a swimming pool could change that.

“It will add value to the upper floors. (Otherwise) who would want to ramp up all the way to the 10th storey?”

Sales are not the only side to these properties’ value coin; the developments should also command higher rentals because of the increased maintenance fee burden that the recreational facilities place on owners.

However, once these projects are granted their Temporary Occupation Permit, they do not seem to command a premium rental compared to traditional offerings, said OrangeTee head of research and consultancy Christine Li.

One example cited by SLP Research is UB.One, a basic industrial project whose $2.88 per square foot per month average asking rent tops that of the two recreation-ready projects located nearby: Oxley Bizhub and Oxley Bizhub 2. The three projects were completed within two years of each other, said SLP.

There are several possible reasons why these facilities may not be as well received. “Some SME bosses are concerned that their workers might get distracted by these facilities and hence become less productive at work,” Ms Li said.

Mr Tan wonders how many employees would be comfortable swimming in a pool where their colleagues and bosses can see them from their cubicles. A possible explanation for the way sales have outperformed rentals is that these developments appeal to some investors, said SLP research head Nicholas Mak.

“While the lifestyle facilities may appear appealing . . . the most important factors to end-users are the accessibility, the usability (in terms of suitable specifications) and the business synergy with other companies in the vicinity,” said Mr Mak, adding that this explains why these projects tend to attract more investors than end-users.

Investors who are used to buying residential property but are new to the industrial market are the ones attracted to these properties, he said.

He believes that after the government implemented property- cooling measures such as the additional buyer’s stamp duty (ABSD) and the total debt servicing ratio (TDSR), these investors may have moved to the industrial market, drawn to industrial properties with familiar, premium residential features.

Recreational facilities remain deal sweeteners, said CBRE’s Mr Sim. “Learned investors will still look at the basics . . . price, location and the potential of the product being launched.”

New JTC rules on industrial land

Revised Subletting Policy (with effect from 1 October 2014)

http://www.jtc.gov.sg/policies-and-procedures/pages/subletting.aspx

Currently, JTC’s lessees or tenants are allowed to sublet their space to facilitate the co-location of related companies and activities for better synergy. They are also allowed to sublet temporary vacant space to other companies, putting scarce land resource to productive and optimal use. As lessees or tenants have been allocated the land for their own productive use, they have to continue to occupy the majority of the space. As such, JTC has set a limit on the maximum amount of space lessees are allowed to sublet.

Upon extensive consultation with various industrialists and industry associations, there is general agreement that 30% of the total gross floor area (GFA) is an adequate steady state space for a company to use as buffer to cater to fluctuating business volumes. As a result, JTC will be adjusting the maximum allowable sublet quantum from 50% to 30% of GFA, with effect from 1 October 2014 onwards  This sublet quantum cap does not apply to lessees subletting to their wholly-owned subsidiary or company in which they have a majority shareholding of at least 51%. In addition, given that tenancies are short term, JTC tenants will no longer be permitted to sublet their space. In the event tenants have excess space , they can renew their tenancy for a lower quantum at the end of their current term.

The changes to the Subletting Policy are reflected as follows:

The changes to the Subletting Policy are reflected as follows:

Affected Parties	Current Policy	Revised Policy with effect from 1 October 2014
End-user Lessees	Can sublet up to 50% of GFA per allocation upon Temporary Occupation Permit (TOP), to non-related companies.	Can sublet up to 50% of GFA to non-related companies within five years after obtaining TOP, and up to 30% thereafter.
Third-Party Facility Providers​​	– Can sublet up to 50% of GFA per allocation to non-anchor subtenants. – Must sublet at least 50% of GFA per allocation to anchor subtenants​	– Can sublet up to 50% of GFA per allocationto non-anchor subtenants within five years after obtaining TOP, and up to 30% thereafter – Must sublet at least 50% of GFA to anchor subtenants within five years from obtaining TOP, and 70% thereafter.​
	No minimum occupation period for subsequent anchor subtenants.​	Minimum occupation period of three years for subsequent anchor subtenants.​
JTC’s Tenants​	Can sublet up to 50% of GFA to non-related companies.​	Not allowed to sublet.​

Note: All subletting applications are subject to JTC’s consent.

For additional information on the Revised Subletting Policy, please refer to the FAQs here.

Subletting

• JTC has not commenced any legal action against you

• You are not subletting your premises for pure office use only, unless it supports the manufacturing operations located within the premises

• You may not sublet your premises for third-party logistics warehousing, unless prior approval has been given by JTC for you to use it for third-party warehousing

• You are not carrying out any open land/ unauthorised subletting

• You do not intend to sublet any open land

• Your subtenant’s usage is Industrial and complies with other Government Agencies’ rules and regulations (e.g. Urban Redevlopment Authority (URA)’s 60:40 usage quantum)

• Your subtenant’s usage complies with JTC’s usage guidelines (i.e. usage should be compatible with JTC’s usage zoning/ URA’s land use zoning and does not fall within the Negative List or Further Assessment List etc).

• Central Building Plan Unit (CBPU) must have cleared your subtenant’s usage

• Public Utilities Board must have cleared your subtenant’s proposed water consumption if the subtenant is applying for NEWater/ industrial water usage or if the potable water consumption exceeds 500 cubic meters per month.
• For information pertaining to third party facility providers, please click here.

See also:

http://www.businesstimes.com.sg/premium/top-stories/tighter-jtc-subletting-rules-seen-crimping-reits-20140711

In today’s article in BT, it was reported that JTC’s tightening of its subletting rules is expected to affect the Reits market here.

For sure, it will temper sale and leaseback transactions – where industrialists wishing to be asset-light and to unlock value from their properties sell their factory leases to third parties such as real estate investment trusts (Reits).

This is because Reits will probably become more selective with their acquisitions, now that they must sublet at least 70 per cent (up from 50 per cent) of their total gross floor area (GFA) to an anchor tenant five years after the factory is completed.

“If pre-acquisition, the anchor tenant does not take up 70 per cent of the space, the Reit will think twice,” said one analyst who requested anonymity.

“Take Ascendas Reit’s recent acquisition of Hyflux Innovation Centre last month. Hyflux will leaseback 50 per cent of the GFA. The centre’s other existing tenants are NEC, Covidien, American Express and Renesas Electronics Singapore. Now, Ascendas Reit will have to find a way to occupy the extra 20 per cent in three years’ time to comply with this ruling.”

The policy shift will thus result in a slowdown in Reits’ pace of acquisitions and portfolio expansion, and growth will have to come from elsewhere – organically or through development, DBS Group equity research analyst Derek Tan said.

He projects a continued tough environment for industrial Reits as an enormous imminent space supply is expected to keep moderating rents.

Undaunted yet, seven of the nine industrial Reit counters on the Singapore Exchange rose slightly on the stock market yesterday; only Cache Logistics Trust finished flat while Viva Industrial Trust dipped 0.6 per cent.

JTC wants to ensure that the Reits which have bought over industrial premises will continue to rent the bulk of the space to the industrialists. “After all, the land was allocated by JTC to the industrialist for that specific use,” it told BT.

That said, if a Reit is unable to find a single tenant to take up 70 per cent of the space, JTC does allow multiple anchor sub-tenants to occupy the requisite area, as long as they each occupy at least 1,500 sq m and satisfy certain productivity criteria.

Industry watchers say another effect of the policy could be the creation of an anchor tenants’ market.

“Going forward, Reits will probably insert stronger clauses in their agreements to disallow anchor tenants from downsizing after five years. The anchor tenant will maybe input that into rentals and ask for rent discounts. This gives it bargaining power,” said CBRE research head Desmond Sim.

As Reits offer rental concessions to secure larger anchor tenants, this may also have the unintended effect of creating a two-tier market which magnifies rental differentials between large anchor tenants and smaller tenants, said UOB Kay Hian analysts Terence Khi and Vikrant Pandey in a report.

Mr Tan from DBS believes that the pool of eligible tenants that meet the “anchor tenant” classification will shrink in tandem with JTC’s stricter definition, and industrial landlords will compete for them. “But on the flip side, these tenants will tend to be better-quality, longer-lasting ones.”

Most agree that there is still time for Reit landlords to comply with the new rule. They are given a three-year grace period until end-2017 to adjust.

Of the nine industrial trusts here, UOB Kay Hian has identified Sabana Reit as the riskiest.

Two of its buildings at Chai Chee Lane and Commonwealth Lane – which make up 11 per cent of its valuations – stand at occupancies of 53 and 69 per cent respectively. “If negotiations are not already at an advanced stage, Sabana will need to secure anchor tenants for 17 per cent of the space,” it said.

Most Reit-owned industrial buildings here measure up to the revised requirement, with some landlords like AIMS AMP Capital Industrial Reit already fully compliant. Others may even stand to benefit from the change.

“As smaller tenants squeezed out from existing sub-tenancies will have to seek alternative compliant leases, Mapletree Industrial Trust’s flatted factories … could see a surge in interest from smaller space tenants,” it said.