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New property zone in the making

IN what could be a precursor to the creation of a new class of space – between office and light industrial – JTC Corporation is understood to be spearheading the development of a building, expected to be in Woodlands, that will provide affordable space for rental to companiesthat provide manufacturing-related services but do not have industrial production in Singapore.

This is in response to feedback in recent years from trade associations that there is a lack of affordable office space in Singapore. At the same time, many businesses do not qualify for the use of cheaper premises zoned for Business 1 (or B1) use, where typically light industrial and warehouse uses are allowed – since they do not have manufacturing operations here.

Moreover, the Urban Redevelopment Authority (URA) has a planning rule that effectively forbids the use of industrial space as pure offices. In the past few years, the authorities have strengthened enforcement action against unauthorised use of B1 space.

This has led to calls from some quarters urging URA and JTC to relax the definition of permitted uses in the B1 zone – to keep pace with the changing industrial production landscape, with a blurring of the traditional division between manufacturing and services.

However, instead of relaxing B1 use – which could be seen as penalising those that have been adhering to the approved uses of this zone and condoning those that have been flouting planning regulations – the authorities seem to prefer a new intermediate zone between B1 and commercial.

Industry observers reckon that rental in the new building could be slightly higher than that for B1.

It is thought that JTC is planning a pilot project to get a sense of the level of genuine demand for such space. If there is deep demand, the statutory board could offer more of such space or even sell land with the new zone through the Government Land Sales Programme for development by the private sector, guessed analysts.

Market watchers commented that the Woodlands location is ideal to test demand for the proposed zone.

Its proximity to Iskandar Malaysia would allow companies to locate their factories in Iskandar where industrial space is cheaper and house supporting value-added services in the JTC pilot project, said a market observer.

Preliminary information about the new building could be released over the next few months, BT understands.

When contacted, JTC said: “URA’s Master Plan 2014 identified several new growth areas that will provide new commercial and business spaces and bring jobs closer to homes. They include the Woodlands Regional Centre, which is envisioned to be a vibrant live-work-play business hub with new transport connections . . .

“JTC is working with URA and the relevant agencies on the detailed plans for these growth areas. We are engaging industry players to get ideas.

The details are still being worked out.”

Market expectations are that JTC is likely to allocate space in the proposedprojectona rental basis to qualifying users only if they meet stringent criteria that are likely to include proof that their organisation is involved in manufacturing – even though production is located overseas.

Such tenants could potentially use the space for their headquarters, distribution hub, buying office, design centre, servicing and other approved functions. Clear-cut office uses such as the activities of advertising firms, lawyers and front-end operations of banks will not be allowed in the new zone.

DTZ South-east Asia chief operating officer Ong Choon Fah said: “The nature of manufacturing has changed with the knowledge-based economy and so there is a need for the definition of manufacturing space to evolve alongside this transformation.”

Currently, at least60 per cent of total floor area in each strata unit in a B1 development must be set aside for core industrial activities such as clean and light manufacturing, assembly and repair, or warehouse and storage.

The other 40 per cent may be for supporting purposes including ancillary offices.

However, standalone offices that do not support core manufacturing activity by the same occupier in the same premises do not qualify for B1 use. The rule is intended to ensure industrial space is used predominantly for industrial activities.

– See more at: http://news.asiaone.com/news/singapore/new-property-zone-making#sthash.gwEmjsVA.dpuf

JTC seems to be taking an incremental planning approach through the proposed intermediate zone between Business 1 (B1) and commercial uses. Had it opted for a big-sweep rezoning of some areas of Singapore from say B1 use to the new zone, that would cause major problems for both owners and tenants of B1 premises.

JLL head of South-east Asia research Chua Yang Liang said: “A step-by-step measured approach will allow JTC to test-bed the proposed zone, study the impact and adjust the concept if necessary before widening its implementation. To do a widespread change of use overnight from B1 could create severe knock-on effects in the market.

“For instance, there may be repercussions for occupiers who are validly operating within B1 premises if the landlord decides to go for an upgrade to this intermediate zone – because the landlord would then want higher-paying tenants commensurate with his additional investment in the property.”

Agreeing, an industrial property analyst said: “The whole look and ambience of the building would also change . . .”

On the other hand, if the owner decides to stick to B1 zoning, the genuine B1 tenants may continue to operate in the building but tenants whose activities don’t comply with B1 usage have to leave. Even if some time is given for the transition, such occupiers would still have to leave within a definite timeframe, he added.

From a landlord’s perspective, there could be big monetary implications. The owner of a B1 building considering getting his property rezoned to the new use with a view to complying with the law – for instance, if he has tenants whose activities are not permitted for B1 zone (such as pure office use) – would be staring at the prospect of paying a substantial differential premium to the state for the enhancement in use.

DTZ South-east Asia chief operating officer Ong Choon Fah said: “If you suddenly change the rules of the game, it could jolt the market. It is better to take an incremental planning approach and test out new concepts gradually.”

Knight Frank executive director (industrial) Lim Kien Kim said that JTC’s move to develop a new building under the planned intermediate zone would further weaken industrial rents. “The government has created a lot of Business 1 space in the past few years through the GLS Programme. So now they are clamping down on unauthorised use of such space and going to create legal space for these people. That will potentially drive down demand for B1 space and have an adverse impact on B1 rents and capital values.”

He also suggested that JTC should consider piloting the new zone at one of its projects such as Seletar Aerospace Park, CleanTech Park and MedTech Hub, where there is some vacant space – instead of developing a new building in Woodlands to try out the concept.

However, Mrs Ong said: “There may be some vacancy in these projects but they are intended for very specific use. It takes time to germinate and nurture ideas; for instance, one-north also took a while before it took off.

“As lead agency in this space, JTC will always push the boundary and experiment with new space because it can take a longer-term view. JTC has to be the initiator and innovator. Once the market has accepted the new concept, the private sector can start to develop.”

The authorities’ decision not to relax permitted uses for the B1 zone – at least for now – is unlikely to go down well with industrial property agents who have been lobbying for such a move. A key plank of their argument is that Singapore’s manufacturing landscape is changing; there is now less traditional “hard core” production here but more service type activity as the Republic ascends the production value-chain.

Of course, a broader range of uses for B1 zone would also make it easier for agents to lease out such space, boosting demand, rents and prices. There is market talk of investors who have been stuck with B1 units, especially those snapped up in projects built to office specifications instead of being designed to cater to the needs of genuine industrialists. It is difficult to lease out such units given the strict enforcement by the authorities against illegal use of industrial space.

Some analysts point out that had the authorities acceded to a request to allow standalone offices, for instance, that would penalise those who had been adhering to the approved B1 uses.

“Moreover,” Mrs Ong said, “it would undermine the push towards developing decentralised offices in places like Paya Lebar and Jurong East.”

The incidence of businesses illegally using B1 space as pure offices (that is, without any core industrial or warehousing activity) gathered momentum during the office shortage that preceded the 2008 global crisis. At the time, office rents were shooting up and more companies had quietly moved into premises zoned for B1 use, to keep a lid on rental expense.

Moreover, B1 developments are typically near major transport nodes and in established areas such as MacPherson, Ubi and Tai Seng – making them an attractive alternative space for office tenants.

Around the 2011-2012 period, there were mounting complaints that such tenants whose activities were not in compliance with B1 use, were driving up rents for genuine industrial users. About the same time, a string of new strata projects on B1 sites came to the market boasting features and specifications that more closely resemble office buildings than industrial premises. Units in such developments were the subject of much speculative demand.

So the authorities stepped up enforcement action against tenants and landlords who were flouting the rules on B1 uses. And in early 2013, a seller’s stamp duty was introduced on industrial property to discourage short-term speculative activity that could distort industrial property prices and raise occupancy costs for businesses.