The Singapore industrial sector has been a standout performer in the real estate market. In the fourth quarter of 2023, industrial prices continued to rise, moving up 0.6 per cent from the previous quarter, while rents gained 1.7 per cent, marking an upward trend for 13 consecutive quarters.

Despite a slowdown in demand due to elevated interest rates in 2023, rents remained robust, mainly driven by undersupply, particularly for high-quality assets.

However, performance was varied among segments, each facing unique dynamics.

Prime logistics and conventional warehouses outperformed due to limited new supply and sustained demand from third-party logistics (3PL) players.

On the other hand, high-tech and conventional factories saw modest growth, influenced by a decline in tech demand and manufacturing exports.

Business parks remain a clear two-tier market, with city fringe properties seeing resilient demand due to their proximity to the city and relatively newer stock. Suburban business parks faced challenges, with older developments having higher vacancy rates and steeper rental declines compared to newer properties, some of which even managed to chalk up higher rents.

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Expectations in 2024 are for Singapore’s economy to improve, interest rates to moderate (though still remaining high compared to pre-pandemic levels) and a recovery in manufacturing growth to set in.

In turn, industrial demand is expected to rise. We anticipate broad-based rental growth, led by quality assets. The pace of rental growth, however, will vary depending on supply-demand dynamics.

Prime logistics and warehouse would continue to lead growth, driven by demand for modern and high-specification spaces, as 3PL players and e-commerce users focus on operational efficiency. While supply will remain tight into 2024, rising tenant resistance will weigh on the pace of rental growth, after a cumulative 23 per cent surge in rents in prime logistics and 9 per cent rise for warehouses, over the last three years.

High-tech factories, conventional factories and business parks should see improved rent growth this year in view of stronger manufacturing growth. There are also hopes that tech demand could see a recovery this year, after a strong rally in tech stock prices. And trends such as business digitalisation, the growing adoption of 5G, artificial intelligence and Internet of Things should spur tech demand over the long term.

No easy pickings

While growth prospects look promising, the Singapore industrial market does not offer easy pickings. With most industrial land under JTC’s management, investors must navigate and familiarise themselves with JTC’s rules and regulations.

For example, JTC industrial land may face multiple restrictions, such as:

• Anchor Tenant Subletting Rule: Third-party Facility Providers (non-industrialists) must sublet at least 70 per cent of gross floor area to an anchor tenant who needs to meet JTC’s assessment criteria based on productivity, jobs creation and economic value-add.

• Minimum Assignment Prohibition Period: Third-party Facility Providers must hold the property for five to 10 years, depending on land tenure.

While the rationale is sound, this increases leasing and investment risks for investors, particularly in the event of the exit of the original anchor tenant, and investors will need a clear leasing and risk mitigation strategy.

Short lease tenures

Most industrial land in Singapore is estimated to be on 30-year leasehold tenures or less. A short lease tenure deters many foreign institutional investors, as the value of the land declines as the lease runs down. Other markets, such as Australia and Japan, typically offer freehold land.

Shorter tenure sites create complications for asset owners to undertake asset enhancement. This is further compounded by the heightened interest rate environment as development costs are increased.

Based on our experience, investor interest for industrial land with tenure of 20 years or less tends to fall off, as the exit strategy becomes increasingly uncertain.

While extension of the land lease is possible, it is not straightforward and is subject to JTC approval and dependent on the long-term plans of the area. Typically, probability of approval is higher with a secured anchor tenant(s) with a commitment to undertake asset enhancement to raise the productivity of the land.

Who dares, wins

That said, the Singapore industrial market offers a wide range of opportunities.

Yields are driven by tenure, with shorter tenure land (30 years and below) at about 6 to 8 per cent, while freehold industrial land tends to trade around 3 per cent.

Shorter tenure industrial sites are acquired for steady rental income and can be yield-accretive for many investor portfolios, while freehold industrial sites are typically acquired for strata sales or for long-term investment by investors for value retention.

Investor interest and activity continues to be sustained as yields for shorter tenure sites remain above borrowing costs, while developers acquiring freehold sites for strata sales are not yield-sensitive.

Sites with leasehold tenure of more than 30 years could be a sweet spot and potentially appeal to both investor profiles looking for rental yield and strata sales.

Attractive themes

We continue to see strong demand for cold chain assets that serve the food industry. The sector offers strong supply-demand dynamics, with limited new supply due to high capital expenditure requirements and strong demand amid growing affluence in the population and increased consumption of fresh food.

Value-add opportunities will continue to emerge as demand for newer and energy-efficient cold chain facilities is expected to rise amid the focus on sustainability.

As such, owners of industrial sites with ample power and good specifications may consider expending capital to convert suitable warehouses into a partial or full cold storage facility.

Investors can also consider investing in “cold-chain ready” warehouses with allowances for tenants to install their own cold chain equipment, given varying tenant requirements. Not all sites are suitable for cold chain, and investors need to consider the availability of power, location, facility layouts in their site selection process.

Prime logistics properties remain highly sought after, with the undersupply situation persisting into 2024. Sustained interest from 3PL players and a flight to quality to modern warehouses as occupiers try to increase operational efficiency continue to drive demand in this sector.

Given the upward trajectory of rents, occupiers can consider partnering with a developer for a built-to-suit solution to better control occupancy costs. There could be suitable opportunities arising from Reits or third party facility providers looking to divest non-core assets to recycle capital.

Given digitalisation trends and Singapore’s status as a regional data centre hub, Singapore data centres enjoy very strong demand, with vacancy rates below 1 per cent. While the Singapore government has recently lifted the moratorium on new data centres, the market remains under supplied. However, available stock for sale is very limited, with most owners holding for the long term.

Retail investors looking for exposure to the industrial market can look at industrial properties that are supported by transport infrastructure or close to MRT stations, which are able to attract good leasing demand. That said, building specifications are important, and retail investors need to do their due diligence.

Most industrial sites have plot ratios of 2.5 and below. There could be future opportunities for plot ratios to be raised to improve the efficiency of the land. The aforementioned factors are potential price catalysts and en bloc deal opportunities.

Brenda Ong is head of industrial and logistics, Singapore, and Wong Xian Yang is head of research Singapore and South-east Asia, at Cushman & Wakefield