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Alternative real estate investments - Industrial Space
The strata industrial market has traditionally been viewed by investors as a less appealing cousin of residential and commercial property, given their often boxy-looking and uninspiring exteriors.
That, however, changed from 2008/2009, when the government implemented measures to cool the red-hot residential property market. This led investors to start putting their money elsewhere, including in industrial space – which typically offer higher gross rental yields at a lower capital outlay, compared with the residential sector.
Helping to spur demand was the rise of more innovative industrial developments, as developers began differentiating their products by incorporating stand-out project concepts, and state-of-the-art designs and unit configurations. Many developments that have launched over the last few years now offer end-users more convenience with amenities such as ramps that give vehicular access to all levels, and added luxuries such as a swimming pool, a gym, and landscaped gardens.
This led the strata industrial market to see rising prices and transaction volumes – a trend that generally continued up till the government introduced the total debt servicing ratio (TDSR) in June 2013, which has caused transaction activity across most property sectors to fall.
That said, rental yields are still higher compared with residential property, with freehold industrial property boasting yields from 4 per cent, while shorter-tenure properties have yields at about 8 per cent or 9 per cent.
What this means is that there are still good opportunities out there for savvy investors. Here, we give you an introductory look into the industrial market to get you started on your investment.
Single vs multi-user
Single-user industrial space, as the name suggests, is meant for use by a single occupier. No strata subdivision is allowed for such developments.
In contrast, a multiple-user industrial property refers to developments that can be strata subdivided and used by multiple users. The users of the individual units can be independent of one another.
B1 or B2?
Generally, industrial space classified as Business 1 (B1) and Business 2 (B2) are used for anything from manufacturing to assembly production to repair workshops and even as data centres.
Regardless of whether a development is classified B1 or B2, at least 60 per cent of space in a development has to be used for industrial activity, such as warehousing and production, as well as e-businesses such as IT infrastructure and software development. It cannot be used purely as an office, or for retail purposes. This is something that can affect the tenants that can take up space in industrial developments, and hence something that investors must take note.
There are, however, exceptions. For instance, childcare centres and even furniture showrooms are allowed within industrial developments if they support the main industrial activity. As examples, parents who are working at the building may need to leave their children at the centres, while furniture manufacturers may need a space to showcase their finished products.
Additionally, around the end of last year, rules were tweaked to allow commercial businesses such as mini-marts and fitness centres to operate out of industrial buildings in outlying estates such as Kranji and Sungei Kadut in the north, and Tuas and Pioneer out west.
Such commercial use will be capped at 200 sq m (2,152.78 sq ft), or 10 per cent of the total proposed gross floor area (GFA) per development, whichever is lower, and must be contained on the building's first storey.
Overall, these non-industrial uses – both the commercial and supporting use such as childcare centres – can take up a maximum of 40 per cent of space at an industrial development.
Source: Urban Redevelopment Authority
So what’s the difference between B1 and B2?
Broadly, B1 is for light and clean industrial use, while B2 is meant for general industry that could be heavier, noisier and dirtier. Examples include manufacturers, welders, and furniture makers. In short, B2 space is meant for heavy industries that have a greater environmental impact. As a result, space classified B2 are required by the National Environment Agency (NEA) to have a nuisance buffer greater than 50 metres on the surrounding site, and are within health and safety buffers.
Special activities such as the manufacture of industrial machinery, and shipbuilding and repairing, may also be allowed in selected B2 areas, subject to evaluation by the Competent Authority.
What to look out for
Regardless of the categorisation, what is more important is that the design of the industrial unit fits the purpose of the intended end-user – the tenant. What this means is that you should have an idea on who your tenant might be, and ensure that most, if not all, aspects of the unit meet his needs.
Areas to consider include the property’s location – whether it is close to public transport amenities, for instance, since that would be a point of consideration for the tenant – and facilities that will make it easy for the tenant to operate his business.
These include service lifts, a sufficient floor-to-ceiling height, and adequate floor loading capacity.
It is also important to check whether the design of the unit fits the industrial zoning allocated.
As mentioned earlier, freehold industrial property typically boast yields from 4 per cent, while shorter-tenure properties have yields at about 8 per cent or 9 per cent. If promised yields are usually high, you should investigate further into similar developments around the area that boast similar specifications – such as tenure, type of use, etc. The idea is to provide a comparison that is as accurate as possible, so look to units that are as similar as possible to the desired unit. This will give a good gauge on whether a project can deliver the promised returns, and also help you to manage expectations.
30-year vs 60-year leasehold properties
In 2012, the government began slashing lease terms for industrial sites sold, to curb the soaring prices of these sites. Under the industrial Government Land Sales (GLS) programme, leasehold industrial sites sold from the second half of 2012 onwards now have a maximum lease of 30 years. Previously, industrial sites sold had tenures as long as 60 years.
It is important to note at this point that 30-year leasehold industrial properties are not new to the market. These developments have been available even before the change in rule to cut the maximum leasehold tenure of 60 years. The difference, however, is that 30-year leases will now be the new norm.
What the new rule aims to do is weed out short-term speculators, who shifted their focus to the industrial segment following the introduction of the Additional Buyer’s Stamp Duty (ABSD), causing a sharp increase in prices for strata industrial properties.
The general consensus among property consultants is that the move has indeed helped to reduce prices or at least, moderate price increases – for plots whose leases are now 20-30 years – although available like-for-like comparisons are few and far between, and thus this view may be considered unsupported and inconclusive by some.
Nonetheless, if the general consensus is to be believed, the cut in maximum tenure has helped to stabilise the market – not a bad thing from the perspective of a long-term investor. Investors or end users who want to fork out a smaller overall sum can now look more closely at 30-year leasehold properties. In particular, those who are committed to holding the property for the long term and are looking for end-users – or are themselves end-users – who prefer some leasing flexibility and are unsure about being tied down for a lease beyond 20-30 years, such properties are worth a look.
Plots with 60-year leases, in contrast, are likely to cost more. However, for the investor with the cash to spare, investing in these industrial units could be worth it. The main reason is because there are some end-users of industrial units who tend to prefer longer leases beyond 20-30 years, to maximise their investments in the fittings and property, plant and equipment. A longer tenure also makes reselling the property easier.