Over-exuberance in the industrial sector – Are we due for a commercial break?

I have hesitated to cover this topic for some time, as by my own admission, I am no industrial expert. However, given the high frequency with which clients and prospects have been coming to me waving attractive flyers and recounting killer sales spiels from commercial property agents they’ve encountered, I felt it necessary to at least highlight some key issues to consider before one takes the plunge into commercial property.

It’s always a bad idea to go into any investment sector when it seems like half the world including the taxi driver on your last ride into town is buying into it. A telling sign would be when the true industrialists are staying on the sidelines and renewing their leases, while the bulk of buyers appear to be virgin industrial investors. The industrial newbies are drawn by the promise of high rental yield, and seemingly cheaper pricing as compared to alternative real estate sectors, and of course the avoidance of additional buyer and seller stamp duties affecting the residential sector.

They appear to have completely ignored the fact that in the event of a sharp economic downturn, industrial property will be affected even more than the residential sector. According to URA reports, the median rental for multiple-use factory space (ie. B1 & B2) was about $2 psf/mth in Q2 2012. Given that there is currently over 23,000,000 square feet of factory space lying vacant, and another 49,000,000 square feet coming online over the next two years, one can only imagine what rentals will be like come 2014. (As my learned friend and mentor Mr Ku Swee Yong thoughtfully points out, the total lettable floor space at Vivocity Mall is about one million square foot.** So that’s basically more than 23 times Vivo’s total shop space going rent-less, with another 49 Vivos in the pipeline!)

I am also quite bewildered by so-called “commercial” property agents* who have approached me with proposals to bring them my clients, telling me things like, “Oh, since the government has stopped releasing new industrial land of 60 year leases and cut this to 30 years, the 60 year leases will be in super high demand”. Whilst it’s simple logic that a 60-year leasehold property will fetch a dearer price than a 30-year leasehold property, one should also consider the reason for the government’s action – to make industrial properties more affordable to industrialists. It is thus not inconceivable that the government can and will step in to intervene in a similar fashion as it did in the residential sector, if industrial property prices truly skyrocket as these agents are promising prospective investors.

When buying property for investment, one should always try as far as possible to attune oneself to the end-users’ needs and decision-making process. Industrialists are far more price sensitive than residential tenants when it comes to rentals, and care a great deal less about being close to MRT/amenities, or having an in-house pool/gym facilities. And yet, if you flip through the newspapers these days, it’s getting increasingly hard to distinguish an industrial property launch advertisement from a residential one, as both feature stunning building facades, lap pools and other nice-to-haves that would be quite irrelevant to an industrialist watching on his bottom-line.

Of course there are most definitely opportunities out there, my grudge is not with the commercial property sector per se, but rather, I worry for the ill-informed, newbie investors fearlessly storming into this “new” terrain without knowledge of the risks that lie ahead. As Warren Buffet expounds, invest in what you know. Going in with a load of hype and scant knowledge is a recipe for disaster.

* I wish to clarify at this juncture that there is a distinct difference between true-blue commercial realtors who play a vital role in this sector, and those property agents who have simply leapt onto the commercial bandwagon because it’s where the action is. (Many of the latter are being churned out via courses that purport to instantly equip agents with the means to close commercial deals.)  The latter simply talk loudly and feed off the buyer frenzy, whilst the former are the real business facilitators, steadfastly serving the needs of the commercial sector. If you’re keen to diversify your property portfolio and get a finger in the commercial pie, do make sure you’re partnering the right advisors. Having had the opportunity to speak with a handful of well-qualified colleagues from the commerical sector, I can safely vouch that the knowledge they bring to the table is not something that can simply be replicated via a 3-5 day course!

** Ku Swee Yong of International Property Adviser Pte Ltd, author of Singapore bestseller “Real Estate Riches”, has much to share on the commercial property market. His next book, “Building Your Real Estate Riches – Hard truths about Singapore’s Commercial & Residential markets”, due in stores this November, covers commercial property in greater depth. I would strongly recommend that you postpone any first-time purchases in the industrial/office sectors till you’ve read this book!

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2 thoughts on “Over-exuberance in the industrial sector – Are we due for a commercial break?

  1. Great thoughts and good advice. I would recommend all would-be newbie industrial investors to read this article before being misled by over-zealous industrial marketing agents.

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