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!)

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