Have Industrial Property Prices Spiraled Out of Control?

By Mr. Propwise

Whileeveryone (including the government) has focused their attention on theresidential market, one segment that has gone through the roof is industrialproperty. In 3Q2012 the Industrial Property Price Index registered a stunning8.8% quarter-on-quarter growth tohit 183.3, an all-time high. This was the twelfthquarter of growth, and unlike the residential property segment, the rate of growthis accelerating. This begets the question – have industrial property prices spiraledout of control?

Comparing industrial property prices with othersegments

Figure5.2.1a – PPIs of various property segments

 FromFigure 5.2.1a (courtesy of PropertyMarketInsights.com, an essential resourcefor property investors), we can see that since 2010, the once boring industrialPPI has risen at a much faster pace than the other property types, and hasmassively outperformed Office and Shop properties. Since 2009Q3, the IndustrialPPI has grown by an astonishing 102.8%, versus just 34.9%  for the residential PPI.

 Andas the Rental Index for Industrial Property has only increased 39.3% over the sameperiod, this suggests that: i. Yields for industrial property are compressingand ii. There’s likely some element of speculation in the industrial propertymarket, i.e. the rise in industrial property prices were not mainly driven bystrong end-user demand.

Is industrial property now too expensive forindustrialists?

 

Figure5.5.2a – Median price of factory and warehouse ($ PSF)

  From amedian price perspective, in 2012Q3 factory and warehouse space sold for $606 and$768 psf respectively (Figure 5.5.2a). This was more than double what it costjust five to six years ago.  This wasmore than double what it cost just five to six years ago.

 

 Figure 5.5.2c – Median rental of factory andwarehouse

Rentalshave gone up as well, although not as much as prices. As of 2012Q3, the median rentalof Factory and Warehouse space was fairly similar at $2.02 and $1.91 psf  respectively (Figure 5.5.2c). Versus six years ago, this is an increase of around 60percent.

Hasthe profitability of our industrial companies and SMEs increased this much?

More measures to control industrial property prices onthe way?

Giventhe relative stabilization of the residential property segment post six rounds ofcontrol measures since 2009, and the skyrocketing prices of industrialproperty, will this segment become the next target of government measures?

We’vepreviously written several articles about the industrial property market, includingan explanation of the URA guidelines and a discussion on shoebox  factories. Suffice to say that the continuing surgein industrial property prices has increased the policy risk for thissector. 

Measuresto keep the minimum size of industrial units at 150 square meters and crackdownson illegal usage of the space by non-industrial users could be just the beginning.Investors in shoebox industrial units will have to seriously ask themselves whothe likely tenant for the property they  havebought will be. Caveat emptor!