Multiple Positive Surprises

• Surprise uptick in occupancy and rental rates for multiple-user factories
• Recovery of the commodities and shipping sectors will support further take-up of industrial space
• More than S$6bn of acquisitions announced YTD21 will drive exponential growth for earnings
• Logistics assets are expected to outperform other industrial properties; top picks are ALLT and MLT

Uptick in occupancy and rental rates. Overall industrial properties occupancy and rental rates in 1Q21 inched up 0.1% and 0.6% q-o-q, respectively. The higher occupancy and rental rates were most pronounced for the multiple-user factory space as construction delays continue to ease concerns over spike in new supply.

Multiple drivers of demand. In addition to the ongoing expansion of the logistics sector, the recovery of the manufacturing sector and the rebound of the commodities sector will likely drive demand for industrial properties in FY21. New economy businesses such as biomedical sciences and technology firms will continue their expansion in the business parks assets. However, we believe that city fringe precincts such as Buona Vista and Alexandra will likely outperform business parks in the rest of the island.

Industrial REITs continue their stellar growth trajectory. Having been the most active REIT sector in FY20, industrial S-REITs once again claimed the top spot in YTD21. With an influx of portfolio deals, industrial REITs have so far announced and completed more than S$6bn worth of acquisitions in FY21. As we are still in the first half of the year, we expect to see more deals from the sector. With more accretive acquisitions and some organic portfolio growth, we can expect the industrial REIT sector to outperform the other segments in the near-term.

Key observations

Pick-up in leasing activity and improvement in rental rates. Since the turn of the year, leasing activities have picked up and rental rates continue to inch up. Although the multiple-user factory space was originally projected to face pressure due to a spike in supply, it was the best performing segment. The broad economic recovery as well as delays in construction played a role in the segment’s outperformance. Occupancy and rental rates of multiple-use factory posted the highest improvement among all industrial property types, increasing 0.5% and 0.8% respectively.

Due to the spike in COVID-19 transmissions, the ongoing heightened measures could cause a blip to leasing activities in the early part of 2Q21. However, Singapore’s broader economic recovery in FY21 will likely support the rebound of the manufacturing industry and we believe the industrial sector will benefit from the economic recovery as it continues its structural transition into Industry 4.0.

Fourth consecutive quarter of positive net absorption. 1Q21 was the fourth consecutive quarter of positive net absorption. Despite the muted demand for new industrial space in FY20, construction delays meant that only c.357,000 sqm of new industrial space was added for the whole year, a record low. With the bulk of new supply delayed to this year, a total of c.2.5m sqm of new supply is expected to come online in FY21.

However, the prolonged border closures continue to weigh on the construction sector. Although the highest over the last four quarters, only 126,000 sqm of new industrial supply was added in 1Q21. The labour crunch could well lead to further delays in construction and this would be a positive surprise for industrial landlords. As compared to a year ago, overall industrial property occupancy rate recorded a 0.8% improvement to 90.0%. The higher occupancy rate was contributed mainly by the multiple-user factory segment as construction delays affected this segment the most.

What are we watching?

Sources of new demand for industrial space. Stockpiling activities were the main driver of new demand for industrial space in FY20. With stockpiling activities nearing its plateau, we expect expansion activities in FY21 to come mainly from new economy businesses including the biomedical sciences, precision engineering, technology, infocomm and media, and modern logistics sectors.

The rebound in the commodities and shipping industries could also provide further upside to the industrial sector in FY21. These industries are traditionally large occupiers of industrial space and they also help drive demand for many other support services. The continued growth of the new economy businesses, recovery of the shipping and commodities firms, as well as further delays in new supply could support occupancy and rental rates in FY21.