Industrial properties sold like hot cakes in 2011 and 2012 as cooling measures impacting residential properties diverted hot money into the sector. It propelled the Property Price Index for multi-user factories to skyrocket 58% over the course of two years. In those years, the percentage of strata industrial units flipped within two years of purchase doubled from 21% in 2010 to 39% in 2011 and 44% in 2012, prompting the government to impose Seller’s Stamp Duty (SSD) in January 2013 to curb speculative activities.
The party ended early as rising vacancy, looming supply and the clampdown of illegal users cast their shadows on the market. Sales volume of all industrial properties plummeted 71% from 4,695 caveats in 2012 to just 1,362 caveats last year and price growth of multi-user factories crawled to 4% in 2014. What became of these industrial investors?
Caveat analysis found that the percentage of unprofitable transactions for non-shoebox strata industrial properties had climbed from 5% in 2012 to 7% in 2014 and 2015. Among the 7% unprofitable deals, the average loss was $143,873 or 14%.
The study matched resale and subsale caveats of strata industrial units that are larger than 100 sq m with the caveats of their previous transactions. Profit and loss was computed based on the difference in selling and purchase prices, taking into account the prevailing SSD rate, where applicable, but excluding any other costs.
Short holding period indicates speculative intention
The average holding period for non-shoebox strata industrial properties sold in 2014 and 2015 was 5.2 years versus 7.5 years for residential properties. Within the top 10 losses, eight units were held for less than two years.
The biggest loss for units sold in 2014 and 2015 was traced to a unit at Westlink Two, a 60-year leasehold warehouse unit in Tuas. It was purchased for $400 psf in February 2014 and resold in April 2014 for $262 psf. The $262 psf selling price was below the project’s average price in 2014 of $350 psf. It resulted in a loss to the seller amounting close to $600,000 or 44%. We are unable to ascertain if it was an arm’s length transaction.
Notwithstanding, a majority 93% of strata industrial transactions in 2014 and 2015 to date were still in the black, with the gains averaging $376,545 or 54%. Even among the profitable deals, the average holding period was just 5.3 years.
The top ten profitable properties, however, were held for an average of 8 years. Among them, the highest margin accrued to a 5,177 sq ft unit at Tong Lee Building, a freehold factory at Kallang Pudding Road. The seller first purchased the property in May 2006 for just $102 psf. He resold it for $540 psf in April 2014, pocketing $2.3 million or 427% of profit. Overall, units bought between 2001 and 2007 yielded more than 100% of profit.
Based on the number of caveat matches, Soilbuild’s North Spring Bizhub in Yishun was one of the most actively traded projects in 2014 and 2015. All the transactions were profitable with the gains averaging 36% or $258,393 (See Table 1).
Table 1: Top percentage gains and losses in 2014 and 2015 (non-shoebox)
Table 2: Actively transacted projects in 2014 and 2015 (non-shoebox)
8% of shoebox industrial units sold at a loss
Shoebox industrial units attracted strong investment interest back in 2011 and 2012 due to their highly affordable quantum and promising rental yield. According to the URA, there is propensity for small-format industrial units to be used for non-industrial purposes such as offices. The proliferation of such units from projects such as Oxley Bizhub led the Government to enforce a minimum unit size of 150 sq m in December 2011 for projects developed on government land sale sites.
The number of unprofitable transactions for small-format industrial units of 100 sq m or less jumped from 2% 2013 to 8% in 2014 and 2015. Losses for units sold in 2014 and 2015 averaged 7% or $46,496.
Meanwhile, the gain among the profitable transactions was markedly smaller at 35% compared to 54% for bigger industrial units (See Table 3). Quantum-wise, the gains for small-format units averaged $151,013. Holding period for profitable and unprofitable deals were 2.7 and 4.5 yeas respectively.
Table 3: Profitability of shoebox versus non-shoebox units sold in 2014 and 2015
The most profitable transaction accrued to a 506 sq ft unit at Northstar @ AMK amounting to $208,888 or 220% while the top loss was traced to a 958 sq ft unit at Pioneer Point (See Table 4).
Oxley Bizhub has the highest number of caveat matches in the small-format segment, which indicates active sales turnover. Seven units changed hands at a loss, averaging $29,414 or 4%. Units at Oxley Bizhub were launched at record prices for 60-year leasehold strata properties in its vicinity at over $600 psf. On the other hand, nine other deals were profitable and the gains outpaced the losses at $94,861 or 16%. Holding period was approximately three years (See Table 5).
Table 4: Top percentage gains and losses in 2014 and 2015 (shoebox units)
Table 5: Actively transacted projects in 2014 and 2015 (shoebox units)
Proportion of unprofitable transactions set to increase
According to the URA, prices of multi-user factories have fallen by 1.9% since the peak in 2Q2014. They will come under further pressure as investors are faced with a double whammy of 23 million sq ft of vacant multi-user factory and warehouse spaces and huge pipeline supply. Around 4.5 million sq ft of multi-user factory space and 5.7 million sq ft of warehouse space (gross floor area) are set to enter the market between Q2 and Q4 this year. Net take-up of multi-user factory space, on the other hand, averaged just 2.4 million sq ft annually in the past decade (See Figure 1). The impact of higher interest rates will therefore be more pronounced in the industrial sector.
Figure 1: Supply of multi-user factories outstrips demand
This article appeared in The Edge Property Pullout of Issue 681 (June 15) of The Edge Singapore.