Industrial properties have been a major contributor to en bloc transactions in Singapore over the past five years, supported by local players. So what is driving the allure of such assets and does this spell opportunity for foreign funds?

*Excludes related transactions (i.e. Portfolio injections by Sponsor)
Sources: URA and JLL Research

1. Yield accretive sale-and-leasebacks

A familiar practice in the industrial sector, sale-and-leasebacks enable the seller to free capital for business enhancement and offload management of non-core real estate. For this reason, sellers are often happy to pay a premium rent in exchange for the immediate cash benefit. Such arrangements typically command a higher overall rent due to a charge on the entire built up area as compared to a multi-tenanted context which is rented on a smaller leaseable space. For instance, Hyflux Innovation Centre, which sold for SGD 191.2 million in (date), reportedly achieved an estimated net yield of 7%.

Opportunities for such acquisitions are considerable with an estimated 54% of island-wide industrial stock being owner-occupied.

2. Industrial assets remain a viable investment alternative

*Excludes related transactions (i.e. Portfolio injections by Sponsor)
Sources: URA and JLL Research

Industrial assets are generally more affordable than other asset types (78% discount to en bloc office space since 2010), partly attributable to the shorter land tenures and higher valuation yields. However, having reputable tenants on long-term contracts could mitigate the latter. For instance, the acquisition of two HP buildings by United Engineers last year involved HP inking a five-year lease (with three options to renew for five year terms).

3. Government policies are hastening a clear out of labour intensive operations

Government policies have incentivised industrialists to either offload assets entirely or free up capital to improve productivity and intensify usage of their sites. A prominent example is Western Digital’s shift of manufacturing activity to Thailand. We have also observed more industrialists consolidating manufacturing operations over the past few quarters. The increasing stocks of such assets are apt for asset enhancement works to optimise the land and generate better return for the owner.

Assets are ripe for the picking, but investors will have to be selective

While local players possess greater familiarity and impetus to acquire domestic assets, the deals witnessed in recent months suggest there are opportunities for foreign funds to enter the fray. Even as the sector potentially faces some downside rent risk due to oversupply, foreign funds could target assets that offer 1) higher yields, 2) longer-term lease contracts with reputable tenants and 3) higher specifications (e.g. better floor loading and high ceiling). Softening prices, particularly in the multi-user factory sub-market, should open the door for opportunistic purchases.

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