Source: First published on The Business Times 19th December 2017
GDP growth is being revised upwards. Data for total trade and manufacturing output has been growing year-on-year since 2017 began. With most analysts claiming that the property sector will rebound in 2017 or 2018, every media story about the real estate sector is bullish.
Oddly, while property industry players are celebrating, the vacancies of office, retail, factory and warehouse space are setting new highs (Figure 1).
Data for third quarter 2017 shows that the vacancies of office, retail, factory and warehouse spaces, at 13.3%, 8.2%, 11.1% and 12.5% respectively, have well exceeded the vacancies experienced during the Global Financial Crisis in 2009. The 11.1% vacancy in the factory segment translates to 45.0 million sqft of vacant production area. For those of us who find it difficult visualizing the expanse of such a large space, try imagining 45 vacant VivoCity’s as VivoCity has a lettable area of 1 million sqft.
Not surprisingly, monthly rentals and transacted prices of retail, factory and warehouse spaces dropped. However, data from the office sector went against logic: despite the total stock of vacant office space increasing by 872,000 sqft between 30 June 2017 and 30 September 2017, the rental and price indices increased by 2.4% and 0.4% respectively.
According to the Ministry of Manpower, total employment excluding Foreign Domestic Workers has contracted in the first nine months of 2017, with a total of 19,800 jobs lost. The fundamental changes in the economy is causing us to experience healthy economic growth in manufacturing, services and trade, brought about by fewer people in the workforce with higher productivity and output. This is one reason for the increasing stock of vacant space: we do not need the same amount of space to produce the same economic output. Another reason for the swaths of vacancies: a generous supply of space in new commercial clusters, business parks, innovation districts, regional centers, etc.
Given such mixed data, what should business owners do?
If you are a tenant of a commercial or industrial space, you can take heart that new supply coming on 2018-2020 will add further pressure to rentals. High vacancies also imply that tenants have a range of choices to consider for relocation. In short, we recommend business owners to seize this opportunity and plan for their business needs:
- Review your current space usage and the medium to long term growth plans of your business;
- Decide on which spaces to reduce, where to expand or consolidate;
- Negotiate for leases that are flexible, including contraction rights and sub-letting rights.
Business owners could also consult with their trusted property advisors to map out a plan to take advantage of the current market weakness.
What if you owned the business premises? We can look at it in two ways.
If you are using the property for your business operations, you can consider if the property will still be relevant for your business over the medium to long term, say over the next 10 years. You can reassess your needs and given the fast evolving global business environment, you might consider making your business more nimble-footed by doing a “sale-and-lease-back” of your commercial and industrial properties.
If you are a landlord and you invested in strata-titled commercial and industrial properties for rental income, you might want to consider if the product attributes such as location, size, layout and design are well suited for long term holding as investments. Furthermore, note the length of the remaining leases of industrial properties. The shorter leases of industrial properties, especially those with 30-years or 60-years leases, pose significant challenges during divestment as the prospective buyers of these properties often find difficulties in obtaining loans.
Singapore’s economic fundamentals are shifting with technological disruptions. While we continue to be a magnet for new businesses coming into Asia, we are also seeing SMEs reduce their physical spaces in Singapore in order to pursue the plentiful opportunities overseas. Given the rapid changes in manufacturing technology, 3D-printing and mass customization, realignment of global logistics and supply chain and the new business trends involving e-contracts, blockchains and payment systems, business owners would do well to keep their businesses agile.
We urge SMEs to take advantage of the high vacancies in the commercial and industrial properties to re-group and plan their corporate real estate needs for the fast evolving economic landscape.
Ku Swee Yong is a licensed real estate agent and the Co-Founder of HugProperty.com. His fifth book “Preparing for a Property Upturn” is available in all good bookstores near you.