Industrial property sector resilient

AMID the struggling economy, the local industrial property market seems to fare better than office and residential properties although industry players expect the market for this asset class to remain flattish this year.

They concur that the current slowdown in manufacturing orders has not impacted industrial property as tenancy contracts for industrial property are locked in for a longer period of between five and 10 years compared with two to three years for office space.

They say these long-term tenancy commitments reduce any panic selling or “irrational transactions”, thus sustaining the prices and rental rates of these properties.

This property sector has remained relatively resilient because landlords are more willing to work out “win-win” solutions with their tenants during the current difficult times and tenants are allowed to pay up when business conditions recover.

“Landlords are more inclined to help roll-over rentals because capital expenditure (capex) for signing up new tenants is quite high,” an analyst from Kenanga Research tells StarBizWeek.

The reason for this is that industrial property space is usually tailored for specific tenants and any changes in tenancy will incur additional costs of construction and renovation.

The gross yield for industrial property is around 7% to 13%, with rental rates averaging at between 80 sen and RM1.75 per sq ft.

Association of Valuers and Property Consultants in Private Practice Malaysia (PEPS) president James Wong, who thinks the impact of the global financial crisis has not been fully felt yet, says industrial property prices are stable and have not declined.

However, he says with the full impact of the global recession to be felt in the second half and drop in domestic investments in the industrial property sector to RM7.8bil from RM13.9bil, “the industrial property market for this year will be affected.”

“We foresee that there will be a slight drop in prices, demand will be weakened and new launches of industrial property are likely to be deferred until confidence returns to the market.

“The volume of transactions of industrial properties will also contract. Although the industrial property market in the Klang Valley is expected to be the most resilient, a mild drop in prices seems inevitable,” he tells StarBizWeek, adding that the property market for next year will fare worse than this year.

“By then, quite a number of manufacturing companies will close down and go into receivership. This will result in forced sale by the banks, which will bring down industrial property value further,” he says.

Manufacturing output has fallen from a year ago. In January, exports plunged 28% to RM38.3bil from a year ago, while imports fell by 32% to RM29.5bil.

Wong adds that unlike the Asian financial crisis in 1997/98 period, the global slowdown is expected to prolong.

“We do not foresee a recovery in the industrial property market before 2010,” he says.

The industrial property sub-sector is a relatively small sector in the property market. In 2008, there were 8,126 transactions worth RM7.9mil out of a total 340,240 transactions worth RM88.34bil.

In tandem with the economic slowdown, the unsold units in the industrial market sub-sector increased by 30.7% to 2037 units last year compared with 1557 units in 2007.

Penang is the most affected as demand has dropped by over 50% in core industries such as electrical and electronics, plastics and metal.

“The performance of the industrial property market will depend on the performance of the manufacturing sector,” he says.

Wong suggests seeking new export markets as one of the ways to boost industrial property such as the Asean-Australia-new Zealand Free Trade Agreement. Others include setting up small and medium-scale industrial parks with subsidised grants, hi-tech and science parks.

International Real Estate Federation vice-president for marketing and networking Michael Geh expects demand for industrial property to start rising after the first quarter of next year.

Reapfield Properties Sdn Bhd president David Ong says it will be a great challenge for the industrial sector going forward as there is a possibility of some factories ceasing operations due to drop in demand for their products.

Hall Chadwick Asia Sdn Bhd chairman Kumar Tharmalingam says if the economy does not improve, he expects industrial property to feel the impact by the fourth quarter this year. However, he says factories have not closed down yet although they are laying off workers.

“The situation is not clear but I understand banks have not foreclosed any property yet because a lot of factories and businesses are still paying their rentals,” he says, pointing out that the Government’s stimulus plan is to make sure factories will not shut down.

Colliers International Property Consultants managing director Teik Bin Teh says demand for industrial property is on the decline but the exact number is unclear.

“Prices have not dropped because there is no transaction. We are unable to judge the price trends with only a few transactions. But prices are certainly not going up,” he says, adding that there is no oversupply of industrial properties because not many new industrial estates have been developed in the past five to six years.

By The Star (by K.C.Law)