Published July 09, 2012

Demand for industrial properties set to stay strong

By cai haoxiang

ASK Cache Logistics Trust chief executive Daniel Cerf about the risks facing the logistics sector here and he refers to Singapore's roots as a British colony at the centre of the Malay Archipelago. "You've got location, infrastructure, governance," he says "Liners come here, air cargo, sea cargo. This goes back to the 1800s, man, this isn't any new concept."

Mr Cerf and other industrial Reit managers highlight several factors investors need to consider.

New supply of industrial space from 2012-14 is expected to cause rental prices to moderate. This comes after a supply shortage in the last two years that pushed rents up and caused a similar rise in industrial Reit stock prices.

To cool the industrial property sector, the government has halved land tenures to 30 years for all sites sold in the industrial Government Land Sales programme from this month until December. But analysts do not expect the move to affect industrial Reits as they can still acquire existing properties or buy from overseas.

Demand for industrial properties like warehouses, factories and business parks is expected to stay strong.

Roger Tan, chief executive of SIAS Research, says the market is facing a situation of supply catching up with demand rather than an oversupply. "Singapore is only that big," he says. "Already there are some parts of Singapore where people tell me it's very hard to find a factory, a warehouse to operate."

Macroeconomic risks matter and a recession will cause a fall in demand and, correspondingly, a drop in rentals. But industrial Reit managers tell BT that worries about the global economy do not weigh much on their minds in the short term.

Says Chris Calvert, CEO of Cambridge Industrial Trust: "Fundamentally what we're seeing across our portfolio is that tenants are still in pretty good shape.

"The majority of our tenants produce goods for local consumption and . . . what we've seen is lesser reliance on (exporting) products to the EU and more a shift into producing products for the immediate Asia region".

Mr Cerf notes that even in a downturn, companies need to store their goods.

Reit CEOs also point to how the government carefully controls the amount of land available for industrial use, such that there is very little room for speculation.

AIMS AMP Capital Industrial Reit chief executive Nicholas McGrath says that tenant credit risk is carefully assessed and leases tend to be for five years and more, so Reits can ride through market cycles.

Large security deposits of an average of eight months ensure that dividends can be paid out for a while, even if rents stop coming in, he says. "Throughout the global financial crisis we only had one tenant out of 26 properties who stopped paying rent," he says. "Tenants' businesses slowed, but no one got to the point where they couldn't pay rent."