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The industrial property sector, which had grown at a steady pace for most of 2008, is unlikely to escape from the economic downturn that has hit its residential and office counterparts.

As manufacturing activity dips and relocations from offices slow, some property consultants believe that industrial rents and capital values could register double-digit percentage falls starting from Q4 2008. Industries could also start sub-letting space that they no longer need.

'With an expected slowdown in GDP growth and poor expectations of the performance of the manufacturing sector, demand for industrial space is likely to moderate,' said DTZ's senior director of research Chua Chor Hoon.

'The fourth quarter could be the turning point,' noted Knight Frank's head of industrial business space Lim Kien Kim.

According to DTZ data, growth within the industrial sector in the first three quarters of the year pushed the average rent of first-storey private industrial space up 6.8 per cent to $2.35 per sq ft per month (psf pm) in Q3. That of upper-storey space rose 7.9 per cent to $2.05 psf pm.

But rents could slide in Q4 as the manufacturing sector cools, said Ms Chua. The Singapore Purchasing Managers' Index fell for the third straight month in November, reflecting tougher times for manufacturers.

DTZ estimates that average rents of first-storey and upper-storey private industrial space could each drop by more than 2 per cent from the previous quarter to $2.30 and $2.00 psf pm, respectively, in Q4.

High-tech and business park spaces are likely to face the same sinking fate. Rents had jumped 15.4 per cent to $4.50 psf pm in the first three quarters, largely because more companies were moving over to avoid soaring office rentals.

The average occupancy rate in private sector business parks notched up 6.3 percentage points from Q4 last year to 93.2 per cent in Q3 2008, said DTZ.

'Businesses, including those occupying prime office space, increasingly found business parks to be attractive alternatives for housing approved back- end operations,' said Mr Lim.

But such spillover demand could slow as office rents fall amid a weakening economy. DTZ projects that the average rent of high-tech and business park space could drop to $4.30 psf pm in Q4, more than 4 per cent down from Q3.

As Colliers International's research and advisory director Tay Huey Ying said: 'Modern light-industrial and hi-specs industrial buildings would be worst hit as they will suffer from the double whammy of slowdown in demand from industrialists as well as from office users.'

She noted, however, that the industrial property sector had started to cool from the second half of 2008. Colliers's data pointed to a slight fall in rents of hi-specs space in H2, while those of factories and warehouses stayed flat in the same period.

As the downturn hits businesses, industrial tenants could start moving to cheaper locations, said Ms Tay. She also expects more downsizing companies to sub-let part of their premises.

DTZ's Ms Chua shared similar views. 'We may see some shadow space in the industrial sector next year, like what we are beginning to see in the office sector, as more companies consolidate their operations.'

Industrial landlord JTC Corporation has been taking back more space as manufacturing and related companies merged their operations. According to its quarterly facilities report for Q3 2008, termination at its ready-built facilities surged 25.7 per cent quarter-on-quarter and 45 per cent year-on-year.

'Industrial landlords could be more flexible in the coming months in order to maintain the occupancy levels of their industrial portfolio,' said Knight Frank's Mr Lim.

He estimates that for 2009, industrial rents could slide 7-12 per cent and prices by 10-15 per cent, with modern industrial space and business parks facing greater declines.

Ms Tay from Colliers believes that rents of conventional flatted factories and warehouses could drop by 12-15 per cent next year, while those of hi-specs industrial space could fall further by up to 20 per cent.

'Capital values are expected to soften by the same quantum as industrialists choose to conserve cash for their business operations instead of investing in an industrial unit,' she said.

Economic uncertainty has already spurred the Trade and Industry Ministry to suspend sales of state-owned industrial land on the Confirmed List for the first half of 2009.

While industrial rents and prices will fall, the sector is nowhere near a crash. 'The speculative element in industrial sector is not major,' said Mr Lim. As prices moderate to more realistic levels, 'the correction will be good as it will again draw investments back into industrial activities for Singapore'.

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