Industrial property rent slides off its growth trajectory in 2Q24

SINGAPORE, July 25, 2024 – The slowdown in the JTC rental index (All Industrial) in 2Q24 is not surprising. On a quarterly basis, the index has been shifting to a low gear since 2Q23. This latest quarter's growth of 1.0% q-q, the slowest in 10 quarters, is dragged by weakness in the business parks and warehouse segments despite the upside of 1.5% q-q for multi-user factory space. The lingering strong demand could have lifted the multi-user segment resulting in vacancy tightening to 8.7%, the lowest since 1Q12 (post-GFC recovery demand).

However, most leading indicators in the industrial sector, such as our Monthly Total Manufacturing Output (on a seasonally adjusted basis) as reported by the Department of Statistics (Singstat) in May, while volatile, have largely been slowing. From a stunning double-digit growth of 14.8% in February this year, it has decelerated to merely 1.1% by May (the latest available).

This slowdown in the overall rental index is not unexpected given the tardiness in external demand, especially from Europe, where factory activity was reported to have declined, dragged by falling demand for manufactured goods across the bloc. In China, major local banks have also just announced their plans to cut deposit rates following the government’s recent announcement to reduce benchmark lending rates to bolster the ailing market.

Manufacturing businesses and firms in Singapore, in the latest Singstat survey (2Q24), were also less confident of the immediate term. Given the economic weaknesses in Europe and China, businesses are naturally less sanguine. An overall net weighted negative balance of 2% of manufacturing firms expecting a less favorable market over the immediate three months (i.e. Jun into Sep). Firms were more confident over the mid-term (Jun to Dec) with a net weighted positive balance of 22%.

Looking ahead, despite the softer rental trend, risks remain on the upside. Reportedly, the purchasing managers index (PMI) compiled by S&P Global for manufacturers in South Korea has expanded to 52.0 from 51.6 in May, the highest reading since April 2022. South Korea's export activity is often used as a bellwether of the trade activity for APAC. With this recent strong gain, Dr Chua reckons that the fragmented global trade on the back of the US-China trade war should continue to benefit Asia. This could bring further upside to industrial activity in Southeast Asia, including Singapore, as more firms position themselves to take advantage of trade regionalism here.

Dr Chua opines that there could be an upside in manufacturing/trade activity in Singapore in the second half of 2024 that would lend some support to the demand for industrial space despite the expected large supply completion. Rents are likely to remain stable going forward. S&P Global's latest PMI data in June also showed manufacturers in Singapore posting the fastest expansion since October 2022. If this comes to pass, we can expect a stable market for the rest of 2024.

Nonetheless, the downside risks remain, especially those associated with the outcome of the US election this year. If Trump re-captures the White House, as many market watchers expect, this could lead to a higher interest rate environment given Trump’s trade protectionism and the Republican's general preference for lower taxes that could heighten inflationary risks. This could add more uncertainty to the timing of the cut in interest rate and potentially upward pressure on business costs.

Another risk, albeit low, is the associated rising friction in the Red Sea, as reflected in the Global Supply Chain Pressure Index (GSCPI, Federal Reserve Bank of New York). This index, which captures the cost of transportation and manufacturing as a gauge of the global supply chain conditions, has been slowly rising from -0.72 in Apr to -0.03 in June. The increment is quite modest at this point, but given the political instability in the Middle East, this situation could quickly escalate.