Safe or sexy?

Investor savvy: In the commercial sector, there are no speculators, only investors.

Industrial property sector considered a stable investment

WHEN it comes to property investment, the suggestion of parking your money in a factory lot may raise more than just a few eyebrows. Simply put, it’s just not considered sexy, compared with say, the residential sector.

According to Axis REIT Managers Bhd head of investments and Malaysian Institute of Estate Agents immediate past president Siva Shanker, the word “sexy” to investors means being able to make a lot of money overnight.

“To the general property investor, it means being able to flip and make a huge chunk of money from it,” he tells StarBizWeek.

According to Siva, people with money only invest in the residential sector. He says one should also look at other sectors for opportunities.

“There are other sectors too, such as commercial and student housing. But Malaysian developers are not interested... they just build condos after condos after condos!

“Sectors like the industrial sector are not considered sexy because unlike residential, it does not experience phenomenal growth or provide significant gains.”

Stable industry

The problem with the residential sector, says Siva, is that over the years there has been too much speculation, causing prices to spike and demand outstripping supply.

“On the other hand, if you look at the industrial and to a certain extent, the commercial sector, there are no speculators – only investors.

“Here, people buy the land, build a facility and sell; or after building, they put in place a tenant, then sell. There are no flippers like the residential market.”

Siva adds that segments like the industrial sector, which has no speculators, tends to be more stable.

“There is no major growth or significant dip. The industrial sector has held itself well. With the fall of the ringgit, many of the industrial players in the export market have benefitted from higher orders.

Additionally, the industrial sector also looks promising for those eyeing opportunities within the Malaysian real estate investment trust (REIT) sector.

At the Association of Valuers, Property Managers, Estate Agents and Property Consultants in the private sector, Malaysia (PEPS) seminar in January, former Axis REIT Managers CEO Datuk George Stewart LaBrooy said industrial REITs had been growing strongly both organically and via acquisitions.

He pointed out that the rapid growth of e-commerce was creating new high value assets that should be coming onstream in the next two years.

LaBrooy said industrial land prices had been climbing, leading to an introduction of new innovative multi-level distribution centres, adding that the demand for new high quality industrial estates would transform the landscape.

He noted that the larger new distribution centres would fetch between RM400mil and RM500mil and provide industrial REITs an opportunity to find scale and liquidity.

“Yields will be higher and provide REITs with higher yields (7% and above) with long leases and stable revenue. The long-term outlook will be bright for the sector,” he said at the PEPS seminar.

According to the National Property Information Centre’s (Napic) 2015 Property Market Report, the industrial property sector recorded 7,046 transactions worth RM11.97bil in 2015, down 13% in volume and 17.5% in value from 2014.

Selangor continued to dominate the market with 28.9% of the nation’s volume, followed by Johor and Perak, each with 16.1% and 9.6% market share respectively.

Napic said the industrial overhang saw a slight increase to record 243 units worth RM240.57mil, up by 7.5% in volume and nearly triple the value of 2014.

“The significant increase in value was contributed by cluster industrial property, which accounted for 45.6% of the national overhang value and were solely in Johor.

“The unsold under construction also observed a similar trend, up by 29.7% to 1,731 units, whereas the unsold not constructed reduced to 87 units, down by 41.2%.”

Napic said the sector’s construction front was sluggish compared to 2014.

“Completions, starts and new planned supply were down by 11.6% (927 units), 32.7% (2,294 units) and 65.1% (1,104 units) respectively. As at end-2015, there were 103,868 existing units with another 11,206 units in the incoming supply and 9.981 units in the planned supply.”

According to CH Williams Talhar & Wong (WTW) in its Property Market Report 2016, the ongoing and upcoming infrastructure developments will give rise to potential improvement in the industrial sector for the next few years.

“Although the industrial prospects sector is state-driven and underrated by most investors, strong growth is anticipated especially in terms of rental and prices evident by the shortage of industrial supply.”

WTW says that as of the third quarter of 2015, 522 investment projects were approved by the Malaysian Investment Development Authority (Mida) amounting to RM67.7bil.

Of that, 75% or RM50.8bil was domestic investment while the balance was foreign investment.

“Johor topped the list, attracting 104 projects with proposed capital investments totalling RM30bil, followed by Sarawak (18 projects with RM11.8bil investments) and Melaka (20 projects with RM6.8bil proposed investments).”

WTW adds that while the weakening of the ringgit has also encouraged more exports, trade surplus contracted to RM9.7bil in September 2015.

“The exports have expanded to RM70.16bil in August 2015, which is the highest monthly export value recorded and import value also rose to RM60.47bil.”

Within the Klang Valley, WTW says manufacturing activities remained active in the first half of 2015 with 131 projects approved during the period.

“Foreign investments constituted 55%, totalling RM2.3bil, while the remaining RM1.92bil were domestic investments. Among the notable investments were Nestle in Shah Alam and the joint venture between Ingress Corp Bhd and Katayama Kogyo Co Ltd in Bandar Baru Bangi.

“Nestle invested RM258mil in its Sri Muda’s plant in Shah Alam, which was in full operation in 2014. In Bandar Baru Bangi, a RM46mil research and development and manufacturing facility will be established under the joint venture.”

As at the third quarter of 2015, WTW says industrial supply remained unchanged.

“The average rental rates in selected industrial areas remained firm. Incoming supply are concentrated in the Klang district, of which 2,015 units are expected to come into the market.

WTW also notes that the introduction of incentives for industrial estates by the Government is expected to enable industrial estate operators to enjoy 100% tax exemption on statutory income for five years.

“This is likely to interest more developers to develop industrial estates in the Klang Valley.”

It says the aggressive promotion of aerospace industry investments by Mida has led to the growth of aerospace investments in the country, where the projects in relation to manufacturing and maintenance, repair, operations grew to RM682mil in 2014, an increase of 76% from 2013.

“The efforts include development of Asia Aerospace City in Subang by Mara, which is expected to commence work for phase one in 2016 and slated for completion in 2018.

“The World Class Infrastructure will generate interests among aerospace industry manufacturers to expand their operation in the Klang Valley.”

According to Rahim & Co in its Property Market Review 2015/2016, as at the first half of 2015, the price of industrial developments within prime areas such as a 1½-storey terraced factory in Glenmarie Industrial Park currently is about RM2.3mil.

In Subang Jaya, a similar type of building would sell for between RM1.1mil and RM1.8mil.

Foreign investments in Selangor include that of China-based edible oils manufacturer Xinghe Holdings Bhd, which set up a manufacturing plant in a free trade zone in Klang.

“The construction work is expected to be completed in 2016. Another example is a Germany-based company, Hanwha Q Cells planning to construct a 800 MW factory for photovoltaic modules to be located in Cyberjaya.

“The new plant is also expected to be fully operational in 2016.”