Strategies for Investing in Singapore's Industrial Property Sector Amidst Global Changes

Strategies for Investing in Singapore's Industrial Property Sector Amidst Global Changes

Singapore boasts one of the world’s most vibrant industrial property markets, supported by its position as the world’s 12th largest trading nation, with over $1.2 trillion in total merchandise trade. As of 2023, Singapore ranks 1st in terms of merchandise exports per capita, at $82,900¹.

Transaction volumes in Singapore’s industrial property leasing market have been on a steady annual ascent since 2017² , fueled by growth in high-value manufacturing_^3. However, a global economic slowdown, driven by high interest rates and tension-filled geopolitics, presents a challenge for Singapore in the medium term. In 1Q24, leasing volumes slid 7.7% to the lowest in four years⁴.

How should investors approach Singapore’s industrial property sector in the coming years? What areas of the market present the most opportunity for growth? What key external factors should investors consider in this asset class?

A History of Growth and Stability

Singapore’s significant role in global trade is the result of decades of government planning and investment aimed at ensuring the nation remains above the value chain in manufacturing. With the help of the Building and Construction Authority (BCA), Singapore has transformed itself from a low-cost manufacturer of textiles, garments, and basic electronics in the 1970s to an industrial and technological exporting powerhouse today.

The country’s top exports now include integrated circuits, refined petroleum, specialised machinery, and gas turbines. Total exports of $639 billion in 2023 were more than 13 times higher than 40 years ago⁵, indicating a compound annual growth rate of 6.8%.

Singapore’s industrial property market has grown alongside the country’s manufacturing boom. Total annual transactions for industrial property have doubled over the past decade, from 2012 to 2023, exceeding 12,000 for a third consecutive year. Discounting the post-COVID spike that led to a record 12,809 transactions in 2021, the general trend for deals in the country’s industrial property market has been positive.

Industrial property prices have been on a long-term uptrend dating back to the mid-1970s. Prices have typically endured prolonged corrections over the years, triggered by global economic downturns, including the Asian Financial Crisis, the Global Financial Crisis, and the COVID pandemic-induced recession.

Singapore’s high degree of export exposure to China, both through mainland China and Hong Kong, also led to industrial sector weakness during the 2015 economic slowdown in the world’s 2nd largest economy, whichever berated throughout the global energy and commodities markets.

A new set of challenges faces the global economy that could once again impact Singapore’s economy and the industrial property market. Higher interest rates, resulting from central banks’ efforts to contain inflation, have restrained economic growth in many parts of the world, particularly in neighbouring Southeast Asian nations. 

The intensifying trade war between the U.S. and China is aggravating a difficult recovery in the latter, which is still navigating its way out of a property crisis. As Singapore’s top export market, slower growth in China and widening trade restrictions imposed by the U.S. on technological exports add to headwinds faced by the sector.

Electronics Remains a Bright Spot in Singapore’s Industrial Property Market

Industrial property deals have slowed in Q1 2024 due to weakness in overall manufactured goods exports. The number of leasing volume transactions for factories and warehouses declined 7.7% YoY to 2,866, the lowest number of first-quarter transactions since 2020⁷.

Strata industrial sales activity was also weak during Q1 2024, with transactions falling by 21.8% from the previous quarter to just 319, the lowest since the pandemic.

Sentiment in Singapore’s manufacturing industry has been improving, though. Its purchasing managers’ index (PMI) in May ticked up to 50.6 points.  However, it’s evident that the expansion in manufacturing activity has been tentative since it hit 50.7 points in January. 

Within this reading, Singapore’s electronics manufacturing PMI was the strongest, with a reading of 51.1 in May, rising from 50.9 in April. This indicates robustness in electronics exports, which outperformed the overall manufacturing industry in April. 

Non-oil domestic exports in April fell 9.3% compared to the previous year, dragged down by a steep 73.3% drop in pharmaceuticals exports. Electronics exports bucked the sector’s weakness with a 3.3% annual gain⁹.

The strength in industrial space demand from the electronics manufacturing sector is expected to continue, as Singapore becomes an increasingly attractive location for chip manufacturers in the region, thanks to its strategic location, stable power infrastructure, and efficient logistics network.

 TSMC affiliate Vanguard International Semiconductor and European-based NXP will build a $7.8 billion state-of-the-art chip production facility in Singapore starting the second half of 2024¹⁰. Japanese printing and materials group Toppan Holdings plans to build a chip package substrate plant in Singapore, with commercial operations beginning by the end of 2026¹¹.

Investors in Singapore industrial property should focus on the more resilient freehold and 60-year leasehold assets that have achieved stronger pricing and rental growth in Q1 2024. Prime business parks are also holding up well, buoyed by high-spec industrial spaces benefiting from the growth in Singapore’s electronics manufacturing sector.

Be Mindful of External Headwinds

While interest rates are starting to decline in Europe, the U.S. Federal Reserve is maintaining its cautious stance in light of sticky inflation and a tight job market¹². A resurgence in inflation that leads to a pause in the rate cut outlook is a risk that may result in slower economic growth and weakness in global trade.

Despite this, the International Monetary Fund (IMF) has projected 3% global trade growth in 2024, accelerating to 3.3% in 2025¹³.That compares with a 3% annual decline in global trade last year¹⁴.

The Monetary Authority of Singapore expects the country’s economic growth rate to range between 1% and 3% for 2024. It cites a continued recovery in the manufacturing and financial sectors and an anticipated easing in global interest rates as drivers for growth. The global chip industry alone is seen growing 13% compared to 2023, with Singapore a main beneficiary of changes in the global supply chain away from China¹⁵ .

Geopolitical tensions are taking centre stage as the U.S. elections draw closer. The Taiwan Strait and the West Philippine Sea are potential flashpoints that could draw China and the U.S. military into a tight corridor where costly miscalculations can happen. While the risk of a shooting war is remote, the status quo is still characterised by elevated risk that could lead to a disruption in regional trade flows.

As a neutral party in the region’s China-related maritime issues, Singapore can provide a safer and more stable environment for companies looking to increase their presence in the region. 

The Savills Industrial & Logistics team can help companies navigate the global challenges with customised solutions that meet client needs. It offers a range of sector-specific services that cover the entire line of industrial and logistics facilities, allowing clients to zero in on the optimal approach for any scenario. Contact a representative today.

 ¹https://stats.wto.org/dashboard/merchandise_en.html

²https://fred.stlouisfed.org/series/QSGR628BIS

^3,4,6,7https://pdf.savills.asia/asia-pacific-research/singapore-research/singapore-industrial/singapore-industrial-briefing-q4-2023.pdf

⁵https://www.singstat.gov.sg/publications/reference/singapore-in-figures/trade-and-investment

⁸https://tradingeconomics.com/singapore/manufacturing-pmi

⁹https://www.straitstimes.com/business/singapore-export-slump-eases-as-shipments-fall-93-in-april

  ¹⁰https://asia.nikkei.com/Business/Technology/TSMC-affiliate-Vanguard-to-build-7.8bn-Singapore-plant-with-NXP

  ¹¹https://asia.nikkei.com/Business/Tech/Semiconductors/Japan-s-Toppan-to-build-Singapore-chip-package-substrate-plant

  ¹²https://www.cnbc.com/2024/05/15/cpi-inflation-april-2024-consumer-prices-rose-0point3percent-in-april.html

  ¹³https://www.weforum.org/agenda/2024/05/global-trade-to-double-2024-imf-wto/#:~:text=World trade is picking up again&text=Meanwhile%2C the IMF's latest World,from earlier in the year.

 ¹⁴https://unctad.org/publication/global-trade-update-march-2024#:~:text=Overall%2C the value of global,performed worse than global averages.

  ¹⁵https://www2.deloitte.com/us/en/pages/technology-media-and-telecommunications/articles/semiconductor-industry-outlook.html