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THE real estate market is made up of different "personalities". There is the attention-seeking residential segment, the dependable commercial property segment and the retail and hospitality segments that are always ready for a good time. As for the industrial property segment, it is shy and lingers in the background. However, this could change in the near future.
According to VPC Alliance (KL) Sdn Bhd's managing director James Wong, who spoke at the PEPS 6th Malaysian Property Summit on Jan 22, opportunities abound for developers to build industrial properties because of the increase in manufacturing activity in the country. The summit was organised by PEPS or the Association of Valuers, Property Managers, Estate Agents and Property Consultants in the private sector of Malaysia.
The manufacturing sector, according to the Malaysian Investment Development Authority (Mida) 2012 data, contributed about 24.6% to Malaysia's GDP after the service sector (50.6%). It is the largest employer in the country, hiring 12.5 million or 29% of the total workforce.
This means industrial properties, typically buildings for manufacturing or warehouse purposes and vacant industrial land, have investment potential like any other property type. Meanwhile, they account for only 2.2% of total property transactions and about 10% of total property transaction value in the country, according to the National Property Information Centre's figures for 1H2012. Average yearly transactions are about 8,000.
With most private developers preferring to focus on residential and commercial projects, the main developers of industrial parks are state economic development corporations and other government agencies, said Wong.
While it is not difficult for developers to sell industrial buildings, renting them out is another thing altogether, he added. Conditions such as good location in a developed area, accessibility to highways and ports, availability of industrial workers in the vicinity, available infrastructure and limited industrial property supply in the locality are some of the factors that have to be considered.
Some developers have targeted small and medium manufacturers and come up with industrial units that meet their requirements. "There are now developers who are building a new generation of industrial units for the multiple functions of warehousing, light manufacturing, workshops, offices and showrooms, all under one roof, which are suitable for small and medium enterprises that don't want to tie up their capital by buying an industrial property," Wong explained.
More individual investors looking at industrial properties
"Individual investors buying industrial properties such as factories and warehouses is a new phenomenon in Malaysia," Wong said.
According to him, one of the benefits of this is returns of 6% to 10% compared with 3% and 6% for residential properties and shopoffices respectively.
Moreover, industrial properties require less maintenance and management. And unlike the two-year tenancy agreements for residential properties — at the end of which tenants are wont to make fresh demands — the leases for industrial properties are longer. In addition, the management deals with fewer tenants unlike for serviced apartments, for example.
As the industrial property market is small, there is room for growth with capital appreciation in the mid and long terms, Wong observed.
Industrial parks
In the past 10 years, most of the industrial parks in the Klang Valley and the outlying areas have been developed by the Selangor State Development Corporation (PKNS). The majority of them are located in areas such as North Port (Klang), West Port (Klang), Shah Alam, Meru-Kapar, Subang Jaya- Puchong, Sungai Buloh, Petaling Jaya, Segambut-Selayang, Rawang, Sungai Besi -Kajang and Nilai (Negri Sembilan).
Based on a Mida report, Selangor has the largest concentration of industrial properties in the country and attracted the most approved investments in manufacturing projects from January to September 2012 worth RM7.684 billion or 24% of total investments for the said period in the country, Wong said.
"Over the past five years, the Klang Valley industrial market has seen capital values rise as much as 50% while rents gained 20% to 30%. The price and rent rises were due more to a lack of new supply than overly strong demand."
VPC Research data show the prices of prime vacant industrial land in Glenmarie Industrial Park in Shah Alam rose to RM185 psf in 2012 from RM75 psf in 2007 — an increase of 146.7% — while that for industrial land in Bukit Jelutong Industrial Park, Shah Alam, increased 85% to RM120 psf in 2012 from RM65 psf in 2007.
Factory prices have also appreciated over the years. A 2-storey terraced factory in Taman Ehsan Industrial Park, Kepong, with a built-up of 3,197 sq ft saw an average price growth of 12.1% to reach RM950,000 in 1H2012 from a year ago. The price of a semi-detached factory in Meru Industrial Park, Klang, with a floor area of 7,287 sq ft rose 7.5% from the previous year to RM2 million in 1H2012.
As for rents, Wong said the rates for a conventional factory in Glenmarie Industrial Park were between RM1.80 and RM2.20 psf while in Bukit Jelutong Industrial Park, similar units were leased out for RM2 to RM2.40 psf. In 2007, rental rates for both industrial parks were RM1.20 psf.
Johor and Penang
Besides the Klang Valley, Wong believes Johor and Penang are two regions where industrial properties will see growing demand.
"A few industrial clusters are being developed in Johor, including the Southern Industrial and Logistics Clusters (SiLC), industrial parks in Nusajaya, Pengerang oil and gas refinery and transmission hub and Seaport Worldwide's petrochemical industrial park," he said. "Ascendas has also announced a joint venture with UEM Land to develop a technology park in Nusajaya, Iskandar Malaysia, with an investment value of S$1.5 billion, which will bring in Singapore manufacturers."
The 2,217 sq km Iskandar Malaysia covers the city of Johor Baru, the adjoining towns of Pontian, Senai and Pasir Gudang and the upcoming new administrative capital in Nusajaya.
Interest in Iskandar Malaysia has already boosted industrial property prices. Semi-detached factories in Nusa Cemerlang Industrial Park in Bandar Nusajaya achieved a y-o-y price growth of 31% to RM190 psf in 2012. Rents for factories in Pasir Gudang and Port of Tanjung Pelepas are between RM1.10 and RM1.50 psf while those in SiLC, Tebrau, Nusajaya, Senai and Tampoi are between 80 sen and RM1.50 psf.
Penang is also looking attractive for industrial property investments, thanks to the completion of the second bridge to the mainland, Wong pointed out. "With the second bridge expected to be completed this September, there is a lot of interest in land and industrial premises in the Valdor, Batu Kawan and Bukit Minyak areas, including the Science Park. We see strong growth in this locality as the housing projects currently taking off in Juru, Tasek and Nibong Tebal will provide accommodation for workers while the easy availability of workers will attract industries to set up factories there."
The second bridge has spurred real estate activity in Tambun and Sungai Bakap with freehold industrial land going for as much as RM26.80 psf in 2012 compared with RM20 psf in 2011 — a 34% increase.
Due to the scarcity of land in Penang, prices rose to RM70 psf in 2012 from RM50 psf in 2010, an increase of 40%, remarked Wong.
Furthermore, state government efforts to develop industrial parks are attracting foreign investors. "The Penang Development Corporation (PDC) has successfully developed six industrial parks comprising some 5,890 acres. Many of the export-oriented multinational corporations are located in PDC's industrial parks while industrial land available for booking is located in Penang Science Park and Batu Kawan Industrial Park," Wong said.
PDC's data reveal that the prices of factories in Bukit Minyak Industrial Park, which offers standard terraced (built-up: 2,303 sq ft), corner terraced (built-up: 2,335 sq ft) and semi-detached factories (built-up: 5,834 sq ft), range from RM243,000 to RM630,000. Rental rates are from RM1,612 to RM4,083 per month.
At Bayan Lepas Industrial Park (Phase 4), which features the same kind of products and built-ups, prices range from RM420,000 for a standard terraced factory to RM1.1 million for a semi-detached one. Rents are from RM2,994 per month for a standard terraced factory to RM7,613 per month for the semi-detached.
Wong also highlighted that besides the Klang Valley, Johor and Penang, industrial developments in other parts of Malaysia — where land for such purposes is cheaper, such as in the east coast of Peninsular Malaysia and Sabah and Sarawak — are being promoted by the government.
Opportunities
Wong said developers and investors should consider developing industrial properties in development corridors and industrial and SME parks. "As at June 30, 2012, the Sabah Development Corridor had attracted committed investments of RM112 billion from domestic and foreign investors in various sectors. Iskandar Malaysia recorded investment amounting to RM95.5 billion, followed by the East Coast Economic Region (RM32.7 billion), the Northern Corridor Economic Region (RM25.9 billion) and the Sarawak Corridor of Renewable Energy (RM24.5 billion)."
As for SME parks, he said small and medium enterprises contributed 32% to GDP in 2012. "Under the SME Master Plan 2012 to 2020, the government targets to raise the contribution of SMEs to GDP to 41%."
Private developers in the Klang Valley with a large landbank and ex-plantation land can also consider developing industrial parks as there is a shortage of vacant industrial land in Selangor and Kuala Lumpur. "This will complement PKNS' industrial park development activity," Wong pointed out. "They should build near existing highways to have easy access to ports and in existing industrial free trade zones."
Industrial REITs
The potential in developing industrial properties is evident from the interest shown by real estate investment trusts (REITs). There are four REITs with Malaysian industrial property assets in their portfolios, namely Bursa Malaysia-listed Axis REIT, Atrium REIT and AmanahRaya REIT, along with Singapore Exchange-listed Mapletree Logistics Trust, which has acquired many Malaysian industrial properties.
Atrium REIT is the only pure industrial REIT listed on Bursa with five properties. Five out of AmanahRaya REIT's 15 properties are industrial. Axis REIT has a majority of industrial properties with 25 out of 29.
Wong explained that REITs are attracted to industrial properties because of their good yields — the highest among the property types. The industrial properties under Axis REIT, for example, have achieved an average net yield of 10.66% per annum while those under AmanahRaya REIT have seen a net yield of 6.71% to 8.17%. Atrium REIT's properties provide an average net yield of 6.56% per annum.
The outlook for industrial properties also looks bright, thanks to the progress of the Economic Transformation Programme (ETP), said Wong. "The expansion of ports and the overall economy has resulted in opportunities to develop modern warehouse and logistics centres, which are much sought after by industrial REITs and property funds. As the industrial market's base is small, there are lots of opportunities to expand it as the country is progressing from an emerging industrial economy to a developed industrial economy by 2020."
While industrial properties are not as popular as other property types, and probably never will be, they are emerging from the shadow as Malaysia projects itself as the choice location for SMEs and MNCs in the near future.
This story first appeared in The Edge weekly edition of Feb 18-24, 2013.
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