THE market for industrial warehouses is facing challenges in the short term, according to the boss of a local real estate investment trust (Reit).
Aims AMP Capital Industrial Reit Management chief executive Koh Wee Lih said demand is "soft", with a lot of supply coming on stream over the next 18 months.
But he said the trust is managing this by upgrading facilities to suit client needs and is looking for investment opportunities in other industrial sectors as well as in Australia.
A few years ago, we anticipated that there would be a slowdown and made an effort to upgrade our properties.
- Mr Koh Wee Lih, chief executive of Aims AMP Capital Industrial Reit Management
He noted that the economic restructuring is having an impact on the Reit's clients, adding that tenants were taking longer to decide on renewing their leases.
The Reit obtains around 60 per cent of its rental income from the warehousing sector. It has 25 properties in Singapore and one in Sydney. Market capitalisation as of March 31 was $956 million.
One strategy to maintain occupancy rates involves redeveloping properties with better facilities.
Mr Koh said that in a market where supply is high relative to demand, there is always a flight to quality assets. "A few years ago, we anticipated that there would be a slowdown and made an effort to upgrade our properties."
The trust redeveloped its facility at 20 Gul Way to better suit its client, CWT, which committed to leasing the entire facility before redevelopment began.
The Reit built a five-storey ramp-up warehouse in place of 10 single-storey buildings. The new building has higher ceilings, more loading bays and the capacity to load heavier products. Thanks to the redevelopment, the annual rental income rose from $3.6 million to around $22.2 million.
Mr Koh said the Reit is planning additions and alterations to several other properties and aims to have customers commit to leasing before starting the work.
It also asks clients six to nine months ahead of the lease expiry to see if they have any requests.
"You need to provide a solution to what the customers want," said Mr Koh.
Mr Donald Han, managing director of consultancy Chestertons, said warehousing demand will be supported by e-retailing, as merchandise has to be kept somewhere.
He said business parks and high-tech industrial facilities targeted at corporations were industrial sectors that will enjoy "higher occupancy rates and rental preservation". These will come from social media and non-financial companies moving out of the city centre because of rising rent.
In February last year, the Reit acquired a 49 per cent interest in Optus Centre in Sydney for A$184 million (S$191 million). Mr Koh said it is on the lookout for other investment opportunities in Australia. He also pointed out that rising interest rates would indicate possible rent rises. "If interest rates rise, it would also mean the economy is doing better."
In such a situation, Singapore's trade with the United States and Europe would improve. This would provide an opportunity for industrial real estate rents - which are re-negotiated every three to five years - to increase.