Should You Invest In An Industrial Property? | Industrial Malaysia
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Should You Invest In An Industrial Property?

Should You Invest In An Industrial Property?

A property investor often looks at two things to make money - the capital appreciation or rental yield from a property. There is, however, an increasing trend in industrial property investments for those who have a higher income ability. Industrial real estate is commercial real estate that usually offers functional and retail space in factories and warehouses mainly used to manufacture goods, storage, and logistics. Let's measure in on the pros and cons of investing in industrial properties.


Advantages of industrial real estate investments
 
Strong Demand for Industrial properties

The recent COVID 19 pandemic has caused a surge in demand for industrial properties; this includes manufacturing facilities for rubber gloves, last-mile delivery distribution hubs for packaging and sorting of products, warehouses, e-commerce. Many companies have to rethink their commercial real estate. Organizations are giving up retail and office space, research & development (R&D), commercial real estate, and integrating with their industrial properties for cost and commercial efficiency.

Long term tenants

Unlike residential properties and conventional commercial real estate shop lots, you usually get some pretty long-term industrial property tenants looking to lease for some time. This is because they typically take a long time to weigh in on their decisions and do their research beforehand on what fits their business model and venture before signing onto that rental agreement. Their lease tenure can be as long as ten years and even more if they find that the factory suits them. It costs heavy investment to set up production lines, computer numerical controls machines (CNC), research & development machines. It that's several years before the tenant could achieve a certain level of economies of scale. That saves you the headache of consistently trying to source for new tenants and adapting to new tenant habits due to tenants' high turnover. And with a longer lease, you can be assured of a stable investment return.
 
Steady yields

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For the 3RD  quarter 2020 Axis Real Estate Investment Trust, earnings for the third quarter ended Sept 30, 2020 (3QFY20), which saw a 23.9% increase in net profit. For the year 2020, Real Estate Investment Trust (Axis REIT) has acquired seven new properties worth RM288mil, with RM140mil worth of industrial properties. AXIS REIT acquisitions were focused on industrial-type assets in the manufacturing and warehousing sectors as industrial properties do not face the current pandemic due to their demand. Investors can expect minimal fluctuations in their investment value. There will not be issues such as a sudden incoming supply of factories, or a premature fire sale of these properties does the supply and demand are most of the time matched.
 

The rise of e-commerce and logistics warehousing

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The COVID -19 pandemic has accelerated the growth of e-commerce and logistics warehousing.  According to the IBM Retail Index, the pandemic has accelerated the shift from physical stores to digital shopping by roughly five years in advance.  The report suggests that department store retailers will need to pivot more quickly to omnichannel fulfillment capabilities to remain competitive in the new environment. Specifically, they will need to drive traffic to their stores through services like buy online and pick up in-store and will need to offer an expanded set of ship-from-store services.
The surge of demand for warehousing has caused many companies to look for factories and warehouses at strategic locations to store their goods before delivering to customers as customers' needs and demands grow.  Sellers and distributors are looking to fulfill the order and gain their market share via faster delivery time, hence the need for last-mile delivery warehouse and distribution hubs.


Disadvantages of industrial property investments

Not all industrial assets class are in demand

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A lousy design factory or warehouse can be a grave financial disaster. Failure to account for sufficient loading bays, large in-corporation of offices to warehouse ratio, massive warehouse beam, low eave height, insufficient electricity power can be very detrimental. Like a double-edged sword, on the one hand, you may secure a long term tenant with leases that can go as long as ten years. Still, you may also take a long time before being able to find a suitable tenant on a poorly design industrial property. Tenants focus on the highest and best use of the industrial property. To ensure they achieve the highest commercial efficacy, and right location and operation and rental cost. Inefficient design industrial properties may be left vacant for an extended amount of time, which means that the owner has to foot the bill and costs of maintaining the building, financing cost.


Is the demand for industrial property genuinely sustainable?

In the year 2020, the growth and demand for industrial properties have been unprecedented, and it will continue to increase to the year 2021. The rental rate of industrial properties has risen from 1.60 per sqft to 1,80per sqft to a high of reaching RM 2 per sqft. Hence this causes many companies to venture into industrial property development. The trend is evident in the recent mega warehouse investments in Malaysia, for example, the setting up of the one million sq ft Ikea regional distribution and supply chain center in Pulau Indah and AREA Logistics' warehouse with a built-up of 1.5 million sq ft in Ampang. In Shah Alam, Hap Seng Industrial Hub will complete a 20-acre industrial facility with 1.38mio of sqft. Galaxy Logistic hub in Puncak Alam has 1.5mio of ready space.  Recently Aspen group has acquired 71 acres of industrial space in Shah Alam Seksyen 16. Hence industrial space will be abundant within the next five years.  Thru our work, we have noticed many new start-ups for e-commerce, logistics and glove manufacturing companies that enter into the foray of renting or investing in industrial properties. The majority of them are riding on the wave of growth that is caused by the pandemic. The question remains what will happen post-pandemic? Are some of the newly minted gloves manufacturers continue to sustain to be profitable? And can the market support a large number of logistics and e-commerce players?


High purchase price of industrial land and construction cost.

Continue escalation of industrial land prices due to scarcity in prime area and regulation from state and local authorities means; industrial builders need to continue to spend a considerable amount of money in the development of warehouses and factories. Over the years, building materials continue to rise substantially. The unprecedented pandemic has created problems for builders to obtained foreign workers. There is also another underlying cost like the COVID-19 screening test. The government's movement control orders (MCO) have caused delays in completing factories and warehouses. This has escalated cost and create time inefficient and uncertainties, which are costing industrial real estate developers.


Should you need more details or information on industrial real estate properties, please email us at hello@industrialmalaysia.com.my