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Misuse of industrial space ever more widespread

The misuse of industrial space has become rampant, and with tenants having settled into units in new strata projects offering office-like designs and proximity to transport nodes, the trend has become even more conspicuous.

Posted on 25-Jan-2017

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Misuse of industrial space ever more widespread

The misuse ofindustrial spacehas become rampant, and with tenants having settled into units in new strata projects offering office-like designs and proximity to transport nodes, the trend has become even more conspicuous.

Businesses ranging from law firms and real-estate agencies to accounting and tax advisory firms, recruitment agencies, training providers, commercial schools and boutique investment firms have taken up units in industrial premises such asOxley BizHub,UB. One,AZ @ Paya Lebar,CT HubinKallang, andOne Commonwealth.

Market watchers are decidedly split in their views on how hard the government should come down on this issue.

The Business Times visited various industrial premises and found so many businesses operating there which fall outside the approved uses for industrial space, that it would be unfair to single out some names and leave out others.

For example, other than office users,Oxley BizHubinUbihouses a pay-per-use study area, a spa and even a geomancy-service provider.CT HubinKallanghas become a hub for the offices of religious organisations.

Industrial units in these projects zoned Business-1 (B1) are mostly sold to investors and end-users.

It is clear that the unauthorised trades operating there are drawn to these B1 developments by their lower rents vis-a-vis commercial property rents and proximity to MRT stations.

Current asking rents inOxley BizHubare around S$2 to S$3 per square foot (psf) a month; atCT Hub, industrial units available for rent now start at S$3 psf. Rents for office space inPaya Lebar Square, on the other hand, are between S$4 and S$6 psf, based on online listings.

But under the guidelines of the Urban Redevelopment Authority (URA), buildings approved for industrial use are meant primarily for activities such as manufacturing and warehousing; certain types of e-business and media activities may also be allowed.

Under a 60-40 rule, at least 60 per cent of total gross space of the development has to be used for core industrial activities, and up to 40 per cent for ancillary uses. In strata projects, units also have to comply with the 60-40 rule.

A check by BT found that, among the religious organisations that have huddled inCT Hub, only one has obtained written permission for the factory units it owns to be primarily used for video production and storage. Over at WCEGA Plaza, an older strata B1 building inBukit Batok Crescent, at least six units are used as places of worship.

URA guidelines bar the conversion of factory units into places of worship or offices for religious organisations, though the common facilities of the building or the ancillary spaces within each factory unit can be considered for religious use in a "limited and non-exclusive" way.

Amid slowing economic growth and generally high commercial rents in Singapore, these unauthorised users of these spaces have found empathy among some industry watchers.

Chia Siew Chuin, CBRE director of industrial and logistics for Asia, said the government should first offer cost-effective alternatives before deciding to enforce its planning guidelines and clamp down on these users. "The various government agencies should long have studied this issue together with the private sector to update and redefine the trades that are allowed in industrial premises," she said.

Concurring with her, SLP International executive director Nicholas Mak said the owners of these industrial units may have found themselves weighing between leasing the space to an unauthorised user and defaulting on their mortgage.

On the other hand, International Property Advisor's key executive officer Ku Swee Yong said that having office users in B1 space will raise rental costs for legitimate B1 users, many of whom are struggling small and medium-sized enterprises (SMEs).

"Office landlords are also losing corporate tenants who are happy to operate in the grey area of leasing B1 space slated for factory use and operating their business there," he said.

At the same time, there are also B1 landlords who are willing to accept office users under a "factory use" lease contract.

The playing field is thus tilted against rule-abiding parties.

Mr Ku added: "Honest property agents are struggling, in this economic downturn, to find landlords and tenants with solid integrity who will stick with the government guidelines."

The downturn in the residential market may have catalysed this problem. When multiple rounds of residentialcooling measuressent investors piling into the industrial segment between 2010 and 2013, the unwitting ones among them snapped up strata units in industrial developments in the hope of getting high rental yields - and some of these were sold by housing agents unfamiliar with the rules for industrial space.

But industrial brokers say that the majority of the occupants should know better, because the government stipulated in 2012 that sale-and-purchase agreements or tenancy agreements must spell out the approved use of the property.

A spokesman from the Council for Estate Agencies (CEA) told BT that property agencies and agents must be fully conversant with and must comply with the relevant rules and regulations on property transactions. "CEA can take disciplinary action against property agencies and agents if they are found to have facilitated property transactions that led to the unauthorised use of industrial sites," he said.

Clearly, the misuse ofindustrial spacehas been exacerbated by the proliferation of shoebox units in projects built without the right specifications for genuine industrialists.

But even in older industrial buildings such asHalcyon BuildinginJalan PemimpinandMidview CityinSin Ming, non-authorised users can be found.

An industrial broker who declined to be named remarked that there is no urgency for the relevant authorities to clean up unauthorised industrial-space users because there may be no other takers for the space amid receding demand among industrialists. The authorities are also perceived to be sensitive to the plight of SMEs amid the economic downturn.

In response to BT's queries, a URA spokeswoman said: "Where unauthorised uses in specific industrial units are brought to our attention, these will be investigated and enforcement action will be taken on both the operator and property owner if an infringement is ascertained. For example, we more recently took action against a number of units in industrial buildings such asOxley BizHub,Midview CityandCT Hub."

One Pemimpin, where URA reportedly undertook enforcement action on unauthorised trades back in 2013, was about 30 to 40 per cent vacant when BT visited it this month.

Meanwhile, net demand for industrial space islandwide has withered, dropping 66.2 per cent year on year in the first nine months of 2016 to about 1.13 million sq ft, based on JTC's data on change in occupied space. This was mainly due to negative net demand in the Central Region (stretching from Bishan to the Southern Islands and Queenstown to Marine Parade) and the East Region.

CBRE's Ms Chia noted that high vacancies in these projects could be due to the already ample space in the B1 market. The sputtering manufacturing sector still faces headwinds despite an uptick in output in the fourth quarter. Because of relocation costs, industrialists may be put off moving into newer projects, even if these are built to suitable specifications, she added.

BT's observations bear this out. At9 Tagore LaneandNorth Spring BizHubinYishun, newly completed ramp-up factories offer access to every floor for trucks. The units here have been sold out by developers - but lie largely vacant.

The Business Times

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