INDUSTRIAL SECTOR HAS PLENTY TO OFFER
by Lim Lay Ying
Property Times, New Straits Times
29th May 2004

In the United States, industrial real estate represents the largest sector of the country’s real estate – both in terms of area and value. In total, there are over 12 billion square feet (1.1 billion square metres) of space in a variety of shapes, structures, and sizes, which are used as manufacturing plants, warehouses, research and development (R&D) centres, air cargo facilities, distribution centres, etc.

The role of the sector however, cannot be said of Malaysian industrial real estate although virtually every business in the country does, directly or indirectly, rely on some form of industrial property to manufacture, warehouse, or distribute goods.

In fact, over the last six years, the combined effects of almost a decade of overbuilding, a real estate depression, and company consolidations, have shrunk the sector’s contribution to the nation’s real estate industry to miniscule proportions.

In terms of market activities, industrial real estate contributed the least to the total number of property transactions even during the peak periods of the market. Before the market collapsed in 1998, the volume of industrial properties transacted (in 1997) amounted to 9,426 units which had a combined value of RM6,319.86 million, constituting 3.4 per cent and 11.2 per cent of total transactions respectively. In 1996, the value contribution was more, at 14.5 per cent despite a slightly lower number of 9,271 units changing hands.

Promising Outlook for the Sector

At the trough of the recession in 1998, the sector’s contribution shrunk to a mere 2.6 per cent (4,862 units) and 10.1 per cent (RM2,838.07 million) of all properties transacted in the country. Of late though, with the strengthening of the country’s economy and a more buoyant manufacturing sector, there have been indications of moderate improvements in the sector. A total of 6,490 units worth RM3,967.98 million of industrial properties were transacted last year. Proportions of contribution to total transaction activities however remained insignificant – at 2.7 per cent and 9.1 per cent in volume and value terms respectively.

Since the beginning of this year, major economic indicators have been looking very promising. Exports and industrial production numbers are showing double-digit growth rates, leading economists to focus on the nation’s manufacturing sector to drive economic growth further. The electrical and electronics sector has been experiencing increasing demand for advanced microchips which are vital component parts in consumer electronic appliances. In tandem with the expansion of the economy, heightened activities in transportation, financial, and tourism services are expected to stimulate growth in the services sector as well.

With renewed optimism in the outlook of the country’s economy, industrial real estate can also look forward to a more dynamic role as a real estate supporting the supply chain process. Along with some of the other dynamic property types such as office, retail, or residential, the sector’s potential is an oasis for savvy developers and investors.

As changes take place in space demand, manufacturing and distribution channels, physical and locational requirements, and purchasing processes, a potpourri of investment and development opportunities is being created as well. There will be demand for more specialized facilities and a wider array of industrial real estate products.

Traditional Industrial Properties Getting Obsolete

These changes could lead to the traditional major industrial product types such as terrace factories, semi-detached industrial buildings, etc., becoming obsolete quickly as space users seek to improve efficiency and productivity to remain competitive. Hence, relying on past industry trends to predict and develop real estate for the future industrial space user, or assume that one size should fit all, could leave the developer stuck with unmarketable space.

It is critical instead, that developers develop an insight into changing spacial requirements because major structural shifts or revolutions such as technology and the new economy will occur. Understanding emerging trends will be particularly helpful to identify market niches that may exist. Especially noteworthy are the following:

• The globalization of business, economies, and finance affects the industrial property sector both directly and indirectly, hence changing the generic structure of the real estate. Demand is rising for regional distribution facilities and new transhipment points.
• Logistic, an important part of the supply chain, has undergone dramatic changes triggered by the e-business, Internet, technological revolution. In many industries, the change has eliminated the middlemen hence affecting the level, design, and location of industrial facilities.
• Changes in retailing practices are also influencing demand for industrial facilities. The growing popularity of discount retail superstores selling huge quantities of bulk products is stimulating demand for centralized distribution centres where full truckloads of merchandise are stored and loaded for direct store delivery.
• The proliferation of discount superstores in urban and rural locations or clustered at mega shopping centres (including power centres) is leading to fewer but larger regional cross-docking cargo facilities.
• So-called “reverse logistics” – product returns from retailers or consumer – is growing as manufacturers become more customer-service focused.
• The practice of “local finish and customization” presents an opportunity for facility development and leasing. Major multinationals often import bulk quantities of standard products and transfer them to nearby local engineering and configuration centres which customize, enhance, or label generic products.
• The growth of high-value technology, fashion-oriented, and perishable products necessitates infill airport-adjacent or on-tarmac airfreight facilities, of which the location is paramount. Quick access to a large customer base and close proximity to ports and airports is mission-critical to these companies.

Changing business trends and supply-chain reconfigurations are creating more market niches than ever in the country’s industrial real estate. With the increasingly segmented demand and supply sides of the business, opportunities are vast for those who are able to understand and meet the changing market expectations of the end-users.