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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.

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 as Oxley BizHub, UB. One, AZ @ Paya Lebar, CT Hub in Kallang, and One 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 BizHub in Ubi houses a pay-per-use study area, a spa and even a geomancy-service provider. CT Hub in Kallang has 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 in Oxley BizHub are around S$2 to S$3 per square foot (psf) a month; at CT Hub, industrial units available for rent now start at S$3 psf. Rents for office space in Paya 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 in CT 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 in Bukit 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.

One of them said that 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.

Concurring, another 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, 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.

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.

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 residential cooling measures sent 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 of industrial space has 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 as Halcyon Building in Jalan Pemimpin and Midview City in Sin 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 as Oxley BizHub, Midview City and CT 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.

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.

BT's observations bear this out. At 9 Tagore Lane and North Spring BizHub in Yishun, 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.

Adapted from: The Business Times, 25 January 2017

Time for a review of rules on industrial space usage

"Face reality as it is, not as it was or as you wish it were." This is what Jack Welch, the former CEO of General Electric used to tell his management to acknowledge market conditions and embrace change. Singapore urban planners will do well to pay heed to this principle too, as an evolving manufacturing landscape challenges the very assumptions underpinning rules on the use of business space.This problem is not new. But it appears that for a long time, the authorities have not faced up to a new market reality. Now, the mis-use of industrial space has only become more conspicuous than before.

It is easy to blame opportunistic developers for building strata projects that meet investors' appetite but not the needs of industrialists. But even in some of the older industrial buildings that come with proper goods lifts and loading bays, floor load and ceiling height for genuine industrialists, unauthorised usage still exists.

Perhaps, current rules cannot be effectively enforced or the government has opted for a light touch to avoid inflicting further hardship on small businesses. If so, it may be time to see if these rules are keeping up with market changes.

There are three possible parameters that deserve a relook to consider their relevance in today's context - existing land-use zoning for industrial space, allowable uses, and the 60-40 rule that requires at least 60 per cent of gross space to be used for industrial activity.

Broadly speaking, all industrial properties are categorised into two zonings - Business 1 (B1) and Business 2 (B2). B1 is usually intended for light and clean industrial use while B2 sites may be used for heavy industries that have a greater environmental impact.

Under the 60-40 rule, URA allows up to 40 per cent of gross space in industrial buildings to be used for ancillary purposes, up from the previous 25 per cent ceiling before 1999. Certain types of e-business and media activities can be allowed on a case-by-case basis; a development charge at commercial rates may be levied. Industrial space cannot be rented to pure office or shop users such as tour or maid agencies, advertising firms, accounting and law firms.

While existing guidelines on allowable uses for industrial space are seen as too blunt on paper, they are open to interpretation in practice as there are no clear definitions on the type of trades allowed.

This means that a bridal studio, for instance, may operate in B1 buildings if the space is primarily used for core media activities - in other words, production services requiring technical facilities. Similarly, travel solutions companies can possibly operate in B1 premise if their gross space is mainly used for online e-business or call centre operations.

On the other hand, architectural firms and quantity surveyors - which undertake the upstream work of the construction industry - are not allowed to occupy B1 space. But some would argue that the justification for such trades is strong as they fall within the sector's value chain.

Increasingly, service-like activities such as R&D, marketing and sales, and customer support, as well as intellectual activities such as product design and testing are taking on a larger share of what manufacturing companies do.

This begs the question of whether a clear division between manufacturing and essential services should continue to apply. Some industry players have argued that the 60-40 rule should be flipped the other way by raising the gross-space ceiling for ancillary services to 60 per cent or even 70 per cent.

Most would remember that rules governing business space use were introduced during Singapore's early years of industrialisation. While there have been tweaks in the planning parameters along the way, these are at best "cosmetic.

The ruling and regulations have not changed to address the changing manufacturing trends and this is hurting landlords and the industrialists themselves. Are private developers producing the right hardware for Singapore to chase after the industries? How is URA and JTC working together with the other government agencies to make this happen?

As Singapore embraces the Internet of Things (IoT), new technologies, and change in business models, we have to change the way we view business functions to ensure that our real estate is able to support advances in technology and e-commerce. Landlords too should look at their stable of assets to consider ways to refresh them.

Singapore's close rival Hong Kong has run ahead in coping with the structural change of its industries. It had in late 1989 introduced an "Industrial/Office" (I/O) zone that is flexible to accommodate either industrial or office uses following a manufacturing shift to China and rampant mis-use of industrial space. Hong Kong then went on to expand the uses within the "Industrial" zone in 2001 and started rezoning "Industrial" land to "Other Specified Uses (Business)" in the same year to accommodate a wide range of economic activities.

Affordable space

Though Singapore's JTC is experimenting a new zoning in Woodlands to provide affordable space for firms in manufacturing-related services that have no production here, there is still no update on this since the news broke in late 2014. Meanwhile, trades that fall under grey areas do have plenty of options in the market if they choose to take the chance with B1 space.

Expanding the uses for B1 space here may not be without its flipside. It is unclear if such a move may cause B1 rents to move up, conflicting with the government's goal of providing affordable space for industrialists. On the other hand, unauthorised users - who are mainly SMEs - may face financial hardship if they have to take up more costly commercial spaces elsewhere.

It is not hard to see why the regulator, stuck between a rock and a hard place, would prefer to act "on a complaint basis", when disturbances are created by unauthorised users. Meanwhile, the mis-use of industrial space continues to fester - more companies choosing to take a risk with the rules, developers buying relatively cheaper industrial land but insinuating office use, and landlords renting out industrial units at near-office rates without having paid the relevant development charge.

But on a broader scheme, it is necessary that we think about how to ride the next growth wave when it comes. To do so, our urban planning framework has to keep in step with market changes in order to provide adequate and suitable space for business users. Besides maintaining industrial stock for genuine industrialists, we need to facilitate the growth of new thriving industries as Singapore moves from an industrial city to a creative city.

Instead of kicking the can down the road, maybe it is time to take a holistic review of the planning parameters to see how our real estate offerings can remain relevant to the business needs of the future. By choosing not to hold off on difficult decisions, we are better off in the long run.

Adapted from: The Business Times, 25 January 2017

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