The Next Level – Factories

Everyone’s familiar with residential properties because they live in one. Commercial properties, we aren’t as familiar with, but we’ve been to shop houses and shop offices, and some of us probably working in one. Industrial properties remain alien to most. How on earth do you invest in one? Stephen Tew, Director of Axis REIT and Dr. Lee Ville, Director of New Bob Group offers Property Insights some insights.

Making the giant leap into investing in industrial properties may prove to be difficult for some. Making a leap from the comfort zone of residential and commercial properties, to jumping in the great black of Chasm of Unknowns and Unfamiliarity which gapes menacingly in the face of the average investor. Therefore lies the bridge across? They say the best way to learn is to immerse oneself in the environment. But to climb down the chasm into the darkness is hardly a smart move. You can die of falling into the Abyss of Bankruptcy. The smartest option is to build a Bridge of Knowledge, so let’s begin construction, brick by brick.

IMPORTANT NEEDS OF TENANTS

“Since the early “90s, on Penang Island, not many developers have gone to develop industrial factories,”explains Dr. Lee Ville, Director of New Bob Group, who has just launched their first light industrial park in Batu Maung, Penang, last year. “An industrial park adjacent to ours has always gotten feedback from renters that its size is too small. So for our development, we decided to build bigger, semi-detached units, which nobody else is doing.”

Just as old flatted units are not suitable for some industries, small terraced units are limiting your choices of tenants. Exactly what are the components that make up a good industrial property depends on your future tenant’s needs, but generally, says Tew, you should keep in mind that the needs of businesses which rent industrial buildings are totally different than those that rent shop houses.

“They will consider container movement, distribution, haulage, the highway system, and how the roads connect. They’re not bothered by whether there’s a public transportation system nearby. Depending on what business they are in, they might also consider the security, because if they don’t secure their warehouse, things will go missing,” Tew adds. If you can recall, in December last year, microchips worth RM800,000 was stolen froma  lorry near the Free Industrial Zone (FIZ) in Bayan Lepas. That’s the sort of thing your tenants want to avoid.

“One important thing industrial tenants look for is good infrastructure. Industrial tenants will be transporting their goods all over, so the road system must be good and wide. Parking space must be available for their own lorries and workers. Next is the labour availability,” says Dr. Lee. “For example, Batu Maung, where our development is, located in the south of Penang Island, where there is a huge population of workers. The workforce is there.”

“Traditionally for the industrial sector, the ports are a magnet. Everybody needs to be not too far away from the port. In Penang, the area where the airport is – Bayan Lepas, is very “hot”.  There are at least three ways to ship: You either use the airport, the seaport, or for local distributors who ship nationwide, the roads and highways,” explains Tew.

Another aspect to look at when choosing an industrial property is the design. A well designed property should have high ceilings for storage, wide roads and back roads for manoeuvring large vehicles, with a large compound for unloading goods or products. You would do well to avoid units designed like a shop house, as that is not what proper industrial tenants are looking for.

FINDING TENANTS, MANAGING PROPERTIES, AND PROBLEMS

Industrial tenants are a different breed from commercial tenants. But to find one, it is still advisable to go through property agents, as it is much more convenient for you. In fact, it can be much safer. Tew relates the story of a man who once showed his industrial building to a prospective tenant: He was kidnapped by him and demanded ransom. Actually, the story has been toned down, but bear in mind that there are real dangers associated with this hands-on approach.

In regards to tenant type, both Tew and Dr. Lee admit that industrial tenants are as varied as they come. “We have a mix of tenants for our industrial project. There are pharmaceutical companies, chemical-based manufacturers, engineering companies, and so on,”, says Dr. Lee.

“Industrial properties are much easier to handle. You just rent it as it is – bare. As an investor, you will have less headaches, because you won’t have to call your electrician to fix the air-conditioning unit. Industrial tenants also tend to lease long-term, at least for a few years, whereas residential tenants will rent for 2-3 years, move out, and then you’ll have to find new tenants. Big companies are more secure in terms of tenancy,” explains Dr. Lee.

Comparing rental yields, residential properties have terrible yields when you talk about landed properties. Whereas for industrial properties, if you buy in the right location, you might have a good positive cash flow. Capital appreciation is also better in the long run.

Having said all that, finding the right long-term tenant is not as easy-peasy as it sounds. “When a company enquires about your industrial property, they might tell you that the nature of their business is engineering, and you might have a general idea of the business that they are going to run, but it might turn out to be some other kind of business. One challenge is that you might not able to identify the true nature of your tenant’s business,” says Dr. Lee.

“Usually, tenants will incur heavy initial up-front costs for their business. Once they’ve set up, they’re going to be there for a good 10 years. If you’ve chosen the wrong tenants, you’re going to be stuck with them for a long time. But I would say that it is actually a very rare case. Sometimes, you will have irresponsible tenants who cause a lot of damage to the property, or maybe cause pollution. As the landlord, you are responsible to a certain extent,” he adds.

Unless you’ve secured the wrong kind of tenant, managing your property will be easy and straightforward. All you need to do is appoint a local property manager, whose task is to ensure that water and electricity is running fine, and that the roof is not leaking. When changing tenants, damaged flooring from heavy machinery and vehicles would have to be repaired. The walls and foundation will also have to be checked.

At the end of the day, after buying and renting out your industrial property, you might encounter difficult neighbours, who for example, might block the access road with heavy vehicles and containers. You need to be firm in getting the relevant authorities to take action, as there are cases where inaction and law enforcement by the authorities has caused businesses to go bust. Now that we’ve covered these aspects, let’s look at the market.