URA cracks down on misuse of factory units

Circular to developers aims to ensure buyers are clear on the possible restrictions

By Esther Teo, The Straits Times, 20 Mar 2012

THE Government has wasted no time in tackling a thorny problem that had sprung up over the wrong type of tenants using factory space to get cheap rent.

The prompt action seems to have been set in train by a no-nonsense blog post by National Development Minister Khaw Boon Wan last week.

He suggested that sharp practice by developers and their marketing agents could be prompting unwitting investors to buy small industrial units thinking they would be easy to rent.

This belief was fuelled by the taking up of such space by tenants who were technically not meant to be there, and who have been bending the rules to get lower rent than would otherwise apply.

Earlier media reports cited examples such as tuition centres, retail outlets and even churches - adding that the higher demand could drive up rents too.

In response, the Urban Redevelopment Authority (URA) has made changes to ensure that buyers are not misled into buying industrial units without knowing the possible restrictions on their uses.

A URA circular sent to developers and lawyers states that developers selling non-residential properties - shops, offices and industrial units - must from Friday insert, in the option to purchase and the sale-and-purchase agreement, a clause stipulating clearly the approved use of the unit sold.

For instance, an industrial unit's use could be specified as for a factory or showroom, according to what was stated in the URA's approval for the project.

Currently, the unit can be loosely stated as for 'industrial use', and buyers unfamiliar with the sector may be unclear as to what sort of tenants are allowed.

This clause should be contained in a side letter made known to the buyer before the booking fee is accepted - or at the time the option to purchase is issued.

Experts say that as this will allow buyers to be aware of the approved use of the unit purchased, they cannot subsequently argue that they are unclear about the scope of uses allowed. This will minimise potential disputes, they add.

Mr Lee Liat Yeang, a partner at Rodyk & Davidson's Real Estate Practice Group, said the change would alert buyers specifically to the fact that they cannot change the approved use without prior approval from the authorities. They will also know the actual approved use of the project as early as possible in the buying process.

'In the past, very often the buyer is only aware of the approved use... at the time of receipt of the sale agreement from the lawyers. This is after the option has been issued, which means the buyer has already put down a 5 per cent deposit,' Mr Lee added.

An industry observer, who declined to be named, noted that with the residential measures diverting investors to the industrial segment, more housing agents are streaming into the market. Some of them might push industrial units aggressively to investors even though they are unfamiliar with the rules governing the sector.

Soilbuild managing director Lim Chap Huat said that he has always told his marketing agents to be upfront with buyers of his industrial projects.

He is supportive of the change, as investors need to be aware of what exactly they are purchasing, especially with some artist's impressions making new industrial projects look just like shopping malls.

A URA spokesman said the changes do not apply to tenancy agreements, as the leasing of completed properties does not fall under the Sale of Commercial Properties Act, which allows for changes to sales agreements of uncompleted industrial properties.

For prospective tenants, URA has been actively working with the Council of Estate Agents and developers to ensure the accuracy of marketing materials for such industrial premises so that end-users, including tenants, are not misled on the approved use,' the spokesman added.

Mr Khaw put rogue industrial tenants and landlords on notice in his blog entry last Friday, noting that tenants are running some office and non-industrial activities in industrial buildings.

He also noted the emergence of shoebox factories of as small as 50 sq m to 80 sq m, likely too small to accommodate genuine industrial activities.

Still, many investors are attracted by the smaller quantums of typically less than $500,000 for shoebox factory units.

The proper use of industrial space includes manufacturing, warehousing and production. Certain types of e-businesses, such as IT infrastructure and software development, are also allowed.

There are exceptions. For instance, childcare centres and furniture showrooms are allowed, as they support the main industrial activities. Broadly speaking, they may occupy about 40 per cent of the industrial development.

Khaw hits out at rogue use of factory space
Tenants abusing lower rentals offered by industrial buildings
By Esther Teo, The Straits Times, 17 Mar 2012

NATIONAL Development Minister Khaw Boon Wan put rogue industrial tenants and landlords on notice yesterday in his latest blog entry.

He said tenants are running some office and non-industrial activities in industrial buildings, looking for cheap rents by using industrial space instead of areas where they are supposed to operate.

The Straits Times has reported that shops, tuition centres and even churches were using these industrial areas because of lower rents.

For instance, Jalan Pemimpin's Clarus Centre houses five religious groups, including Hope Sanctuary, and tuition centre Twig. It is a similar scenario at Henderson Industrial Park, with non-industrial businesses like outfitter Costume City, travel agency Star Holiday Mart and Acts Baptist Church housed across both wings of Block 203.

The penalty for the unauthorised use of properties is a fine of up to $200,000 and/or jail for up to a year. Shops and offices should be located in commercial sites, such as in shopping malls, as this unauthorised use of industrial space could be leading to higher business costs.

Mr Khaw's post comes as many small and medium-sized enterprises (SMEs) and MPs are raising the issue of high industrial rents eating away at the bottom line of local firms and affecting their competitiveness.

Mr Lee Sze Teck, senior manager of research and consultancy at Dennis Wee Group, estimates that non-authorised tenants could contribute to higher rents in some areas and eventually price out genuine industrialists.

Mr Khaw said: 'The Urban Redevelopment Authority zones land to support industrial activities. The zoning helps to keep the industrial land cheaper than say commercial and office land, and thereby keeps our industries competitive.'

Industrial rent may be more than 30 per cent cheaper, SLP International research head Nicholas Mak said. For instance, while industrial rents can range from $1.50 to $3 per sq ft (psf), suburban office rents can range from $4 to $6 psf.

The proper use of industrial space includes manufacturing, warehousing and production. Certain types of e-businesses such as IT infrastructure and software development are also allowed.

There are exceptions. For instance, childcare centres and furniture showrooms are allowed within industrial developments as they support the main industrial activities if, say, parents need to leave their children at the centres. Broadly speaking, they may occupy about 40 per cent of the industrial development.

Industry observers say the rules should be enforced but tenants The Straits Times spoke to seem to be unclear about the rules.

The manager at Costume City, who declined to be named, believes the business is operating within the guidelines. About half the space is used as a showroom to rent out fancy dress costumes; the other half houses its office and warehouse.

'Don't mislead buyers about units'

SHOEBOX factory units - between 50 and 80 sq m or from 538 to 861 sq ft - cannot accommodate genuine industrial activities, said National Development Minister Khaw Boon Wan in a blog posting yesterday.

The units may look cheap, and could tempt small-time investors scared off by high residential prices. But they could get a rude shock when they realise how small the units are.

The trouble with the so-called shoebox units is that there is not much in the way of industrial production possible in such a small space, experts note.

Mr Khaw said that those marketing such properties should make it clear to buyers that industrial units can be used only for industrial activities.

That tends to make it hard to find tenants, especially if the Government cracks down on illegal uses such as shops and tuition centres, experts add.

EL Development managing director Lim Yew Soon said investors make up about 30 per cent of buyers at his latest industrial estate, Eldix, in Mandai. Unit sizes start from about 1,600 sq ft.

Interest from investors has been growing ever since the Government slapped a series of cooling measures on the residential market, he noted. 'We always make sure that our buyers come in with their eyes open and will explain the restrictions of use to them. These restrictions are also listed in the sales and purchase agreement.'