Solid Economic Growth Boosts Industrial Real Estate Market

As strong demand for Taiwan’s ICT products is not expected to slow down anytime soon, analysts predict that the island’s industrial real estate market will continue to grow.

Booming exports, especially ICT products, are driving demand for industrial plots of land, factories, and logistics facilities to a new high.

Ever since the U.S.-China trade dispute began, demand for industrial real estate in Taiwan has been ticking up. Demand strengthened with the launch of the Tsai Ing-wen administration’s reshoring initiative in 2019, which offers preferential treatment to manufacturers repatriating from China. 

The COVID-19 pandemic has done little to curb the appetite for industrial real estate. Demand is surging amid a renaissance in Taiwanese manufacturing. Industrial property transactions rose 34.6% to a record NT$59.3 billion (US$2.1 billion) in the first half of the year, according to real estate consultancy CBRE. Cushman & Wakefield, another property consultancy, reckons that commercial property deals reached more than NT$105 billion in the first nine months of the year, already surpassing the total for 2020. Land deals increased 15.8% to NT$77.5 billion, buoyed by demand for factories and office spaces.

Despite the record sales of industrial property, land prices remain relatively stable. According to CBRE, industrial plots of land across Taiwan cost NT$137,000 per ping (around 3.3 square meters) on average, up just 2.3% over 2020. In northern Taiwan, prices are up by a mere 1% while that figure is 4% for central and southern Taiwan.

The COVID-19 outbreak that began in mid-May has had a minimal impact on transactions, likely due to its relative brevity (it was largely corralled by August) and the fact that the Level 3 restrictions imposed by the government through the end of July did not require manufacturers to make any major adjustments to their operations.

At the same time, demand for Taiwan’s exports has been robust as orders have grown for 19 consecutive months. Export orders for the first three quarters of 2021 hit a record US$481.6 billion, up 32.4% year-on-year and the steepest growth since 1988, according to the Ministry of Economic Affairs (MOEA).

The Taipei-based Yuanta Polaris Research Institute predicts that Taiwan’s GDP will grow 6% this year on the back of the export boom, led by semiconductors. Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest contract chipmaker, in September posted record monthly revenue of NT$152.7 billion.

The export boom’s top beneficiaries are unsurprisingly the most active in the industrial property market. “The tech sector has expanded the most,” says Wendy Hsueh, Cushman & Wakefield Taiwan’s director of valuation and advisory services.

In the first half of the year, top 5G smartphone chipmaker MediaTek purchased an office building in Taipei’s Neihu District (to be used for R&D) for NT$3.3 billion, while silicon substrate maker Kinsus Interconnect Technology spent NT$4.5 billion on a 44,000-ping plot of land in Taoyuan that will be used to expand capacity.

While tech firms have made many of the highest profile industrial property purchases, manufacturers in other sectors are also quietly expanding their local footprint. One example is Taipei-based JC Grand Corp., an industrial fastener and metal hardware maker, with operations in both Taiwan and China’s Zhejiang Province. The firm had a record year in 2020, benefiting hugely from the demand for home improvement products in the U.S., its largest market. Many of its customers are in the construction industry.

JC Grand recently bought an existing manufacturing facility in an industrial park located in the far north of Kaohsiung, near the border with Tainan. A number of factors played into the company’s decision to expand in Taiwan.

“For both economic and political reasons, it’s getting harder and harder to operate in China,” says Jon Hodowany, JC Grand’s CEO and general manager. He cites the impact of the U.S.-China trade dispute, the lack of enthusiasm in China for Taiwanese-owned facilities to keep operating there and the inconsistent way that environmental standards are being applied. “The confluence of these factors will eventually drive more Taiwanese companies back home and raise the cost of industrial real estate in Taiwan,” he says. 

With that in mind, JC Grand acquired the Kaohsiung facility last year when it became available, choosing the space because it met the company’s specific manufacturing requirements and can potentially be built out further. The company also expects it to increase in value over the next few years, but will base any decision to renovate or sell the space primarily on operational requirements. “We could have two smaller spaces in the same area, or move elsewhere. A lot of the equipment can be moved,” Hodowany says.

Industrial revitalization

Analysts expect Taiwan’s industrial real estate market to continue growing steadily in line with strong global demand for the island’s exports, particularly ICT products. “The outlook is still quite good for industrial real estate because of the semiconductor industry,” says Liu Pei-chen, an expert on Taiwan’s property market who is an economist at the Taiwan Institute of Economic Research (TIER).

Exports jumped 29.2% in September to a record US$39.7 billion, driven by global demand for chips amid a persistent shortage that could last until 2023. TSMC posted an all-time high of NT$414.7 billion (US$14.9 billion) in quarterly sales for the July to September period. With unrivaled chipmaking capabilities, the Hsinchu-based firm has become more indispensable than ever to its customers during the difficult pandemic period. The company recently said that its gross profit margin could top 50% in the long term, citing customers’ willingness to pay higher prices.

In April, TSMC said that it would invest approximately US$100 billion in the next three years to boost capacity and support R&D development. The chipmaker will invest a large portion of that sum in Taiwan, including at Fab 14 and Fab 18 in Tainan, an R&D center in Hsinchu County, and a packaging plant in Miaoli County. 

Later, in September, the company signaled that it might build a new 7-nanometer manufacturing hub in Kaohisung’s Linyuan District on the site of a former Chinese Petroleum Corp. (CPC) naphtha cracker complex. According to a report in the Chinese-language Economic Daily News, TSMC plans to build six 7-nanometer plants in Kaohsiung and use the city as its global hub to develop the process. TSMC accounts for 85% of the world’s 7nm production capacity.

TSMC has laid out plans to expand operations in Taiwan’s south, including at its fabs in Tainan and a possible new 7-nanometer plant in Kaohsiung.

The contract chipmaking giant did not directly address the report, but said in a statement that it does not rule out investing in Kaohsiung, although it is continuing to survey land in Hsinchu and Taichung as well as Kaohsiung.

If the plan comes to fruition, it would create a 20-kilometer high-tech corridor in northern Kaohsiung, consisting of the nearby Kaohsiung Nanzih Technology Industrial Park, Zuoying High-Speed Railway station, and the Ciaotou and Luzhu science parks, according to a CommonWealth magazine report. The new semiconductor cluster would have a potential annual output of NT$1 trillion.

TSMC’s possible investment in Kaohsiung could be a game changer for a city best known for its history as a center of heavy industry like petrochemicals. If the chipmaker establishes a major hub in the southern city, firms in its large supply chain will follow, with positive knock-on effects, says Cushman & Wakefield’s Hsueh. “It would attract additional investment in the industrial real estate market and could help Kaohsiung transform into a more advanced manufacturing hub.” 

TIER’s Liu agrees that the potential TSMC investment offers Kaohsiung a chance to accelerate its industrial transformation and become more tech-oriented. However, she cautions that some obstacles must be surmounted. “The government must be able to meet all of TSMC’s needs,” she says. While land is not a problem, “electricity and water could pose challenges. Hopefully, the government can resolve these issues.”

The CommonWealth report cited Kaohsiung Deputy Mayor Lo Ta-sheng as saying that the city can supply the project with up to 1.6 million cubic meters of water per day, slightly greater than the projected demand of 1.5 million cubic meters.

Even if that is the case, Taiwan’s finite resources are increasingly being stretched thin. To be sure, the government has been able to meet the needs of manufacturers for the short term, particularly those returning from China establishing facilities in science parks. MOEA has set up a one-stop shop through its InvesTaiwan office to make the process relatively seamless.

Yet questions remain about how Taiwan will address its five shortages of land, electricity, water, labor, and professional talent. With regards to water, the island had a close call this year. From January to early May, it received just 800 millimeters of rainfall. Given that no typhoons hit Taiwan in 2020, already-low reservoir levels plummeted to 30% capacity, the lowest in a decade. In April, water rationing was implemented in parts of Taichung, Changhua, and Miaoli. Each week, residents were without water for two days. Fortunately, the “plum rains” beginning in mid-May provided much-needed relief.

The electricity supply also has been shaky at times this year, with two nationwide blackouts in May. While the first was the result of a technical blunder, the second was necessitated by a sudden surge in electricity demand that outstripped supply.

“It works until it doesn’t work,” JC Grand’s Hodowany says of Taiwan’s electricity supply and the government’s guarantees that it is sufficient. “There is a lot of uncertainty about what the long-term power mix is going to be.”

“If we’re not confident that Taiwan in the long term will be able to provide sufficient power and water, that will limit our investment in Taiwan, both in terms of industrial space and capital equipment,” he says.