Thursday, March 21

Industrial property comes out on top

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Sector has been boosted by the rental performance in the Cape Peninsula

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But that does not mean it is unaffected by the struggling economy. The latest Rode Report shows industrial rentals countrywide grew by about 6% in the third quarter, but Erwin Rode of Rode & Associates acknowledges this growth was largely driven by the Cape Peninsula. Here, rentals for space of 500m² grew by an “incredible” 15% from the previous year.

“This sharp growth is in line with Rode’s vacancy-factor data, which is lowest in the Cape. Rentals in Durban grew by a more modest 4%.”

However, with an economy that is expected to stay in the doldrums for a few quarters, Rode expects the growth of industrial rentals to decelerate.

“But because few industrial buildings are erected speculatively – thereby keeping vacancies under control – I do not expect an implosion of this market segment. This is in contrast to office buildings, which are often plagued by a significant oversupply.”

Recent data suggests the industrial property has performed “slightly better” than retail and “significantly” better than office space, concurs FNB property economist John Loos.

But he says he would not get
“too excited” about this sector. 

Manufacturing is dependent on demand for consumer goods locally so could be affected by the economic decline, impacting the industrial property sector. Picture: Max Larochelle

“Why I say this is because its returns and capital growth have slowed in recent years, along with those of retail and office space.”

While the warehouse component of the industrial sector can benefit from the emergence of online shopping – and the subsequent need for warehousing – Loos says this sub-sector is also dependent on overall consumer demand for retail products.

“Many products destined for malls first go through warehouses, so the economic downturn and weak overall retail sales growth is a negative for warehousing – online shopping or no online shopping.”

Furthermore, the industrial component linked to manufacturing is also linked to demand for consumer goods locally.

“There is no escaping the impact of a weak economy and consumer by the manufacturing sector or by industrial property either.”

But all property sectors are under pressure from recent years of economic woes, he says. Although statistics from the Investment Property Databank show that half-yearly annual returns for industrial property during the first six months of this year were 5.8%, this figure was 9.9% in 2014.

Loos believes industrial and warehouse property can, however, hold up better than retail, the star performer historically.

“Retail space affordability has deteriorated faster than industrial, becoming ‘expensive’, and in tougher economic times this starts to take its toll on a portion of the tenant population.”

The SA Property Owners Association’s latest industrial vacancy report, compiled by MSCI, states that as at June 2018 the vacancy rate was 3.3%. And while this is unchanged from December 2017, it is below its December 2016 high of 4.4%.

This rate is nonetheless lower than retail’s 4.1% and office’s 12.2%.

“Overall the industrial sector remains the best positioned among the three main property sectors. The sector’s aggregate vacancy rate is hovering close to its long-term average, while its base rental growth is in line with inflation.

“Also its base rental yield has stayed stable at 10% since December while the office and retail sectors have seen yields soften…”

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