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Industrial property market blues

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Picture slightly more buoyant and upbeat in Cape Peninsula where growth was recorded

A “lack of vigour” may be the best way to describe current performance across the full spectrum of property in South Africa, particularly the industrial property market.

This is according to property economist and valuer Erwin Rode of Rode & Associates, publishers of the quarterly Rode’s Report on the South African Property Market.

Rode uses the phrase to describe the current state of the industrial property market, where contractions in spending on durables are impacting on the demand for locally manufactured goods – and, in turn, manufacturing production lines. 

The end of the second quarter marked the ninth consecutive quarter in which the consumption of durable goods had contracted, with a 2% contraction seen over the previous year. 

“At this point, these low levels of consumer confidence and the falling amounts of real credit being extended to households do not bode well for the outlook of spending on durables. Therefore, the manufacturing sector – usually
one of the support pillars of the industrial property market – will continue to be negatively impacted by this spending environment,” he says. 

The situation does, however, appear to be slightly more buoyant in the Cape Peninsula where nominal market rentals
for prime industrial space could muster growth of 9%. Despite the poor performance of industrial stand value in the country overall, due to declining economic confidence, those in the East Rand and Cape Peninsula managed to enjoy real growth in the second quarter of 2017. 

This is according to the latest Rode Report on the state of the South African property market. 

“Growth of 8% on the East Rand and 7% in the Cape Peninsula has outperformed increases in building costs of 6%. And while this growth can really only be described as marginal, it is nevertheless still growth, compared to how other industrial areas in the rest of the country are
performing.” 

In contrast, Durban, at -3%, and Central Witwatersrand, at -2%, were both down when compared to a year ago, an
expected result considering current economic circumstances. Rode says stand values on the whole tend to track industrial rentals, whose
performance in turn is driven by the performance of key sectors relating to it, namely retail and manufacturing. 

“While the underperformance of both these important sectors continues, it will continue to undermine the demand for industrial space to rent and, consequently, any growth in industrial rentals. “We can only expect to see an improvement in the value of industrial stands countrywide on the back of a sustained recovery, first in retail and manufacturing, and then in turn on a new-found demand which will hopefully follow for industrial rentals.” 

The South African Property Owners Association (SAPOA) says that, as of June 2017, the national industrial vacancy rate as recorded by the Investment Property Databank was 3.5%. 

This is down from a revised 4.9% in December 2016 and 20-basis points down on June 2016. Historic IPD data going back to 1995 suggests that rental growth has “lagged
shifts in vacancy rates,” SAPOA says in its latest Industrial Vacancy Report. 

This is because excess supply and demand
typically takes time to filter through to pricing.“The current point in the cycle is no different as the higher vacancy rate experienced through 2016 is now weighing on base rental growth.” 

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