With rising inflation and interest rates affecting bottom lines, cost-conscious occupiers are turning to properties in older industrial areas due to their affordability, central location and relatively stable power supply.
In the short to medium term, there are rental growth prospects as these types of properties are inherently more affordable.
With more tenants considering secondary buildings, the scope for increasing rentals in the R50/m2– R55/m2 price bracket is improving, according to the Jones Lange LaSalle (JLL) snapshot report for the third quarter of 2022.
“Though existing secondary stock does not satisfy current requirements, they offer rental discounts, making them more affordable and attractive to occupiers wanting to save costs,” Mieke Purnell, JLL’s research manager, told Business Day.
Demand for these properties is high, especially for logistics and distribution centres and well located stock measuring 20,000m²-30,000m². However, trade-offs such as yard areas and enhanced security still influence demand for such properties.
Redefine Properties industrial national asset manager Johann Nell said industrial property has benefited from town planning over the years.
“We have industrial nodes with large electricity substations, close to older CBDs [central business districts] with access to labour and markets, as well as heavy structural design to support everything from manufacturing to warehousing, and in recent years wholesale and retail,” said Nell.
Timothy Irvine, Growthpoint’s regional asset manager for the Western Cape, said they expect the existing industrial stock to continue experiencing sustained demand, especially in Cape Town. In Cape Town such areas are generally well located with easy accessibility — which drives their popularity and pricing in the Western Cape.
Fortress Reit reports growing demand for its older industrial buildings with good access to main roads and public transport, resulting in vacancies dropping to single digits.
Nell said nodal creep places immense pressure on stormwater, power, water and road infrastructure as new industrial nodes are located further out along major highways to avoid city traffic congestion.
Lack of infrastructure maintenance by municipalities adds a financial burden to investors developing new industrial property facilities, he said.
“Neglected infrastructure exacerbates the pressure to provide new facilities in newer nodes that appear more attractive, which consequently cause industrial business to reduce its tendered rental, thereby keeping rental growth flat over the last decade.”
Nell said there are revival opportunities in renewing industrial nodes including Spartan (Gauteng), Epping (Cape Town) and Pinetown (KwaZulu-Natal), among others.
Purnell said in many of these buildings, landlords still make rental concessions to retain tenants and reduce vacancies, especially in bigger buildings where there commonly are more capex and tenant installation expenses involved.
Tenant churn is high in smaller buildings, thus negatively affecting rental growth. These trends are most prevalent in older industrial areas in Johannesburg’s southern and eastern regions such as Alrode and Kempton Park, as well as in Cape Town in central areas such as Epping and Paarden Eiland.
Rentals depend on the property size but, generally, average rentals are between R45/m2 and R55/m2 in Johannesburg and Cape Town, and between R50/m2 and R60/m2 in Durban.
“We are seeing a trend where rising demand for older stock enables landlords to increase rentals in some cases,” said Purnell.
Demand for existing stock in Cape Town is seeing rental growth of between 10%-15% in some cases, said Irvine.
“Investors are buying secondary buildings and convert or subdivide these properties into smaller units that appeal to small businesses that benefit from the synergies existing in established nodes,” said Purnell.
Bruce Collins, an asset management head at Fortress Reit, said smaller industrial parks characterised by high occupancies are popular with private investors. Fortress is in the process of selling its older industrial buildings to focus on developing prime logistic parks.
Inospace, SA’s leading owner and operator of serviced last-mile logistics parks, specialises in buying suitable old industrial properties and converting them into smaller units that cater for small and medium enterprises (SMEs) in Cape Town and Johannesburg.
The company said in both Cape Town and Johannesburg, demand for smaller logistics is growing, and there is availability of industrial buildings for sale. However, in the Western Cape, transactions are fewer compared to Johannesburg because of expensive property prices.
“Our biggest concern is power stability and the slowing economy as these factors play a huge role in demand for space,” Inospace COO Jacques Weber said.
Inospace is investigating several different solutions and assisting its tenants with their investigations to deal with the power crisis, he said. This could be via clients using invertors. “Some of our buildings are situated on key power grids such as those next to airports which do not get load-shedding.”
Inospace prefers to buy well located properties measuring upwards of 8,000m2, but has acquired smaller assets in the past. Sometimes Inospace chops its existing properties to meet demand within its portfolio.
Weber said demand saw Inospace conclude 2,000m2 of leases during the December shutdown period. To this end, the company is focusing on last-mile logistics offerings such as the one at Island Works in Cape Town where logistics space measures between 90m2 and 200m2.
“Last-mile distribution remains undeniably the most important and costly part of bringing goods to customers. Therefore, older or secondary industrial nodes are well positioned to complement supply chain networks in future,” said Nell.
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