SA’s industrial property sector has continued to outperform the retail and office property sectors, recording low vacancy rates because of rising demand for new logistics facilities.
The sector is the second largest segment within the SA listed property index accounting for just less than 20% of the index.
“Though subsectors like manufacturing still face headwinds, the logistics and storage sectors have been buoyed by good demand,” said Shane Packman, associate investment analyst at Morningstar SA.
Vacancy rates are low particularly in subsectors linked with warehousing and logistics facilities.
Specialist developers and owners of big box logistics such as Fortress Real Estate Investments and Equites Property Fund are reporting low vacancies and rising demand for new logistics facilities in secure parks.
Fortress reported vacancies falling from 0.9% during the 2022 financial year to 0.5%, with the Equites vacancy rate at 0.1% for the six months to end-August.
Fortress CEO Steven Brown said due to longer-term leases concluded on new developments, the portfolio weighted average lease expiry improved from four years in 2022 to 4.7 years.
“The new facilities provide a strong underpin for our future growth ambitions, and tenants benefit from increased operational efficiencies due to occupying more energy-efficient buildings,” said Brown.
Low vacancies
According to the Rode’s Report for the third quarter, vacancies reached 3.7% nationally — lower than pre-Covid levels and below the long-term average of 4.2% since 2000.
Improved vacancy rates in the industrial property sector over the past few years have led to strong market-rental growth of about 5% in 2022 and 4% so far in 2023.
“However, there is a risk of higher vacancies and lower rental growth in the short term, given the sustained level of low business confidence due to weaker economic growth,” said Kobus Lamprecht, head of research at Rode.
Andrea Taverna-Turisan, CEO of Equites Property Fund, said prime logistics rentals are at R80/m² to R90/m². “In the past three years, Equites recorded about 20%-25% in market rental growth for A-grade logistics facilities.”
Growthpoint Properties recorded an increase in portfolio value from 1.8% in 2022 to 3%, or R363m — due to vacancy reductions and portfolio optimisation.
Redefine Properties reported vacancies reducing from 4.9% during the first half of 2023 to 4.1% during the third quarter. Renewal reversions are down to 0.9% (based on 10.9% of the portfolio) from -2.6% in the 2022 financial year.
“Our industrial property portfolio remains defensive, with tenant retention and vacancy reduction continuing to be a key priority for management,” said Redefine CEO Andrew König.
Spear Reit said its multilet industrial parks are experiencing strong demand, with the company recording positive average rental reversions of 4.55% and in-force escalations of 7.71%.
Nominal rentals, which exclude tenant installation allowances and number of rent-free months after lease inception, grew 3.8% for industrial spaces measuring 500m2. In real terms, rentals are still declining due to an 8% increase in building construction cost inflation, said Lamprecht.
Equites said the development cost of a warehouse, which includes land and fees, increased 10%-15%, with steel contributing about 45% of the construction cost of a warehouse, excluding land.
Cape Town recorded the strongest nominal growth at 6%, compared with 5% in the East Rand and the Central Witwatersrand.
Lamprecht said the need for modern warehousing and distribution centre facilities and growth in e-commerce continue to drive demand for industrial property.
In Cape Town, warehouses and logistics facilities measuring over 5,000m2 are already in short supply, while there are no spaces of more than 10,000m2 in good localities to buy or rent.
“These shortages are difficult to address because zoned and serviced land close to the metro has become increasingly scarce,” said Brent Townes, commercial property COO for Lew Geffen Sotheby’s International Realty in Cape Town.
For the 12-month period to end-June, Growthpoint Properties reported vacancies reduction from 5.7% in the 2022 financial year to 3.7%.
Good leasing saw the Western Cape and KwaZulu-Natal record 3.3% and 0.8% vacancies respectively, with Gauteng recording 4.7%.
“The industrial property sector was our strongest and most active portfolio with positive metrics except for renewal growth as longer leases continued to revert to market,” said Growthpoint CEO Norbert Sasse.
Growthpoint, with 168 industrial properties valued at R12.6bn, seeks to acquire industrial properties, specifically in the Western Cape, to meet growing demand.
Rob Kane, CEO of Boxwood Property Fund, said the company aims to acquire industrial assets in Gauteng and the Western Cape.
“We will look at buying where municipal infrastructure is good — and though Cape Town is the flavour of the month, we like Gauteng as the market is four times bigger,” said Kane.
He said the R21 corridor in Gauteng is a good node, being near the OR Tambo International Airport. Major roads and highways were attractive to occupiers.
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