The industrial property market — characterised by high demand and low vacancies — is experiencing stock shortages of quality logistics and warehousing facilities in well-located nodes in Gauteng.
According to Mark Truscott, head of leasing at Improvon, A-grade logistics and warehouse facilities considered top drawer are in short supply. These facilities are experiencing rising demand as occupiers seek modern and efficient buildings to reduce operational costs.
“With limited supply of good stock prices are increasing, pointing to continued growth and strong sector fundamentals,” said Truscott.
Occupiers such as “cleaner” light industrial manufacturers, warehouse distribution and logistics sector-type businesses are increasingly seeking localities with good infrastructure.
Improvon, a specialist warehousing and logistics property developer, said its vacancies are below 5% and have been trending at the lowest seen in five years.
Truscott said consolidations by fast-moving consumer goods (FMCG) companies moving from various smaller facilities to larger warehouses are driving demand for space. These businesses enjoy good trade, especially in clothing and apparel.
Strong growth from online businesses and demand from third-party logistics providers are also driving the speculative development market, which, in turn, supports more aggressive rental reversions.
“We’ve seen rentals for new developments increasing about 15% in 2023, with relets of existing A-grade facilities increasing 8% year on year.”
Truscott said rising rentals on new developments are due to higher land and building costs. On a net basis, yields on existing stock versus new builds are similar to levels last seen in 2022.
He said within their portfolio, demand for midi-units and larger units of 20,000m2-30,000m2 at Dakota Precinct — situated in the Rand Airport node in Germiston — is high. The five speculative units each measuring 1,600m2 are all leased. Due to demand, construction of an additional six units measuring 2,500m2 will begin soon.
Data from Jones Lange LaSalle (JLL), a global real estate services company, said the logistics subsector has driven the overall performance of the industrial sector in the past three years. This trend will continue as occupiers seek to reduce occupational costs and optimise their supply chain networks.
Lease durations
Rental growth in this subsector has improved with landlords further benefiting from increased average lease durations. Lease escalations have moved away from fixed rates that exceeded market rates but lagged inflation, to variable rates.
During the second quarter of 2023, rental for prime industrial space in Johannesburg was R75/m2-R90/m2, Cape Town (R75/m2-R88/m2) and Durban (R75/m2-R85/m2).
In its voluntary operational and financial update for the third quarter ended November 30, Spear Reit reported positive rental reversions of 5.4% with in-force average escalations at 7.66%.
Spear’s industrial portfolio, which comprises multi-let industrial, urban logistics, warehousing, manufacturing and logistics assets in well-located areas in Cape Town, remains strong due to attractive rental rates for small and large occupiers. Vacancies reduced from 1.43% to 1.41%, with weighted average lease expiry (WALE) of 25.55 months.
Fortress Real Estate Investments recorded vacancies of 0.5% (based on rental) for its logistics facilities due to high demand for space.
In its trading and pre-close update for the first half of 2024, Fortress said its flagship asset, Eastport Logistics Park, is experiencing high demand. One of its existing tenants, Teraco, will expand its data centre facility, and the company has entered into a conditional agreement to acquire 108,000m² of land adjacent to its existing site.
The additional land will be subdivided, which could take about 12 months, with a sale price of about R1,890/m².
For the pre-close period ended September 30, Fairvest said industrial portfolio vacancies reduced from 1.5% in March to 1.2%. The WALE improved from 19.2 months to 24.4 months. From March to August, the WALE for new leases and renewals was 30.3 months.
The company, which is targeting vacancies of below 1%, said its large, secure parks are fully let with demand remaining high.
Truscott said while the outlook for the industrial property sector remains positive, above-inflation increases in rates and taxes remain a challenge while service delivery at local councils is lacking.
As a result, tenants’ operating costs, which are not part of net rental, have increased to unsustainable levels especially for smaller tenants.
In some localities, rates and taxes contribute R4m2-R5m2 to operating costs and as much as R15/m2 in some areas despite poor service delivery and decaying infrastructure.
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