Strong manufacturing growth - spurred by a softer rand and low interest rates - has led to all-time high industrial property occupancy rates and a high demand both to purchase and to let. So says Tyrone Govender, executive director of Metboard Properties.

Govender explains that the upswing of industrial property has followed that of retail and preceded that of commercial (office) property.

“This is in contrast to the traditional pattern where industrial property is the last sector to benefit from an upswing in the cycle.”

He adds that Independent Property Databank (IPD) results for 2004 already substantiated total returns of 24% for industrial property, hot on the heels of retail property at 26% and steaming ahead of offices with a total return of 16%.

After being clobbered by the strong rand, manufacturing recovered in the second quarter of 2005, adding 1,2 percentage points to GDP growth of 4,8%, according to an Absa’s economic report. The report said capacity utilisation rose to 84% in the second quarter.

Moreover, manufacturing output data from Stats SA points to solid growth in the third quarter – growth during July and August was 2,6% and 3,5% respectively.

Also, a slightly weaker rand gave manufacturers breathing room and boosted exports. The rand depreciated from an average of R6/$ in the first quarter to R6,49/$ during the third quarter.

Christian Hansen, head of private clients at Provest, ascribes this upswing to the retail boom, because the industrial sector provides logistics, warehousing and distribution facilities to the retail sector.

“Economic growth, confidence and a shortage of space brought about by the hassles of securing industrial space have also contributed to this trend,” adds Hansen.

Alan Hendricks, head of industrial property at Broll Property group, says the property sector in Gauteng is rapidly running out of suitable industrial space and industrial areas are creeping closer to the urban fringe.

Govender says demand emanates from manufacturing, wholesale and distribution concerns. “The emergence of distribution centres to meet the needs of a growing logistics industry has provided an additional lift for the industrial sector.”

Brian Azizollahoff, CEO of Redefine Income Fund, argued there is under supply in the right areas where there is lot of demand.

He discloses that industrial property, which has zero vacancies, makes up 35% of the fund’s portfolio of R2bn.

Govender says within the Metboard portfolio, vacancies reduced from 29,000m2, equating to a mere 2.1% of the gross lettable area and has since decreased even further to 1,5%.

Wolf Cesman, an analyst at Madison Property Fund Managers, points out that rentals have gone up from R15/m2 when the market was flat [in 2000] to R40/m2. Azizollahoff adds that new properties often fetch higher rentals.

“High rentals will lead to more distributions for the unitholders of fund’s with exposure to the industrial market,” says Cesman.

For government, industrial development results in several benefits: it enhances the municipal rates bases, helps boost job creation and attracts additional investment from other companies wanting a presence in the selected areas.

Data released by Statistics South Africa (Stats SA) shows that building plans passed for industrial and warehouse space rose 88% to R1,4bn.

There is a caveat though. Hansen pointed out that the sustainability of these figures is questionable. Property economist François Viruly warns that the market should be careful of an oversupply. “With building costs rising by 15 to 20%, the viability of new projects might be affected.”

Cesman concurs that high building costs may render new projects risky.

Govender argues that the market has some legs to run for a while. “The economy is sound, interest rates are low, GDP is high and industrial property sector is linked to these variables.”

Article by: Chris Nthite - www.moneyweb.co.za