South Africa's Industrial rental growth dips below inflation

Johannesburg - For the first time in more than 10 years, the industrial sector’s base rental growth has dipped below inflation in recording an annualised growth of 4.0% for the six months ended June 2015, according to the latest Industrial Vacancy Report by the South African Property Owners Association (Sapoa).

At the same time, the 2.0% bi-annual base rental growth resulted in a reasonable capital growth of 1.4%. It also seems that tenants are increasingly adopting a wait-and-see approach, according to the report.

"While the aggregate industrial vacancy rate remains low at around 4% there are significant variance between nodes. Active asset management with a focus on nodal selection and geographic diversification remain key during this phase of the property cycle," cautioned Sapoa.

According to Sapoa, the fact that the full base rental growth isn’t filtering through to capital growth means that valuers are taking a slightly more bearish view of the sector’s future earnings.

As at June 2015, the national industrial vacancy rate as recorded by IPD was 4%. While this is virtually unchanged from the 3.9% recorded 6 months prior it is down significantly from the 6% level of 2009/10.

The report also raises some questions around the demand-side economic fundamentals underpinning the sector. Manufacturing volumes remain constrained, while the expansion potential of the sector also depends on improvements in efficiency measures like capacity utilisation and unit labour costs.

According to Sapoa, one positive trend observed in the report is that supply in the sector remains well below peak levels of 2007/08. This makes it a key factor behind the currently low vacancy rate and relatively robust rental growth.

The report found the vacancy rate of all industrial segments remain below the 5% mark as at December 2014. Manufacturing focused property, however, saw significant increases in vacancy relative to warehousing and standard units.

There is currently more space available in middle of the range properties, particularly those sized 2 500sqm to 5 ,000sqm.

Interestingly, the smallest and largest boxsize segments recorded the largest improvements in vacancy rate. This is perhaps surprising given the state of the economy and also the fact that smaller tenants may be more vulnerable to exchange rate movements.

What it could potentially indicate is that most occupiers are downsizing their operations – requiring less space, said Sapoa.