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Report compiled by IPD IndustrialVacancy SURVEY RESEARCH
Report compiled by IPD
IndustrialVacancySURVEY
research
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industrial Vacancy surVey report
H1: 2014 october 2014key findingsAs at the end of June 2014, the vacancy rate of industrial property as recorded by IPD was 2.6% - 60bps down from December’s 3.3% and significantly down from 2009’s peak level of 7.1%.
The declining vacancy rate has resulted in an above-inflation base rental growth which has underpinned returns over the past 18 months. During this time, industrial property has been the best performing sector – outperforming both retail and office property.
The vacancy rate of all four industrial segments namely warehousing, light manufacturing, high-tech and standard units are currently at or below 3%.
Warehousing and High-tech industrials recorded the lowest vacancy rates for the period ended June 2014 with 2.1% and 2.2% respectively.
On a regional level, the lowest vacancy rate was recorded for the greater Cape Town area where an aggregate vacancy rate of 0.7% was recorded across 56 properties.
As at the end of June 2014, the vacancy rate of industrial property as recorded by IPD was 2.6% - 60bps down from December’s 3.3% and significantly down from 2009’s peak level of 7.1%. The declining vacancy rate has resulted in an above-inflation base rental growth which has underpinned returns over the past 18 months.
For the six months ended 30 June 2014, industrial property was the best performing of the three main property sectors by returning 9.9% to shareholders over these 6 months. The total return comprised an income return of 5.2% and a capital growth of 4.5%.
While the capital growth was improved it was the income return that drove the outperformance relative to retail and office property. A low vacancy rate and above inflation net income growth highlight the excess demand currently prevalent in the sector and highlights the current shortage of quality stock available.
Presently, the constrained supply is supporting occupancy rates – underpinning rental growth and contributing to the sector’s superior total return. The level of industrial building plans passed, a good indicator of sentiment and future expansion, is currently at around 140,000sqm per month. While this is well off the lows of 2009 it is still 20% off the levels seen during the boom period of 2007-2008.
While structural issues -such as electricity supply concerns, labor unrest and municipal approvals- could be contributing
to the lower levels of supply it is rather the demand side of the equation which is currently suppressing expansion. On the demand side, manufacturing production and industrial capacity utilization has yet to reach the heights of 2007- implying that industrial space users aren’t yet in full expansion mode.
Manufacturing volumes are currently still 20% off the highs of 2007-08 which has seen industrial capacity utilization drift sideways at levels of between 80% and 82%. Historically, levels of at least 83% were needed to kick start expansion in the sector. For this to happen though, the demand side of the economy would need to improve in order to drive manufacturing production. The South African Reserve Bank (SARB) recently downgraded its economic growth forecast for 2014 to 1.5%, arguably not enough to increase domestic industrial production and create real jobs, especially if one factors in slowing growth among South Africa’s major trading partners especially China and the European Union.
Historically, there’s been a 12-18 month lag from the time vacancy rates turn to when it reflects in the rate of rental growth – implying that the current downward trend in vacancies may sustain rental growth in the medium term. What is encouraging is that vacancy rate peaked at a lower level in the current cycle relative to the period 2000-’02. This resulted in a lower level of oversupply when demand pulled back and ensured that rental growth remained positive during the current cycle whereas it dipped into negative territory during the previous cycle.
Overview
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industrial Vacancy surVey report
H1: 2014 october 2014 figure 1:
Manufacturing VOluMe PrOductiOn figure 2:
industrial caPacity utilizatiOn figure 3:
industrial Building Plans Passed
Source: South African Reserve Bank
The impact of the month-long strike in the metals and engineering sector remains to be seen as this occurred in the month following the bi-annual reporting period. In the six months to June, low grade manufacturing property was actually the best performing segment at 15.0% - driven by a strong capital growth for the period. The capital growth was underpinned by a base rental growth of 4.0% for the period (8.0% annualized) highlighting the scarcity of stock in this segment. Figures 4 & 5 below illustrate the returns and fundamentals of the different industrial segments.
High-tech industrial property recorded the lowest return for the period with 7.8% on the back of a lower capital growth. Fundamentals for this segment remain intact though with a low vacancy rate of 2.2% and a solid base rental growth of 3.9% over the six months.
The long term fundamentals supporting logistics and distribution related property remain robust as the growth in ecommerce and centralized distribution continue to increase. Warehouse vacancies were recorded at 2.1% as at the end of June and have been trending downwards since 2009.
An interesting development over the past six months is the increased vacancy rate among smaller industrial properties, perhaps highlighting the higher sensitivity of smaller tenants to the economic cycle. Industrial properties smaller than 2,500sqm recorded a vacancy rate of 6.1%. In contrast, all industrial properties larger than 2,500sqm had an average vacancy rate of 2.4%.
On a regional basis, industrial proeprty in the Western Cape outperformed other regions over the six month period ending June in recording a total return of 11.9%. KwaZulu-Natal followed closely with 10.6%. Scarcity of available industrial land in these two regions is underpinning returns. Gauteng industrial property recorded a total return of 9.2% - also recording a wider variance in the underlying nodal performance.
segmental and nodal Performance
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industrial Vacancy surVey report
H1: 2014 october 2014
figure 4:segMent leVel return
figure 5:industrial fundaMentals
Source: IPD
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industrial Vacancy surVey report
H1: 2014 october 2014
The industrial sector currently finds itself in a situation of excess demand – largely driven by constrained supply. Given the currently low vacancy rates and above-inflation rental growth the industrial sector can be classified as being in the growth phase of the property cycle (see figure below).
The office sector seemingly hasn’t turned the corner yet with vacancy rates still increasing. The retail property sector is also experiencing a slowdown on the back of slowing disposable income growth and high levels of consumer indebtedness.
Property cycle
figure 6:PrOPerty cycle – Where are We currently?
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industrial Vacancy surVey report
H1: 2014 october 20141. Sample compoSition
2. Regional
Province Vacancy Rate (%) GLA (m2) Number of Properties
Gross Rent (R/sqm/month)
gauteng 3.1 2,493,387 258 40.67
Western cape 0.7 663,045 56 40.07
KwaZulu-natal 2.5 827,412 88 45.75
3. induStRial SegmentS
Segment Vacancy Rate (%) GLA (m2) Number of Properties
Gross Rent (R/sqm/month)
High tech industrials 2.1 919,110 77 42.82
light manufacturing / low grade 2.2 938,193 93 45.51
Standard units / Workshops 3.0 716,906 86 30.39
Warehousing 2.9 1,476,797 148 43.75
figure 7:regiOnal sPlit
figure 8:segMental sPlit
figure 9:sPlit By key industrial area
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industrial Vacancy surVey report
H1: 2014 october 20144. Key induStRial aReaS
Node Vacancy Rate (%) GLA (m2) Number of Properties
Gross Rent (R/sqm/month)
Strathavon / Kelvin / Bramley 0.9 85,797 11 45.13
Strijdom park 8.0 47,077 6 39.27
meadowdale 1.6 304,803 33 44.35
isando 5.3 104,390 16 ..
Boksburg / anderbolt 0.4 205,938 12 ..
Jet park 0.9 278,002 32 51.41
Spartan 3.4 61,997 16 44.17
West Rand 1.3 66,053 5 37.76
midrand 5.7 280,340 33 48.64
centurion 10.3 62,557 5 ..
other pretoria 2.3 129,976 10 33.40
Kensington / observatory 0.0 61,103 5 ..
goodwood/parow/Bellville 1.0 143,820 9 41.02
milnerton/montague gardens 0.0 199,099 14 47.76
umbilo/mobeni 0.1 195,928 12 43.51
durban north 0.0 120,286 19 ..
other durban 14.7 112,169 13 ..
pinetown 1.1 377,886 39 44.23
gloSSaRy
WaReHouSing
Warehousing eaves height greater than 6 metres with good circulation and docking space and multiple access portals
HigH-tecH/HigH gRade induStRialS aRe incluSive of:
High-tech industrial modern construction with office content between 25% - 50% of the gross market rental.
High grade industrial eaves height greater than 6 metres with good yard/circulation space
ligHt manufactuRing
light manufacturing office content less than 15% of market rental. eaves height <6m or limited yard/circulation space or restricted accessibility.
StandaRd unitS aRe incluSive of:
mini units modular units with a majority of rentable areas being less than 500 m2 per unit
midi units modular units with a majority of rentable areas being between 500 and 1000m2 per unit.
maxi units modular units with a majority of rentable areas being greater than 1000m2 per unit.
