Mixed bag for industrial property

Research for previous editions of this column revealed industrial property is the place to be, with vacancy rates as low as 4% – a figure that is somewhat of a holy grail in the commercial property sector.

How true is this perception, given that economists frequently bemoan the low rate of activity in the South African manufacturing sector – and what or where are the hotspots that offer great returns for investors?

The economists are on the money, according to Clive Williamson, divisional director for Broll Gauteng, with vacancies starting to creep up in this sector, although areas like Wadeville and Rosslyn in Gauteng retain their low vacancy status.

“Warehousing and distribution are the industries that are driving industrial property at present, with big retailers and warehousing organisations driving growth in the sector,” he says. “In Gauteng, the areas seeing the most growth are Midrand and along the R21 (which links the Pretoria city centre with OR Tambo International Airport), with these areas showing great investment potential, even though most are fund-owned.”

His colleague William Wakefield, based in the Western Cape, agrees that the growth in this sector in the last five to 10 years has been as a result of a push from big retailers, who have consolidated smaller warehouses across the country into enormous distribution centres which are closer to ports, or that are more centrally located for simpler logistics management.

“We’ve noticed a higher turnover and great vacancy rates on units smaller than 2 000 square metres,” says Simon Black of Black Pepper Properties, a commercial property broking firm, “Tenants in these buildings tend to be smaller businesses that take strain sooner when things get tough. Tenants that occupy buildings larger than that tend to more robust and resilient, and they generally manage through the pressured times. We have found that there are not a lot of vacancies in properties of between 2 000 and 10 000 square metres.”

Black and Wakefield agree that the most expensive industrial property in South Africa is in Durban, with Black pointing out that land in Riverhorse Valley sells for around R2 000 per square metre, while rentals sit at in excess of R60 per square metre.

Longmeadow, a similar type of facility in Johannesburg, sells for approximately R1 250 per square metre, and although its rentals are not far off those achieved in Riverhorse, the norm in Gauteng areas like Wadeville and Roodekop is in the late R20s and early R30s per square metre.

“Land in Durban is so expensive because it has to be leveled before any manufacturing or warehousing units can be built, with civil engineering costs applying upward pressure on construction outlay, and in turn on rentals,” says Wakefield. “Durban is similar to Cape Town in that the city is hemmed in by the ocean on one side, with the Mother City having the added complication of the mountain, which further contributes to scarcity and upward pressure on prices. Land within a certain radius of the city, for airport and ports, is the most sought after and priced accordingly. The rising cost of transport, along with traffic congestion as well as proximity to public transport, are the main reasons for companies sourcing developable land in close proximity to key locations.”

Even though Johannesburg’s prices may seem shy in comparison to what Durban is demanding, zoned and serviced land in Johannesburg, primed for the development of warehousing and logistics sites, is becoming increasingly rare. “This is because the competition for existing pockets that are ready for development, found along major freeway and transport networks in Gauteng, continues to escalate,” Black adds.

“The road corridor between Durban and Johannesburg continues to support the majority of freight supply to Gauteng, although Transnet is busy upgrading its infrastructure, which will hopefully stimulate a shift to rail solutions. Industrial property developers should therefore make provision for rail access on new projects.

“We’ve also seen that the more generically designed a building is, the more likely it is to be released quickly if an existing tenant moves out,” Black says. “Buildings that are built to tenant requirements have a limited appeal, and we have found that the sites built on risk to a fairly standard formula of 10% office space to 90% warehousing space, that have lots of height and yards that are big enough for road freight vehicles to maneuver in easily, are the sites that are let quickly.”

This understanding of the importance of practicalities over the conventional property mantra of “location, location, location” has seen Shree Property Holdings, a Durban-based development and logistics business, become the largest fruit storage company in the Southern Hemisphere.

Pran Shee, director of Shree Property Holdings, recently told SA Commercial Property News that his choice of the Dube Trade Port for growth in his business was led by its accessibility, inter-modal connectivity, its information technology infrastructure and its security.

He was prepared to pay the premium prices for land closer to the main logistics hub because it was easily accessible, preferring to buy old properties to demolish and build over, rather than seeking cheaper land further away from the main centre of Durban’s logistics industry.

He adds that after the land in the Umhlanga area has been built up, Durban itself has nowhere to expand.

Cape Town is faced with a similar shortage of large zoned land parcels, being caught between its spectacular rock and oceanic hard place. Wakefield emphasises that the Cape Town economy has its own momentum and dynamics – and its own industries driving it, which are often unique to this node.

“Warehousing and distribution centre-type properties are generally smaller than those found in Johannesburg, because the Gauteng hub frequently services South Africa’s immediate neighbours too,” he says. “In Cape Town, we have a different mix of users, for example the yacht building industry, that require large factory and warehousing space – but with different services requirements, and then of course there’s the international and local film industries that often use industrial properties as film sets. We are also experiencing a growth in demand in the warehousing sector from retailers wishing to export goods and supplies via container to West Africa.”

Furthermore, faced with the increasing demand for densification and mixed-use facilities within the city, Wakefield adds that many formerly industrial properties, such as now-defunct and technically obsolete clothing factories, have been repurposed into office and commercial buildings, a good example being the Waverly Blanket Factory in Mowbray, while sites such as The Foundry and The Biscuit Mill have been transformed into cultural and culinary phenomena.

However, faced with the shortage of land in the city, developers seeking to build new properties have had to think creatively to source new sites. Improvon recently revived the land that had been previously occupied by a derelict fertilizer plant, which had had negative impacts on the ground on which it was built. The company erected Montague Park, a mixed-use site that is part retail, part high-tech industrial park.

The developers rehabilitated the site, which was polluted with nitrates, and erected warehousing sites that benefited from super-size yards, removing the challenge of circulation experienced at sites within Cape Town.

Much of the development in industrial zones outside of the main centres has been incentivized by the South African government’s Special Economic Zone policy, which identified specific Industrial Development Zones across the country.

Investment in these areas has been encouraged through a 15% corporate tax rate incentive, building allowances, employment incentives, customs controlled areas, and a 12i tax allowance, which is designed to support greenfield investments.

Areas that fall into this category include sites in Coega in the Nelson Mandela Bay Metropolitan Municipality in the Eastern Cape, Richards Bay in northern KwaZulu-Natal (which is linked to Durban by the N2 business corridor, and connects to Maputo and areas of East Africa), East London, the Saldanha Bay area, and the Dube Trade Port.

What of the future in this sector, given that space in the main centres is clearly running out, and that development in emerging centres is being incentivised by government?

“Rentals have been fairly flat for some time and we are now experiencing a sharp escalation in rentals, building costs have been relatively stable  –  although now escalating ­ –  so the market is stable, with potential growth in the face of consistent demand. One must be careful to generalise across the sector as there are various different grades of industrial properties, all with their own vacancy factors and levels of demand,” says Shree.