RESEARCH Industrial Vacancy Report - South African Property ...

 
RESEARCH Industrial Vacancy Report - South African Property ...
RESEARCH
Industrial Vacancy
Report
RESEARCH Industrial Vacancy Report - South African Property ...
Results for the           APRIL
12 months ended
December 2017             2018

KEY FINDINGS
As at December 2017, the national industrial vacancy rate as recorded by IPD was 3.3%. While this is
down from a revised 5.3% at December 2016, it is 100bps up from December 2015. Historic IPD data
going back to 1995 suggests that rental growth has lagged shifts in vacancy rate as excess supply or
demand typically takes a period of time to filter through to pricing. The current point in the cycle is no
different as the lower vacancy rate experienced through 2017 hasnÕt had a pronounced impact on base
rental growth yet. Data out of the listed sector suggests that industrial escalation rates average 7-8%
which suggests that current rental reversions are on aggregate flat to marginally negative.

The basic rental growth of 6.7% recorded for the 12 months ended December hasnÕt translated into an
equal quantum of capital growth which suggests that valuers are still taking a cautious view on the sectorÕs
near term earnings

The current vacancy level and rental growth suggests that the industrial market is recovering well and
again nearing excess demand. The sectorÕs aggregate vacancy rate is hovering close to its long term
average while the above-inflation base rental growth suggests that the excess market supply has seemingly
all been mopped up.

South African manufacturing production posted its highest year-on-year growth of 2.6% in December
2017. While the latest manufacturing growth figure is encouraging, the future growth potential of the sector
also depends on sustained improvements in efficiency measures like capacity utilisation and unit labour
costs. Building plans passed for industrial property declined by 1.5% in 2017 after a year-on-year growth
of 30.6% in 2016. While an increasing number of plans are being passed relative to 2014 & 2015, supply
remains well below the peak levels of 2007/Õ08 and is the driving factor behind the low vacancy rate and
above inflation rental growth in selected segments and geographies.

With the exception of High Tech industrial property, all other segments saw vacancy rates improve during
the 12 months ended December 2017. High-tech industrial vacancies increased by 40bps off a lower
base relative to other segments. High tech industrial property still has the lowest vacancy rate of the
industrial segments at 1.8%. High tech industrial segment still seems to be in a sweet spot where demand
is seemingly quite strong and supply is hampered by a shortage of industrial land and electricity/zoning
difficulties.

Analysing industrial property by box size reveals that there is currently more space available in mid-sized
units. Small industrial units (0-2.5k sqm) saw an improvement in vacancy rate Ð ending 2017 at 3.2% off
4.2% at the end of 2016. The larger industrial size brackets saw vacancy rates improve during 2017

While the aggregate industrial vacancy rate remains low in historical terms at 3.3% there is significant
variance between nodes.ÊSome nodes currently offer virtually zero available space & in most cases, these
nodes are also seeing improvements in rental growth momentum.

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RESEARCH Industrial Vacancy Report - South African Property ...
Results for the            APRIL
12 months ended
December 2017              2018

NATIONAL INDUSTRIAL VACANCY
& RENTAL GROWTH TREND
As at December 2017, the national industrial vacancy rate as recorded by IPD was 3.3%. While this is
down from a revised 5.3% at December 2016, it is 100bps up from December 2015. Historic IPD data
going back to 1995 suggests that rental growth has lagged shifts in vacancy rate as excess supply or
demand typically takes a period of time to filter through to pricing. The current point in the cycle is no
different as the lower vacancy rate experienced through 2017 hasnÕt had a pronounced impact on base
rental growth yet. Data out of the listed sector suggests that industrial escalation rates average 7-8%
which suggests that current rental reversions are on aggregate flat to marginally negative.

The basic rental growth of 6.7% recorded for the 12 months ended December hasnÕt translated into an
equal quantum of capital growth which suggests that valuers are still taking a cautious view on the sectorÕs
near term earnings. Meanwhile, a net income growth of 4.6% was recorded for the industrial sector in
2017 suggesting that operating costs grew faster than rental income. Industrial sector capital growth for
2017 was recorded at 2.8% which means that the so-called income residual factor (or valuer sentiment)
detracted -5.9% from capital growth bearing in mind that yield compression also added +2.0% to capital
growth on the back of a 20bp strengthening in the base rental yield.

The current vacancy level and rental growth suggests that the industrial market is recovering well and
again nearing excess demand. The sectorÕs aggregate vacancy rate is hovering close to its long term
average while the above-inflation base rental growth suggests that the excess market supply has seemingly
all been mopped up.

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                            Email: marketingmanager@sapoa.org.za                                          03
                            Web: www.sapoa.org.za
RESEARCH Industrial Vacancy Report - South African Property ...
Results for the           APRIL
12 months ended
December 2017             2018

ECONOMIC DRIVERS OF THE
INDUSTRIAL SECTOR
South African manufacturing production posted its highest year-on-year growth of 2.6% in December
2017. On an indexed basis, the latest uptick in growth puts manufacturing volumes back at 2008 levels.
While the latest manufacturing growth figure is encouraging, the future growth potential of the sector also
depends on sustained improvements in efficiency measures like capacity utilisation and unit labour costs.
If these measures do not improve it is likely that the aggregate industrial vacancy rate will continue to
hover between 3 & 5%.

The industrial sectorÕs capacity utilisation percentage ended 2017 at 81.8%. While this signals an
improvement since 2014, a level of at least 84-85% is needed to catalyse expansion in the sector as was
the case in the period 2003-2007.

Unit labour costs increased to 6.5% year on year to September 2017 Ð down from 6.9% in the quarter
before. This suggestsÊ that the cost of labour is increasing at a faster rate than manufacturing output
which could have negative consequences for industrial property demand as firms seek to optimise current
operations before looking to expand.

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                           Email: marketingmanager@sapoa.org.za                                          04
                           Web: www.sapoa.org.za
RESEARCH Industrial Vacancy Report - South African Property ...
Results for the           APRIL
12 months ended
December 2017             2018

ECONOMIC DRIVERS OF THE
INDUSTRIAL SECTOR
Building plans passed for industrial property declined by 1.5% in 2017 after a year-on-year growth of
30.6% in 2016. While an increasing number of plans are being passed relative to 2014 & 2015, supply
remains well below the peak levels of 2007/Õ08 and is the driving factor behind the low vacancy rate and
above inflation rental growth in selected segments and geographies.

On an annual basis, building plans passed is getting closer to peak 2009 levels which may weigh on rental
growth Ð especially if occupiers of new space are leaving behind their old space vacant. Given flat
manufacturing production growth and sub-optimal capacity utilisation it is likely to be more challenging
for landlords to fill excess space.

Building plan completions have remained fairly stable since 2012. Bear in mind, industrial buildings
currently scheduled for completion could have had their plans passed at least a year ago, meaning that
the current decline in plans passed could possibly only reflect in completions a year from now. Apart from
a general contraction in demand for new, purpose built industrial space it could also mean delays in
speculative, tenant driven schemes.

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                            Email: marketingmanager@sapoa.org.za                                        05
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RESEARCH Industrial Vacancy Report - South African Property ...
Results for the            APRIL
12 months ended
December 2017              2018

PERFORMANCE BY INDUSTRIAL SEGMENT
With the exception of High Tech industrial property, all other segments saw vacancy rates improve during
the 12 months ended December 2017. High-tech industrial vacancies increased by 40bps off a lower base
relative to other segments. High tech industrial property still has the lowest vacancy rate of the industrial
segments at 1.8%. High tech industrial segment still seems to be in a sweet spot where demand is
seemingly quite strong and supply is hampered by a shortage of industrial land and electricity/zoning
difficulties.

Warehousing and light manufacturing property both saw vacancy rates improve by around 1.5% during
the year ended December 2017. Standard units/workshops saw the largest improvement in occupancy
with its vacancy rate improving from 8.0% to end the year at 3.7%.

The vacancy rate of light manufacturing property remains the highest among the industrial segments
suggesting that the weak manufacturing data & currency depreciation of the past year or two is now filtering
through to fundamentals underlying manufacturing related property.

                             T: (011) 883 0679 F: (011) 883 0684
                             Email: marketingmanager@sapoa.org.za                                          06
                             Web: www.sapoa.org.za
Results for the             APRIL
12 months ended
December 2017               2018

PERFORMANCE BY BOX SIZE
Analysing industrial property by box size reveals that there is currently more space available in mid-sized
units with industrial property sized between 2.5k sqm and 10k sqm seeing an increase in vacancy rate
relative to the year before. Industrial units sized between 5k-10k sqm ended the year with a vacancy rate
of 4.1% - the highest among the size segments.

Small industrial units (0-2.5k sqm) saw an improvement in vacancy rate Ð ending 2017 at 3.2% off 4.2%
at the end of 2016. The year ended December 2016 saw some pressure on the lower end of the size
spectrum as the difficult macroeconomic environment seemingly weighed heavier on smaller operations.

The larger industrial size brackets saw vacancy rates improve during 2017. Industrial units of 10-25k sqm
saw its vacancy rate improve to 3.5% off 6.1% while units large than 25k sqm saw an improvement from
5.8% to 2.9%. Notwithstanding the latest improvement in the occupancy rate of larger units, the currently
vacancy rates are well above 2014 levels which suggests that occupiers may currently be downsizing
their space requirements or splitting up different industrial operations in order to increase capacity utilisation.
This trend may continue since overall industrial capacity utilisation is currently at 81.8% - well off the highs
of 2006/07.

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                             Email: marketingmanager@sapoa.org.za                                               07
                             Web: www.sapoa.org.za
Results for the            APRIL
12 months ended
December 2017              2018

NODAL PERFORMANCE
SIGNIFICANT VARIANCE ON NODAL LEVEL
While the aggregate industrial vacancy rate remains low in historical terms at 3.3% there is significant
variance between nodes Ð illustrated below.Ê Some nodes currently offer virtually zero available space
& in most cases, these nodes are also seeing improvements in rental growth momentum. As at December
2017, 12 of 20 industrial nodes have vacancy rates below 4%.

Meanwhile there are others with vacancy rates in excess of 5%. Rental growth in these nodes are mostly
sluggish and in some cases slipping to levels below its 3 year average. Strijdom Park currently has the
highest vacancy rates at around 10% which ahs seen its base rental growth slip down to below 1% from
its 3-year annualised rental growth of 3.6%.

Active asset management with a focus on nodal selection as well as segmental and geographicÊ
diversification remain key during this phase of the property cycle - where it seems tenants are increasingly
adopting a wait-and-see approach.

The graphic below emphasises this point as the major industrial nodes are virtually evenly split in their
current position in vacancy cycle. Almost as many nodes are either seeing vacancy rates Improving,
Slipping, Bottoming out or becoming sluggish or sticky relative to 3 year average.

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Results for the           APRIL
12 months ended
December 2017             2018

NODAL PERFORMANCE
Analysing basic rental growth on a nodal level reveals a similar pattern to that of vacancy rates. Some
nodes are seeing very strong growth while other nodes are seeing rentals come under pressure Ð
either as a result of vacancy rates increasing or negative rental reversions in the interests of retaining
existing tenants.

Categorising nodes into four quadrants according to their 1 year and 3 year annualised rental growth
rates reveal that rental growth in the majority of nodes can be said to be currently peaking.

Midrand and Bellville/Parow count among the nodes where the one year rental growth figure to
December has slipped well below the three year annualised level which suggests

JohannesburgÕs Linbro Park node, meanwhile, is the only area that saw a pronounced rebound in
rental growth momentum over the past 12 monthsÊ as their one year rental growth surpassed their
low three year rental growth rates.

There has been a pronounced increase in the amount of nodes where rental growth may be peaking
given that the latest year on year rental growth exceeds the three year annualised rate.

Given the fact that rental growth usually lags changes in vacancy rate by at least a year it should
follow that many of the nodes currently in the ÔSluggishÕ quadrant will see rental growth improve over
the next 6-12 months.

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                            Email: marketingmanager@sapoa.org.za                                             09
                            Web: www.sapoa.org.za
Results for the           APRIL
12 months ended
December 2017             2018

NODAL PERFORMANCE
Given where the industrial sector finds itself in the property cycle and the variance between individual
nodes with regards to vacancy levels itÕs worth looking at a slightly longer time period.

The map below shows 5 year average vacancy levels for individual industrial nodes in the Johannesburg,
Cape Town and eThekwini metro area. Industrial vacancy rates in the coastal markets remain low overall
with some exceptions. The Umbilo/Mobeni node in KZN has seen occupancy levels come under some
pressure in the last few years.

While 5-year occupancy levels in institutionally owned industrial property in the Western Cape and KZN
is low across the boardÐ this is not the case in Gauteng where a wide variance is observed in the underlying
nodes. This suggests that occupiers of industrial property are preferring certain nodes above others. This
could be for a variety of reasons, including access to main arterial routes, proximity to the airport and
possibly the location of eToll routes in Gauteng.

The peripheral Strijdom Park node has seen its overall vacancy rate increase as some large occupiers
have seemingly chosen not to renew leases. The major nodes around the airport meanwhile maintains
their low vacancy rates highlighting the value of proximity to ports in an environment where transport
costs are increasing faster than inflation.

                            T: (011) 883 0679 F: (011) 883 0684
                            Email: marketingmanager@sapoa.org.za                                          10
                            Web: www.sapoa.org.za
Results for the   APRIL
12 months ended
December 2017     2018

SAMPLE COMPOSITION
AS AT DECEMBER 2017

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Results for the         APRIL
12 months ended
December 2017           2018

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Report compiled by:

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Results for the                    APRIL
12 months ended
December 2017                      2018

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                                     Email: marketingmanager@sapoa.org.za                                                                    13
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SAPOA - South African Property Owners Association
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Fax:     (011) 883 0684
Email:   marketingmanager@sapoa.org.za
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