Industrial Market Report 2000

Posted On Friday, 15 February 2002 15:57 Published by
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GAUTENG

Johannesburg's southern industrial nodes have experienced relatively steady levels of activity over the past year, especially along the M2 motorway in an eastwards direction, although brokers report that rentals have generally remained static. Some evidence of sales activity is emerging, especially since interest rates have started to decrease.
GAUTENG

Johannesburg's southern industrial nodes have experienced relatively steady levels of activity over the past year, especially along the M2 motorway in an eastwards direction, although brokers report that rentals have generally remained static. Some evidence of sales activity is emerging, especially since interest rates have started to decrease. As a benchmark, industrial land in good nodes is achieving prices of R140/m2 to R150/m2.

The older nodes like Selby continue to see some activity, but generally it is driven by movement within the node - as a result of expansion or re-structuring - rather than the entrance of new tenants. Redevelopment does not always appear to be a viable option in the industrial market, as it is often cheaper to build a new property in a more desirable area than to attempt to reclaim an old one. In the case of urban decay, the swift decline in rentals offers the best hope for improving occupancy levels.

In City Deep, Fedsure Park has attracted a diverse mix of tenants such as mining procurement companies, aluminium window manufacturers and retail distribution centres. Recent deals of between 600m2 and 4,000m2 have been concluded at gross rentals of between R14/m2 and R20/m2. Local brokers report that R16/m2 is a good benchmark for new space in these areas. The proclamation of additional land, with rail access, in City Deep has been tenanted by import/export companies. There is an initiative afoot to establish a Special Economic Zone at the container terminal and the effect of this on the industrial property market would be interesting. Some queries have been raised in recent months about the relative attractiveness of industrial incentive programmes: if there are too many development corridors, industrial development zones and incentivized nodes, what real benefit do they provide to industrialists?

Crown City has seen some warehousing development, but brokers say that office projects are less likely to happen in the short- to medium-term - not least because of the lack of retail amenities for office workers. Nearby Ormonde, on the other hand, can offer shopping facilities to office staff and is achieving gross rentals in the region of R32/m2. Property managers report that demand in the Crown node has been high and cite the example of Crown Industrial Park.

In the north-west, Strijdom Park has evolved into a light industrial node with a strong focus on wholesaling, bulk retailing and services. One of the consequences of this is that the rentals in the node have reportedly moved steadily upwards, in excess of the range normally associated with the industrial sector. Further north, Kya Sands continues to develop, with a trend towards smaller mini-units and owner-occupied premises.

It would seem that the industrial market is moving along at a consistent, if not swift, pace. One exception to this appears to be Linbro Park in Sandton, which has developed very rapidly over the past few years especially since the completion of the London Road off-ramp.

Wynberg is seeing some interest from smaller users, but strictly on the industrial side. Gross rentals being achieved for this type of space are between R10/m2 to R14/m2. Existing office properties in the node are difficult to lease and the node is not perceived to be an office location. However, businesses servicing the commercial node in Sandton are in evidence, like motor-related workshops. Larger premises are proving harder to let.

The northern nodes of the East Rand - and especially Kempton Park - are continuing to enjoy strong levels of activity and although the market remains tight, deals are being done and there are the first signs of a market upturn. Sufficient stock exists to cater to demand, especially with the movement of tenants caused by buy-outs, contractions and expansions.

One of the constraints in the market is the lack of supply for large spaces. Although small businesses are playing an increasingly important role in the industrial market, the demand for industrial property in excess of 10,000m2 does exist and is difficult to accommodate. The key problem is that large-space tenants are generally unwilling to pay the rentals which developers require in order to make these big projects viable.

Midrand continues to grow northwards towards Centurion, with activity evident in developments like Corporate Park and Century Park. Premises with freeway frontage at Corporate Park are enjoying consistent demand and local brokers report that gross rentals of between R22/m2 and R23/m2 are the norm for office/warehousing space with the trend being for approximately 30% to 40% of offices.

Century Park, which is located in Centurion, is developing as a distribution node, taking advantage of good access to both the north and the south.

One of Midrand's strengths is its ability to meet demand for a single office/industrial address, but the question is what effect this has on the retail sector. The existing infrastructure capacity constraints in the Midrand node must also be a key consideration for retail and entertainment projects.

Brokers report that demand in the node has flattened, rather than declined, in the past year but point to a growing under-supply of space which should push rentals up in the next few months. New tenants include upmarket furniture showrooms, pharmaceutical companies and the like, while the information technology sector remains a primary driver of new demand for space.

A final comment on the Midrand market is that there seems to be a growing differential between A-grade and B-grade premises. Whereas space in Midrand has seen little variation between the grades in recent years, a separate B-grade market is reportedly emerging at around R18/m2. Brokers say that B-grade vacancies are higher than A-grade, despite the rental differential. This is arguably as a result of the high-tech requirements of many of Midrand's tenants. The question is whether or not the potential to exists for landlords to renovate and upgrade B-grade premises to A-grade standard.

In Pretoria's light industrial market, Centurion is currently the rising star. Although not as popular as Midrand, the node offers many of the same advantages at - currently - lower land prices and rentals. Distribution centres, mini-factories and other industrial space are in evidence in the node - especially Samrand, Hennopspark and Highveld Park - but activity is not limited to industrial projects.

Industrial brokers report that, in other nodes, enquiries are tending to be for larger industrial premises, rather than mini-units or mini-factories, and that this demand for larger space often cannot be accommodated. With high interest rates, new developments are seen to be overly expensive and this is exacerbating the market's inability to cater to demand. Traditional industrial nodes such as Waltloo and Rosslyn are quiet and the perception exists that they are starting to look rundown and old. At the bottom end of the market, premises are available from as little as R2/m2.

KWAZULU-NATAL

In Kwazulu-Natal during 1998, industrial and warehousing plans passed amounted to 227,546m2, while the amount of buildings completed in this sector amounted to 240,336m2. The following table provides a breakdown of the major nodes which have seen activity in industrial plans passed or buildings completed. Bear in mind that the plans passed data imply a market outlook for the next 12 to 18 month period, since developers take a view on demand growth when they start the development process.
1998 Plans Passed in m2 Buildings Completed in m2
Durban 85,647 65,696
Inner West City Council 27,848 120,922
Kwadukuza / Stanger 1,543 9,211
Newcastle 17,945 4,549
South Local Council 19,527 13,668
Umhlunga 5,532 3,399
Verulam 1,600 9,818

Brokers report that while there is some leasing activity taking place in the market, there is a perception that rentals are generally not seeing much movement. One of the constraints on the market is that there is an under-supply of both good quality space, and large premises. The latter is a factor emerging in several markets around the country.

JHI understands that there is currently research underway to look at the Southern Industrial Basin and its longer term potential for industrial growth - not surprisingly, as the region contributes some 65% of Durban's contribution to the GDP. Described differently, this area accounts for about 5,5% of the national GDP.

The relocation of the airport is a relevant issue when considering the Southern Industrial Basin. On the one hand, the Prospecton node could stand to benefit from the relocation of Durban International Airport, as this would likely release land parcels for industrial development although there would no doubt be the loss of some tenants to the new airport node at La Mercy. On the other hand, the relocation could provide a boost for areas like Mount Edgecombe and Phoenix. Until a decision has been made, these location decisions remain undecided.

Prospecton is nonetheless a fairly active node, with tenants like Robertsons and Toyota. Gross rentals are around R12/m2 to R15/m2, although there is little vacant space available. Jacobs is seen to be an older, unattractive node which is also zoned for noxious uses. Access is not optimal and much of the existing stock suffers from functional obsolescence. Rentals range from R6/m2 to R10/m2, at the top end.

To the west, the Pinetown industrial property sector has seen high levels of activity in 1999 to date, with JHI's Pinetown office reporting that some 85% of all deals concluded were in the industrial market. Tenants tend to be mixed, with enquiries emanating from a broad range of industries like transport, heavy engineering and others.

Benefits of the node as an industrial location include labour resources, access, proximity to major markets and inter-provincial freeways, plus relatively competitive land prices. Top-end land is achieving close to R185/m2 with some deals done at the exceptional price of R200/m2. Please note that these prices are quoted on a net useable basis, not on a gross area basis.

Pietermaritzburg's industrial sector seems to be struggling for survival. Where there is activity, properties are generally being sold at bargain prices. Two recent examples include the sale of a 3,000m2 factory for R1 million; and a 20,000m2 factory on Du Toit Viljoen Road adjacent to the N3 highway, for R6 million.

There is a strong perception in the market that local government has played an inadequate role in attracting new business and industry to the city, and that there is a dire need for a more pro-active and efficient approach to local industrial development schemes. It is also worth noting that the city council owns a significant amount of industrial land in Pietermaritzburg, which is relatively cheap at R50/m2 to R80/m2 for serviced, flat, industrial stands.

Where there is activity in nodes like Willowton, Shortt's Retreat and Mkondeni, it is generally in the leasing of smaller premises like mini-factories or mini-units and in this sector of the market, rentals are about R8/m2 to R10/m2. Local brokers report that premises of more than 2,000m2 can stand empty for years.

Along the Victoria Road/Greyling Street strip, there is activity in the services sector including panelbeaters, workshops and plumbing businesses. In this node, better rentals are being achieved than elsewhere and are in the region of R15/m2gross.

WESTERN CAPE

Industrial buildings completed in the Western Cape amounted to 235,634m2 during 1998. Industrial plans passed for the same period amounted to 479,381m2. Despite these statistics, sentiment regarding the Cape industrial market appears to be more cautious than in other sectors of the property market.

There appears to be a debate emerging as to the long-term importance and potential of Cape Town's industrial economy. If the market is likely to remain a relatively small and regional one, then this has implications for the property sector. However, recent industrial development has been in line with the rest of the country insofar as the trend has moved away from heavy industrial property, and towards light, services-oriented and distribution space.

Concerns raised during research for this report regarding the industrial property market include: the perception that Cape Town is 'losing' its stock industries (textiles, for example); the perceived threat of industry consolidating with Gauteng operations; and the belief that industrial land prices are too high, thereby creating a barrier to entry.

This final point is particularly relevant when considering that industrial rentals are at similar levels in Cape Town and Johannesburg:

Prime industrial rentals R/m2
  250m2 500m2 2,500m2 5,000m2
Central Wits 15.44 14.52 11.86 10.90
Cape Peninsula 17,03 14.50 12.13 11.53

Brokers report that where land prices are reasonable, however, nodes are more likely to see some activity. Despite popular opinion that land supply is limited in Cape Town, there is an argument that this is not the case in the industrial sector. Examples of nodes with ample land for expansion include Capricorn Science & Technology Park in Muizenberg; industrial areas like Blackheath, Kuils River and Stikland to the north; and nodes along the west coast like Atlantis.

Take the example of the City of Tygerberg. In its 1998 Spatial Development Framework, the City indicates that the municipality's non-residential land uses are mainly clustered between the N1 and the N2 freeways. The framework identifies three categories of industrial area, each expected to attract different types of tenants, and these are tabulated as follows:

Main industrial belt   Epping 2
  Parow Industria
  Sacks Circle
  Beaconvale
  Bellville South
  Stikland
Light industrial nodes   Elsies River Estate
  Elsies River Industrial
  Parow East
  Boulevard Park
New industrial nodes   Tygerberg Business Park
  Borchards Quarry
  Cape Town International Airport

The local council goes on to report that, after residential development, the next highest level of property development has been in the industrial sector. Furthermore, there is extensive vacant land available for new development. The breakdown of existing land development is detailed below:

Summary of developed land in the City of Tygerberg, in hectares 1998
Developed Retail 187.91
Developed Industrial 1,153.59
Developed Residential 9,585.5
Developed Office 69.19
Total Vacant 32,238.34

The council estimates that the demand for industrial land will amount to 646 hectares by 2015, including provision for bulk infrastructure.

Overall, the industrial property sector in the metropole seems to be highly differentiated, not only between sectors and nodes but also between buildings in the same node. One example cited is of a 1,000m2 premises in Montague Gardens that recently achieved a gross rental of R17/m2, compared with a similar property, with the same exposure, that lies less than half a kilometre away, and recently achieved R12/m2. Part of this variance may be the issue of security, which is becoming increasingly important in the industrial markets.

Demand for large industrial premises is particularly scarce, and the incidence of obsolete industrial premises looks set to rise. There is no doubt scope for refurbishment of these older properties, but it will have to be demand-driven in order to succeed. Activity in the leasing of mini-units is evident, especially in nodes like Ottery, Diep Rivier and the Milnerton industrial nodes, and rentals can be as high as R20/m2.

Publisher: JHI
Source: JHI

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