After years of being overshadowed by the sexier residential market, office and industrial property has suddenly found new allure. But the question is whether buyers will desert residential as frenzy over an impending commercial-sector boom builds.

There is virtually no decent industrial space available and rents are rising for the first time in half a decade. The huge oversupply of office space, which ensured tenants great rental deals, is fast disappearing and prime rents could soon be heading above R100/m².

The oversupply and limp demand for investment property a few years ago is beginning to translate into a lack of stock today, say brokers. They report that competition for buildings is fierce and is pushing up prices. Industrial property faces the same scenario.

"In Aeroport, near Johannesburg International airport, we have sold 15 ha of stands in the past year," says Alan Hendricks, head of Broll Property Group's industrial division. "There is virtually no proclaimed and serviced land left in the node."

He adds that good vacant space is scarce in prime industrial areas and that this will eventually spark new development.

Pace property group MD David Green says that the dearth of industrial premises in prime nodes is boosting secondary nodes such as Alrode, Wadeville and City Deep.

"It's difficult to focus on growth in any one industrial area because all the popular nodes are seeing regeneration of older buildings and development of new sites," he says.

The national industrial vacancy level is the lowest it has been in eight years and average rental growth has surged by 14% over the past year.

"Land values have risen by 300% over the past five years and R350/m² is now commanded for prime zoned industrial land," says Green.

Brokers pinpoint undersupply in smaller industrial premises of below 1,000 m² and medium-sized buildings of between 1,500 m² and 5,000 m².

The office market is also looking stronger with vacancies and real rentals strengthening. Property economist Erwin Rode estimates that 500,000 m² of office space was taken up in the past 12 months.

Vacancies have started to decrease throughout the decentralised office areas. But not in all centres; Rosebank vacancies have risen from 16% to 18% in the past year.

A new trend to convert existing office buildings into sectional title suites for smaller tenants is growing, says Green. The building, 26 Baker Street in Rosebank, has been purchased by Barrow Properties for this purpose.

eProp research head Marc Schneider says residential and retail property have peaked and that industrial is leading the commercial upswing. Offices have just started to turn, he says, which is why now should be a good time for investors to buy.

Brokers warn that the office and industrial markets are already showing signs of insufficient stock and a lack of land for development, which could halt the sector's new investment momentum.

As usual at the beginning of a boom, commentators have differing views as to why the markets are turning. Some say investors are breaking out of their conventional mind-sets and have a greater appetite for risk.

"The office oversupply was a blessing in disguise because it forced the property market to be more innovative and to seek out new development formats," says Schneider.

He believes developers have a taste for creative new approaches and cites as an example The Mills precinct in Newtown, Johannesburg.

Investment Property Databank MD Stan Garrun says investors are opting for traditional office nodes and consolidating in older areas, such as Parktown and Rosebank. He says people want to live close to where they work and a return to the accessible, older suburbs underpins the trend.

Developers are even refurbishing in newer areas, something that would have been unheard of five years ago. Export House, FNB House, Boart House and 90 Rivonia Rd in Sandton are all being renovated. Revamps are about to begin at three other office blocks in Fredman Drive and Sandown Valley Crescent.

"That's 76,000 m² of reworked office space," says Fran Teagle of Broll's office division.

She adds that though rentals have not yet started to rise, they have hardened and landlords are less negotiable on concessions such as rent-free periods.

Others say that the market is simply mopping up extra stock as demand catches up with supply. And it's unlikely that the residential market will suffer as commercial takes off.

"I don't think the commercial sector will rival the residential market in terms of capital growth experienced over the past few years," says Schneider.

Still, analysts argue that compared with typical residential yields of 7% to 8%, the lure of 12% or 14% yields on commercial property is undeniable.

Teagle adds that residential take-up of potential office land has hiked prices in premier nodes such as Sandton.

One thing is certain: smaller, private and non institutional investors are paying more attention to property than they have in a long time.

And Garrun says that these investors are asking for microstatistics that go beyond broad macro-information. "The demand is more for detailed, operational data."

Financial Mail