Each year about R1,7-billion is spent on industrial property planning, with R800-million going towards actual development says Marc Schneider, head of research at e-Prop, a property Internet, research and consulting firm.

The four big metros account for over 45% (R750-million) in planning activity and over 60% (R500-million) in actual development of industrial buildings.

These include manufacturing, dairies, factories, warehouses, workshops, laundries and changerooms, for example.

e-Prop research estimates that the size of the industrial property market in South Africa is about 100-million m2; at an average value of R1 098/m2, this represents an asset base of about R110-billion, the bulk of which is in the hands of large industrial manufacturers.

Elsie Snyman, CEO of construction management information service provider Industry Insight, says that, although the construction of industrial space has been on a decline since 1995, and has since 2000 fluctuated sideways, approved square metres are now increasing at 46% a year and the industrial sector is growing at a faster rate than nonresidential property such as offices and shopping centres.

In Gauteng, the construction of about 600 000 m2 of industrial space has been approved for the year; Western Cape and Kwazulu-Natal each have about 300 000 m2 approved while the Eastern Cape has the development of less than 100 000 m2 approved for the year.

Snyman points out that there has been an increase in the construction cost of a square metre of industrial space as steel prices have increased quite sharply and an industrial building has a high steel content.

"The average cost now sits at R2 200 to R2 300/m2, which is about a 10% to 11% increase from last year, whereas the average building costs have gone up 5%," she says.

Also pushing up the price is the fact that industrial space is not just industrial space any more; people want more out of their working environment.

In spite of that, Snyman says that, because interest rates are low and economic growth is doing well, it makes sense for industrialists to build and own their buildings, rather than rent.

"Apart from being much cheaper to build, the owner will not be bound by a long-term lease agreement that escalates by a fixed rate every year," she says.

This trend can be seen in that the majority of approved industrial buildings this year are being developed by their owners.

Just some of these projects are Eurosteel's warehouse and offices in Modderfontein; Pick 'n Pay Retailers'warehouse in Pinetown; Jurgens' warehouse in Randburg; Bluefin Holdings' new factory in Hout Bay harbour; Sasol Midlands' extension to its workshop; additions to LSG Sky Chefs factory in Benoni; South African College School's new aquatic centre in Cape Town; Johannesburg Fresh Produce Market's banana-ripening complex; Smart Stone's new factory in Pinetown; a factory for Ford Engineering in Ottery and a factory for Screen Express in Cape Town.

While the largest development in terms of value is a new R176-million warehouse in Germiston for Future Indefinite Investments 180, only 14 of the developments have a value of R10-million or over and 60% of the 76 industrial developments approved for this year have a value of less than R5-million.

"There is, however, a 'feel' in the market that we are going to have fewer projects, but they are going to be bigger in value," says Snyman.

For example, in Kwazulu-Natal, Sapref has a R1,3-billion project out to tender for additions to its factory.

Snyman believes the new industrial development zones (IDZs) will have a more positive impact on the industrial sector, but will be isolated to the four main provinces.

The IDZ planned for Richards Bay is, for example, worth more than R600-million but the value will probably be closer to R1-billion once construction actually starts.

Coega is another example that will boost the industrial market in years to come.

"Although the uptake of Coega has been slow, the spinoffs of the development are already taking place," says Snyman.

Port Elizabeth is, for example, planning a new conference centre together with a Statue of Freedom Park worth R400-million.

Schneider questions the 'flexibility' of some of the IDZ projects given the volatile market context.

"Whether South Africa will benefit from the decentralised IDZ programme, will always be difficult to judge as there are advantages and disadvantages, promoters and detractors.

"Perhaps more telling will be the general production investment focus that our cities, particularly the metros, receive," he says.

The urban development zones and plethora of industrial manufacturing incentives are a big subject and the jury is out whether or not these will necessarily lead to 'brownfields' developments and rejuvenation of traditional industrial areas in a big way.

"Comments from the market on the urban development zones have been positive overall, many acknowledging, however, that, on its own, this is not a fillip for turning inner-city areas around, but nevertheless most welcome," says Schneider.

From a new supply angle there are emerging sectors clustered around biotechnology and aeronautics that may prove interesting in the medium to long term, depending on how seriously South Africa takes these sectors.

Other measures, such as providing effective public infrastructure to obtain new international and local markets, are key, but not necessarily imperative for stimulating industrial demand.

"Far more telling, it appears, are the judgement calls made by the international markets and the influence that globalisation has on megaprojects such as Coega," says Schneider.

"Nevertheless, getting harbour, port, road and general distribution synergies right is important."

Demand for industrial space hinges on overall economic growth, imports and exports and a number of variables related to manufacturing including inventories, durable goods orders, production, wholesale trade and retail sales.

"Manufacturing is quite a good indication of the kind of space that would be needed; for example the fact that imports have increased at such a high rate has created a demand for more industrial-type warehousing," says Snyman.

Since the beginning of this year 22 new warehouses or extensions to warehouses have been approved.

"International experience shows that GDP can be used as a consistent indicator of the demand for industrial space and is a better proxy of the general state of the industrial sector than manufacturing output or manufacturing employment or unemployment," says Schneider. South Africa's present GDP figures bode well for the sustainability of the industrial property upswing and this is supported by a positive trend in fixed investment conditions in the manufacturing sector.

A large sample survey of the manufacturing industry for 2001 showed that there was a total of 33 643 factories in the various manufacturing sectors.

These included food and beverage, 3 109; textiles clothing leather and footwear, 3 098; wood products, paper, publishing and printing, 3 593; petroleum, chemicals rubber and plastics, 3 549; glass and nonmetallic mineral products 1 375; iron and steel, non ferrous and metal and machinery, 10 976; electrical machinery and apparatus, 871; radio TV and communication apparatus and equipment, 902; motor vehicle parts and accessories and other equipment, 2 994; and furniture and other manufacturing, 3 176.

Schneider says that net manufacturing enterprise business formation growth offers an estimate of the potential take-up that can be expected for the industrial property market. The net cumulative rate of growth (formations less liquidations) is about 10%-12% at present, or about 4 270 enterprises a year.

The yearly net growth has moved into positive territory, with the average yearly growth from 1995 to 2003 at 0,90%; the net annual growth of manufacturing formations in 2003 was 4,6% - the highest since 1995.

The growth in liquidations has been negative over the last four years.

e-Prop estimates the average industrial property requirement to be conservatively in the vicinity of 3 000 m2 based on an estimate of industrial gross lettable area stock available on Sapoa Online, an industry-endorsed Internet initiative, managed by e-Prop.

"At a rate of 4 270 industrial business formations a year this translates into a potential manufacturing demand of about 12 810 000 m2 a year, all things being equal," says Schneider.

"Assume that of this about 50% is based on internal 'churn', that is companies forming within existing groups and of that a further 50% have no space requirements because there is available production capacity or physical space, one still sees a potential demand for about three million square metres of space a year.

"Compared to the actual supply of industrial space nationally over a year, about 720 000 m2 a year is recorded, there is a potential massive disparity based on these assumptions," he says.

This may, however, support the hypothesis that, with general efficiency gains, companies in general can still stretch their existing production capacity to a greater extent than is imagined and that the growth in industrial formation and even manufacturing volumes does not necessarily translate into a net demand for space.

e-Prop believes that production first affects the utilisation of production capacity which is about 80% at present.

This means that before actual physical space demand or other investment is effected, this capacity utilisation must first increase and be absorbed in the system before it can be translated into new space demand.

"In theory, 'spare capacity' is used up as demand increases until such point where the effective operational capacity of the building is exceeded," says Schneider.

"This then creates a market demand for a bigger facility - technological advances and continued suitability aside," he says.

In the rental market Schneider says vacancies are on a downward path, ranging between 3% and 8% across the major markets around the country and in some instances there is a complete shortage of prime space.

At the national sphere, on average, the industrial vacancy rate has come down to a level well below 10% last seen in 1996/7.

Lowest vacancies of 4% exist in warehousing, according to Investment Property Databank data, and also well below 10% across all industrial types.

Across all major markets and unit sizes across the country, the annual rental growth is nearly 14%.

Evidence of this strong upward surge is evident across almost all areas, including Maritzburg, the East and Far East Rand, Greater Durban and Nelspruit.

Most recently there has been some strong rental growth in central Wits as a whole.

"The only market that appears to have dwindled of late on this score is Pretoria," says Schneider.

Rentals across different types, sizes and markets can vary greatly.

Leases over large spaces enjoy an economy of scale that can, for example, offer rentals as low as R3/m2 gross in Vanderbijlpark to well over R30/m2 in Longmeadow, eastern Johannesburg.

As a ballpark, operating costs range between R3 and R7/m2 across different stock and there has been some nominal growth in these figures - anywhere between 6% and 50% on average from 1995 to 2003.

Yearly increases are quite varied across the major industrial markets and are affected by the cost of municipal rates and utilities.

Operating costs as a percentage of gross rental income range between 30% for high-grade industrial stock and 48% for mini units.

"It is this ratio, together with demand, that will dictate rentals," says Schneider.

Total returns measured for 2003 show a close range of between 16,3% and 19,6% across the varying sized industrial units.

Brokers in the industrial sector suggest that high-tech demand is on the increase, even though next to high-rise and low-rise offices and mini units, total yearly returns from 1994 to 2003 were weakest in high-tech industrials at 9,9%.

"Given that some of the new light industrial nodes such as Linbro Park serve to partly satisfy an 'office' requirement at rentals generally around R18/m2 - significantly less than the going rates in traditional office nodes or parks - this should see the prospects for this category of space changing," says Schneider.

Industrial initial yields or capitalisation rates have been coming down for a slightly longer period than the office sector.

The average industrial park yield across the country is about 13,9%; a decrease of just under 1,5% from a year ago.

"Comparing yield changes across all industrial property types, strong markets include the main centres of Durban, Cape Town and Port Elizabeth, while markets such as Bloemfontein and East London appear not to be strengthening to the same degree," says Schneider.

"Bloemfontein's plans to build a R400 m industrial development zone may help to boost the province's ailing export industry; while uncertainty about Coega, near Port Elizabeth, could have diluted confidence in the Eastern Cape, the latest news about it being once again in line for a smelter will probably cause the pendulum to swing again."

One of the features of the industrial property market is that it has a good balance of demand and supply primarily because production space requirements are brought to the market on a demand-led basis by an owner-occupier ethic.

However, speculative supply is coming onto the market.

"A key reason for this is because of changes in industrial production requirements versus the traditional supply, which in some cases consists of old obsolete space," says Schneider.

Developers are taking a view that this factor, together with the general demand and a location with good access and effective distribution, makes the supply of even speculative industrial stock quite appealing.