The cost of freedom

Posted On Friday, 24 December 2004 02:00 Published by
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Owner-occupiers pay a premium for sectional title industrial spaces
By Pauline Larsen

Developers appear to be ready to flock from residential to industrial sectional title projects. Units in Boksburg have been selling at a premium, against expectations.

Adopting high-profile selling techniques, Pace Real Estate has sold 19 of 28 units in just under a fortnight at Prospur business park on North Rand Road. When all four phases are developed, there will be close on 15 000 m² of small sectional title units for manufacturers and suppliers.

The units, expected to be ready in September , sold at an average price of R4 000/m². This is impressive for a greenfields development. Typical building costs for industrial property, excluding land, range from R1 750/m²-R3 250/m², say quantity surveyors.

"It's not to say that this concept will work everywhere at these prices," says Pace Properties MD David Green.

Developer Masi Projects started off in residential property by building sectional title complexes, says Green, and more recently transferred to industrial property.

The FM has identified more than 100 000 m² of new projects that are bringing sectionalised small units on to the industrial market in Johannesburg. And this year's low interest rates appear to be persuading small manufacturers to take the plunge.

"It's the psychology of ownership," says Green, who is marketing a number of these projects.

Developers plan to refurbish existing properties along the M2 highway south of the Johannesburg inner city. Wadeville, Germiston South and Alrode are attracting developer attention, too.

A range of units from 80 m² to 5 000 m² should accommodate all sizes of buyers. "The renovated industrial units are being pitched at less than R2 000/m²," says Green.

Owner-occupiers tend to pay more because their motive is not profit, says property economist Erwin Rode. "It's the utility of the premises for a particular potential buyer that will clinch the sale."

For about R4 650/month in bond repayments at Prospur business park, buyers can escape worries about rental escalations, operating costs or lease renewals, say brokers.

The levies, or operating costs, for the units are R12/m². This includes everything but electricity and water.

But there are risks that go with ownership. For one, owners are responsible for insurance, maintenance and municipal charges - at Prospur these are all built into the levy. For another, industrial premises are often designed for specific operations, which makes their re sale difficult.

"It's the old dilemma about whether to buy or rent," says Rode.

So the units aren't really an investment product. Owners may be hoping for long-term capital growth but are less concerned about initial yields.

Pace has calculated initial yields at Prospur to be about 11,5%-12%/year. But this may be an academic exercise.

Owners wanting to let extra space may struggle to achieve the necessary rentals of about R50/m² gross, at least to typical mini-unit tenants. The closest competing space fetches rentals of around R26/m² net, plus about R10/m² in operating costs.

But brokers counter that comparative premises, especially smaller units, are scarce. "Most of the buyers at Prospur have moved from showroom or value retail space, which means their bond payments are still less than their rentals were," says Green.

For a tenant paying R80/m² for showroom space, a drop to R50/m² represents an attractive saving, say brokers. Construction of industrial space is also faster than residential space, says Green.

Rode adds that demand- and supply-side factors should drive an up tick in industrial property in the next 12 months.

Financial Mail
 


Publisher: Financial Mail
Source: Financial Mail

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