By Joan Muller

Senior writer

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INDUSTRIAL property owners are reporting a huge drop in vacancies, which has seen gross asking rentals for new warehouse and distribution space jump to R35/sq m in some areas. A year ago average asking rentals were still around R18 to R20/sq m in the bigger industrial nodes. Latest figures from property portal eprop show that average industrial asking rentals (gross) have increased by 17% between July 2004 and April 2005.

Listed property funds confirm that there’s been a marked increase in demand for industrial space over the past year. Metboard Properties – the largest industrial property company listed on the JSE Securities Exchange, with assets worth R1,85bn – saw its vacancies halve from 5% to 2,4% in the year to end-March. Two years ago its vacancies exceeded 10%.

Metboard executive director Estienne de Klerk says that the reduction in vacancies helped to boost the funds’ revenue by 22,6% and trading income by 21,4%, clearly reflecting the improvement in industrial letting conditions.

De Klerk says that when shorter leases (two to three years) come up for renewal, they’re seeing rental increases of between 15% and 25%, though they’re still battling with reversions on longer-term leases (five to 10 years). Rental reversions occur when longer-term leases with built-in escalations of 10% to 12% outpace actual market rentals. New leases are then signed at lower rentals than before.

Martprop Property Fund MD Roger Perkin says that vacancy levels in its industrial portfolio – 110 properties with a total lettable area of close to 570 000sq m – are at an all-time low of 0,1%. Currently, there’s only one vacancy of 550sq m.

Marriott Corporate Property MD Craig Ewin says that current building costs dictate that starting rentals on new warehousing buildings are touching R28 to R30/sq m on a net basis. That’s obviously producing a "pull" effect on market rentals for existing properties.

Analysts expect the industrial property market to strengthen further over the next year, which should see further rental growth. Lower vacancies and firmer rentals come as good news for investors in listed property funds with a large exposure to the industrial sector (including Metboard, Martprop, Pangbourne, iFour and Capital) as higher rentals should start translating into higher dividend payouts.

Until recently, investors had to be satisfied with capital appreciation alone – driven mostly by lower interest rates – as the earnings growth of most funds was under pressure due to a lingering oversupply of commercial space and little or no rental growth.