THE office and industrial property sectors are expected to continue steaming ahead next year with strong rental growth because of low office vacancies and a shortage of available industrial land.

As far as offices are concerned, Property economist Francois Viruly says it would not surprise him to see rentals in the middle segment of the office market increasing more than 20% next year because of the way office vacancies have been declining.

Over the past year there have been increases in office rentals of about 10%.

After lagging the retail and industrial property sectors for the past few years, it appears the office property sector is coming into its own as demand for space has mopped up most vacancies.

Viruly says that during next year the market will see B-grade office space in prime locations being converted into A-grade space through redevelopments.

A-grade offices are generally not older than 15 years and have high quality modern finishes such as air-conditioning, and also adequate on-site parking.

B-grade offices are generally older buildings with finishes close to modern standards as a result of refurbishments.

Viruly says the redevelopment of B-grade space means that B-grade office users are going to find affordable space in prime areas hard to come by, and that the central business districts (CBDs) will become increasingly attractive as office nodes.

“The difference between the highest rentals and the lowest rentals will increase significantly, and we could well see prime areas finding themselves with rentals that are three times higher than what you would find in SA’s CBDs. The CBDs will start looking very affordable.”

Viruly says in the coming year the “industrial property story” will centre on the availability of land and infrastructure.

“Looking at a medium-term view, industrial developers will be looking for areas with infrastructure and so industrial land prices are going to carry on rising,” he says.

Certain industrial nodes have seen industrial land values double over the past two years.

These include some of the older industrial areas which have become attractive because of the availability of infrastructure.

“Those higher land values will ultimately push up industrial rentals in order to maintain the viability of these projects.

“We will see a very good performance from the office sector and the industrial sector won’t be far behind. The retail sector will trail both.”

First National Bank property strategist John Loos says that in many areas of the country, industrial property rental inflation has been in the double-digit territory and often well more than 20% over the past couple of years.

“I expect more of the same in the industrial sector,” says Loos.

He says office space has been “something of a laggard” with many areas having had low double-digit inflation in rentals.

“I expect this to accelerate and I think in many areas of the country this could be well above 20%.

“I think while interest rates have resumed their rising trend in the second half of this year we might have had a slight rise in capitalisation rates.

“But as soon as interest rate hiking ends, I expect a resumption of the downward trend in capitalisation rates translating not only into strong rental growth but also strong capital growth.”

Loos says these trends will apply to both industrial property and offices.

“I think of all the property categories the two star performers by a long shot next year will be industrial and office space.”