Industrial properties desperately need a turnaround in the manufacturing and retail sectors

29-09-2015

Until there is a significant turnaround in the performances of the manufacturing and retail sectors, strong growth in industrial market rentals cannot be expected.

In the second quarter of 2015, manufacturing output volumes were down by about 1% when compared to the same quarter a year earlier. The retail sector’s performance was slightly better with sales volumes up by roughly 3% over the same period. However, as the corresponding graph shows, the growth in output and sales volumes of these sectors has, in general, waned since 2010.

Households are overwhelmed by debt, experiencing high unemployment, modest salary increases and low levels of confidence. These are all factors that presage modest growth in retail sales volumes.

As for the manufacturing sector, consider here mining’s backward linkages to manufacturing. According to research undertaken by the Industrial Development Corporation (IDC)1 in 2013, the mining sector has backward linkages to as many as six manufacturing-related industries. These industries are machinery & equipment, transport equipment, wood product, fabricated metal product, non-metallic minerals (cement, bricks, etc.) and chemicals & petroleum product. Hence, the lower economic growth outlook in China, with its impact on demand for commodities and commodity prices, is not auguring well for the SA mining and manufacturing sectors.

More unpleasant news for the industrial property market comes from the Barclays Purchasing Managers Index (PMI) compiled by the BER at Stellenbosch University. After managing to improve for three months, the index ― seen as a leading indicator of business conditions in the manufacturing sector ― fell back into contractionary territory (an index reading below 50) in August 2015.

Nonetheless, in the second quarter of 2015 industrial rentals in the Cape Peninsula (+7%) and on the Central Witwatersrand (+6%) were able to show decent yearly growth. This was followed by Durban and the East Rand, where rentals were up by 5% and 2% respectively. In the quarter under review, building-cost inflation — as measured by the BER BCI — is expected to have moderated to 2%. This implies that in the Cape Peninsula, and on the Central Witwatersrand and the East Rand, industrial rentals were over the past year able to grow in real terms.

This stellar performance in spite of the strong headwinds is difficult to fully explain, besides making the obvious point that industrial property development is rarely done on a speculative basis. Thus there is no serious overhang of space – yet.•

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1The interface between the mining and manufacturing sectors in South Africa by Jorge Maia,  Head of the Department of Research and Information at the IDC.