After an extremely challenging 2020 it came as a huge relief that the property market in general performed better in 2021 than 2020. Listed property actually ended up being the top performing asset class in 2021, beating equities, cash and bonds. REITs in general performed better with some even paying out dividends to shareholders. The economy in general is however still in a state of recovery and is yet to even reach the level of 2019 and the property market is still under pressure, especially the office sector with increased vacancy levels and suppressed rental rates. Industrial property performance on the other hand showed some positive trends and performance going into 2022.
The industrial property market is still well positioned this year with low vacancies and recovering rentals after outperforming even the residential market last year. Nominal industrial rentals in the 4th quarter of 2021 grew by 3.7% according to Rode’s industrial survey but unfortunately this is not an increase in real terms after taking into consideration building-cost inflation, which was 5% in the 4th quarter. Nominal rentals therefore grew by 2% which was still an improvement of the 0.5% growth rate of 2020, but still well below the 5% growth seen in 2019.
The industrial sector is still believed to be in the best position as far as the non-residential market is concerned. One of the reasons for the solid performance of the sector are new developments, both speculative and non-speculative. The demand for these developments can be attributed to the growth of the logistics market after increased sales following the pandemic, especially online sales. The manufacturing sector however remains under pressure and is not as big a contributor to the take up of industrial space as the demand for factory space is limited with only certain sectors of the market seeing any growth.
Rode’s 2021 4th quarter capitalisation rate survey also show that industrial cap rates have continued to move lower as opposed to their office and retail counterparts which have remained generally untouched. In fact the industrial market has also been the most resilient non-residential property type when it comes to cap rates during the pandemic with its cap rate rising the least since 2019. The office sector remains the most vulnerable of the three. Nationally the cap rate for prime industrial leasebacks was 9.7% which is still above pre-2019 levels.
With the growth of the logistics market in South Africa, which currently already contributes 15 to 25% of GDP and employs nearly 500 000 people, we believe that industrial property performance will continue positively in 2022 with many speculative developments already being filled and existing vacancies reduced. We are seeing new entrants into the market and the merging and consolidation of logistics businesses which sees movement of both smaller as well as larger distribution centres.