The industrial property market in South Africa continues to thrive, marked by notable nominal rental growth and persistently low vacancy rates, positioning it as the top-performing sector among non-residential properties. In the second quarter of 2024, nominal gross market rentals for 500 m² industrial spaces surged by 6.1% compared to the same period in 2023, an increase from the 4.8% growth recorded in the first quarter of 2024. Remarkably, these rentals are approximately 20% higher than pre-pandemic levels in 2019. Larger industrial spaces of 1,000 m² experienced similar growth at 6.2% in the second quarter of 2024. However, when adjusted for building-construction inflation, real rentals are still declining due to a construction inflation rate of about 9%.
Regionally, major conurbations, particularly Central Witwatersrand and the East Rand in Gauteng, have seen the fastest rental growth. Cape Town’s industrial market remains strong but shows signs of cooling after a robust period. All major areas report low vacancy rates between 3% and 5%, with logistics properties maintaining ultra-low vacancy rates as noted by major players like Equites and Fortress. It’s important to note that these statistics exclude ultra-large premises like bespoke logistics warehouses, where rentals are typically higher due to construction and land costs.
Key drivers of the industrial property market include the performance of the manufacturing and retail sectors. The manufacturing sector started 2024 positively, with a 0.7% growth in production from January to May 2024 compared to the same period in 2023. Despite this, production levels are still 7.2% below 2019 levels. The Absa Purchasing Managers’ Index (PMI) averaged 54 index points in April 2024, signaling expansion, but dipped to around 45 in May and June, indicating ongoing challenges.
Retail sector health also influences the industrial property market. National retail sales from January to May 2024 remained stable compared to the same period in 2023 and slightly higher than in 2019. Retail confidence improved to 39 index points in the second quarter of 2024 from 34 in the first quarter. The demand for new-generation warehouse or distribution space continues to grow, driven by modern racking systems, online retail sales growth, and reorganized supply chains. Online retail sales grew by 29% in 2023, with companies like Shoprite Checkers and Takealot leading the market, while Amazon’s entry in May 2024 is expected to heighten competition.
Business confidence, as measured by the RMB/BER Business Confidence Index, significantly affects industrial vacancy rates. Business confidence averaged 32% in 2023, rising to 35% in the second quarter of 2024. Despite low business confidence due to sluggish global growth and a weak local economy, industrial vacancy rates have been declining since the peak during the COVID-19 pandemic. In the second quarter of 2024, the national vacancy rate was 2.24 points, implying a 3.7% vacancy rate, lower than pre-COVID levels and below the long-term average of 4.2%.
Looking ahead, while higher vacancies may be a short-term risk due to the lag in business confidence, there is optimism for increased business confidence in the coming quarters. This bodes well for the industrial property market’s continued strength. It is crucial to differentiate between market growth rates, which reflect changes in market rentals, and escalation rates, which indicate contractual rental increases. In the second quarter of 2024, nominal industrial market rentals rose by 6.1% for prime 500 m² spaces, continuing a trend of strong nominal growth despite real declines due to construction cost inflation. Overall, the industrial property market benefits from fast-growing online sales and less speculative development compared to office buildings and malls, showcasing its resilience and promising outlook.
