The industrial property market in South Africa continued to strengthen through Q3 2024, driven by robust nominal rental growth and persistently low vacancy rates. Data from Rode reveals that vacancy rates in the sector averaged 3.6% during the quarter, below the long-term average of 4.2%, suggesting a healthy demand for industrial spaces. Industrial property has consistently outperformed other commercial property sectors, including retail and office, largely due to its resilience and adaptability to market shifts, particularly the rise of online retail.
Nominal market rentals for industrial spaces of 500 m² experienced a 6.9% year-on-year increase in Q3 2024, an improvement from the 6.1% growth rate observed in Q2 2024. Larger spaces of 1,000 m² saw even faster rental growth, rising by 7.4% year-on-year. Although these rental gains are substantial, real rentals are declining in value due to elevated building construction inflation, which currently stands at approximately 10%, as measured by the BER Building Cost Index (BCI). This high inflation affects developers’ profits and exerts upward pressure on new-build rental rates, which are further complicated by rising construction and land costs, particularly for bespoke logistics warehouses over 20,000 m².
Regionally, all major urban areas demonstrated strong nominal rental growth, ranging from 4% to 11%, alongside low vacancy rates. In Gauteng, the Central Witwatersrand and East Rand regions led in rental growth. The Cape Town market, which has historically shown resilience, saw rental growth accelerate further in 2024. Cape Town’s rental levels were already strong, driven by the city’s low vacancy rate, which averaged 3.5% in 2024, down from 3.9% in 2023. These low vacancy rates in key conurbations reinforce the steady demand for industrial spaces, despite real rentals showing declines when adjusted for inflation.
Key drivers behind this demand for industrial property include the manufacturing and retail sectors, particularly through warehouse needs created by e-commerce. Despite a slight drop in manufacturing production of 0.4% between January and August 2024 compared to the same period in 2023, the broader trend remains favourable. E-commerce has grown significantly, with online retail sales expanding by 29% in 2023, now accounting for 6% of South Africa’s total retail sales, up from 4.7% in 2022. Leading retailers, including Shoprite and Takealot, have increasingly relied on advanced warehousing solutions to meet online demand, and Amazon’s market entry in May 2024 has intensified this trend.
The shift in the retail landscape, with rising online sales, has underscored the need for large-scale warehouses and modern racking systems allowing for stacking heights exceeding 15 metres. These systems create a need for new-generation warehouses, potentially rendering traditional distribution centres obsolete. Despite the option to increase eaves heights in existing buildings, demand for contemporary, purpose-built facilities is expected to rise, given the structural changes in retail and supply chain management.
Industrial property performance is also closely tied to business confidence, which influences vacancy rates as companies adjust their storage and production capacity in line with market sentiment. Business confidence in South Africa averaged 32% in 2023, down from 41% in 2022, reflecting challenges posed by sluggish global and domestic economic growth. While confidence has remained low in 2024, it has shown improvement, reaching 38% in Q3, up from 30% in Q1. Historically, there is a five- to six-quarter lag between changes in business confidence and industrial vacancy rates, which could signal a future increase in demand for industrial space should confidence continue to recover.
The pandemic period saw national industrial vacancies peak at 2.87 points in Q1 2021 but trend downward since, reaching 2.18 points in Q3 2024. This vacancy rate is considered low on Rode’s scale and is well below pre-COVID levels, underscoring the sector’s resilience. In contrast, vacancy rates in office, retail, and residential properties remain above their long-term averages, highlighting industrial property’s relative stability. Better vacancy rates in the industrial sector have facilitated consistent nominal rental growth, which has ranged between 4% and 6% annually since 2022. National rental growth averaged 6% in the first three quarters of 2024, with expectations for continued stability given a potential rise in business confidence and economic optimism.
Examining rental trends in different regions, Central Witwatersrand in Gauteng showed the fastest rental growth at 10.9% in Q3 2024, surpassing Cape Town, which has traditionally led the market. Central Witwatersrand was also the only major region where rental growth outpaced building cost inflation, demonstrating exceptional demand. Vacancy rates here dropped to 3% in the first nine months of 2024, down from 3.2% in 2023. In the East Rand, rentals rose by an average of 7.4%, with stable low vacancy rates below 5%. Durban saw nominal rental growth of 4.4%, reflecting the additional costs developers incur when levelling land for industrial sites. Cape Town saw rental growth of 6.9%, driven by a consistently low vacancy rate and strong demand.
Other cities such as Bloemfontein and Gqeberha show less robust performance, with vacancy rates between 5% and 7%. Industrial property rentals in the Far East Rand remained relatively stagnant, with higher vacancy rates compared to Gauteng’s primary industrial hubs.
Looking ahead, real rental growth remains constrained due to high construction-cost inflation, which affects the profitability of industrial properties from a developer’s perspective. Additionally, as operating costs continue to rise above consumer inflation, tenant affordability may be affected, influencing future rental trends. Pioneer rentals, which represent rates for newly developed prime industrial premises, are an early indicator of rental growth potential, as these rates incorporate current construction costs and the developers’ expected returns. Therefore, sustained economic growth would likely see these higher rentals gradually reflected in the wider market as demand catches up with new supply.
Overall, the outlook for the industrial property market remains optimistic, bolstered by steady demand for warehouses due to e-commerce growth, low vacancy rates, and moderate improvements in business confidence. Should these trends continue, industrial property is poised to maintain its strong performance relative to other property sectors, supported by both structural changes in retail and relatively low speculative development.
Courtesy: Rode