The South African industrial property market has consistently demonstrated resilience and strong performance, particularly when compared to the retail and office sectors. This is largely due to its low vacancy rates and robust rental growth, which have been sustained despite economic challenges. Key drivers of this market include the manufacturing and retail sectors, with a significant boost from the growth of e-commerce and the need for modern warehousing solutions.
Drivers of the Industrial Market
Manufacturing Sector: Although manufacturing production experienced a slight decline in 2024 compared to 2023, it remains a crucial factor in the demand for industrial space. The sector’s performance is reflected in the Absa Purchasing Managers’ Index (PMI), which averaged 48.7 in 2024. This indicates challenging conditions, but manufacturers remain optimistic about future business conditions. The PMI trended downward towards the end of the year, reaching 45.3 points in January, influenced by factors such as trade disruptions with Mozambique and fuel shortages affecting air freight.
Retail Sector: The retail sector, particularly online retail, has been a significant driver of demand for industrial space. Online retail sales have grown substantially, with major retailers like Takealot and Amazon playing key roles. The introduction of modern racking systems allowing for higher stacking heights has increased the need for new-generation warehouses. Retailers are continually reorganizing their supply chains and distribution strategies, further boosting demand for industrial properties.
Business Confidence: Improvements in business confidence, which rose to an average of 37% in 2024, have positively impacted the industrial market. There is typically a lag of about six quarters between changes in business confidence and industrial vacancy rates. This means that as confidence grows, vacancy rates tend to improve over time.
Rental Performance and Vacancy Rates
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Rental Growth: Nominal gross market rentals for industrial space of 500 m² grew by 6.7% in the fourth quarter of 2024 compared to the same period in 2023. Rentals for larger spaces, such as 1,000 m², increased by 7%, reflecting the strong demand for industrial properties. This growth is particularly notable given the weak economic conditions, with rentals now about 23% higher than pre-pandemic levels.
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Vacancy Rates: The average vacancy rate for the industrial sector was 3.7% in the fourth quarter of 2024, slightly higher than in the third quarter but still below the long-term average of 4.2%. This low vacancy rate is a testament to the sector’s resilience and demand for industrial spaces.
Regional Performance
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Cape Town: Cape Town has been a standout performer in the industrial market, with significant rental growth and low vacancy rates. However, rental growth cooled slightly in the fourth quarter of 2024. Cape Town’s vacancy rate declined to 3.9% in 2024 from 3.6% in 2023, indicating strong demand.
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Gauteng: The Central Witwatersrand and East Rand areas experienced strong rental growth, with rates higher than in Durban. This growth is attributed to the strategic location and demand for industrial space in these regions. In the fourth quarter of 2024, Central Witwatersrand and Cape Town led the way with growth rates of 9.4% and 9.1%, respectively.
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Durban: While Durban has historically had higher rental levels due to geographical challenges and reduced supply, its growth was slower compared to other regions in 2024. The undulating terrain in Durban requires developers to create level platforms, increasing costs and contributing to higher rentals.
Challenges and Future Outlook
Despite the positive trends, the industrial market faces challenges such as high construction-cost inflation, which affects real rental growth and developer profitability. Additionally, rising operating costs could impact tenant affordability and future rental trends. The sharp increase in building-construction inflation is expected to continue, putting upward pressure on new-build rentals.
The outlook for the industrial property market remains optimistic, driven by e-commerce growth, low vacancy rates, and improving business confidence. However, economic uncertainties, such as potential VAT rate increases and geopolitical tensions, could impact future performance. The South African Reserve Bank expects real economic growth to rise to 1.8% in 2025, which could further support low vacancy rates if realized.
Trends for 2025
Looking ahead to 2025, trends in the commercial property sector, including the growth of industrial and logistics sectors, are expected to continue. Factors such as reduced inflation, less loadshedding, and renewed investor confidence are likely to boost demand across all asset classes. The integration of technology and sustainable practices will also play a significant role in shaping the future of industrial properties.
The South African industrial property market is well-positioned due to its strong fundamentals, driven by e-commerce and manufacturing needs. While challenges exist, the sector’s resilience and adaptability suggest a continued positive trajectory into 2025.
Courtesy Rode