According to Rode’s latest data for the first quarter of 2025, the industrial property market continues to outperform its non-residential counterparts — office and retail — positioning itself as the strongest segment due to robust rental growth and persistently low vacancy rates.
Strong Rental Growth and Low Vacancy Rates
Nominal gross market rentals for 500 m² industrial spaces in South Africa increased by 7.3% year-on-year in Q1 2025, exceeding the 6.7% growth seen in Q4 2024. Notably, these rental levels are now approximately 25% higher than their pre-pandemic levels in 2019 — an impressive feat given the broader economic struggles.
Cape Town led this trend with double-digit rental increases. One Rode panellist noted the city’s extremely low vacancy rates in most industrial areas, which limits opportunities for rental discounts and results in rapid turnover of available properties. Similar strength was observed in the Central Witwatersrand and the East Rand, where rental growth hovered around 7%.
The average national vacancy rate for industrial properties stood at 3.7% in Q1 2025, slightly down from 3.8% in the same period the previous year. This stability has been a key feature over the past two years. Low vacancy rates are being sustained by minimal speculative development and rising demand for large-scale warehouse space, especially as online retailing continues its growth trajectory.
Capitalisation Rates and Leasebacks
Capitalisation rates (or yields) for industrial leasebacks remained stable in early 2025. Investors typically seek a net income yield of 9.4% for prime industrial assets backed by long-term leases, assuming a lease escalation rate of 7%. This return is considered fair, particularly for leases with AAA-rated tenants.
For context, 10-year South African government bond yields averaged around 11.4% in April 2025. The trend in industrial cap rates has been gradually declining, reflecting steady demand and tight supply.
Cape Town again stood out as a region where capitalisation rates have seen the most improvement, boasting the lowest cap rates in the country. In contrast, Central Witwatersrand maintains higher cap rates, consistent with its central role in the economy and slightly elevated risk levels.
Leaseback escalation rates (which reflect expectations for annual rental increases over a lease term) averaged 7.2% in Q1 2025. While this figure is aligned with the previous quarter, it is slightly below the 7.9% average observed in 2019. These rates typically range between 6.2% and 8.2%, but Rode suggests that market expectations embedded in these leases may be overly optimistic.
Rode emphasizes that initial rentals on custom-built, long-term lease properties should not be considered reflective of current market conditions. These rentals often mirror the developer’s need to secure a return on elevated building costs and land values, rather than prevailing market demand.
Demand Drivers: Manufacturing and Retail
The demand for industrial property is primarily influenced by the performance of the manufacturing and retail sectors. Manufacturing provides the foundation for demand in production space, while retail drives the need for warehouse and distribution facilities.
However, the manufacturing sector has shown weakness. Output decreased by 2.4% in Q1 2025, with a 1% decline over the previous 12 months. Production levels remain well below pre-pandemic figures, highlighting long-standing issues in the sector.
Compounding this, the Absa Purchasing Managers’ Index (PMI) has remained below the neutral level of 50 since late 2024, signaling contraction in the sector. According to Rode, the ongoing difficulties are exacerbated by global trade tensions, internal political uncertainties, and disruptive weather patterns.
Retail, in contrast, has been more robust. Real retail sales increased by 4.1% in Q1 2025, with a 12-month growth rate of 3.5%. This growth has been fueled by several key factors:
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Higher take-home pay, which grew by 10% nominally year-on-year by March 2025.
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Lower interest rates, with the prime lending rate averaging 11% in early 2025, down from 11.6% in 2024.
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Implementation of the two-pot retirement system, allowing partial access to retirement funds, freeing up consumer liquidity.
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The government’s decision not to raise VAT, which helped support consumer confidence.
These developments have fed into increased demand for warehouse space, particularly next-generation logistics facilities that support online retailing and modern supply chains.
Next-Generation Warehousing and Market Dynamics
Demand for modern warehousing is a central feature of the industrial market. These buildings are tailored for racking systems that require ceiling heights above 15 metres, often rendering older facilities less suitable. Although some existing buildings can be retrofitted, many cannot meet current requirements.
Online shopping growth and evolving distribution strategies among retailers are accelerating this shift. Key players like Fortress, Growthpoint, SA Corporate, and Attacq have redirected their investment focus toward these logistics-centric properties. For instance, Fortress reported a 1.5% vacancy rate in its logistics portfolio for the second half of 2024 — an indicator of robust demand.
While these large-scale logistics facilities are not included in Rode’s core rental survey, they often command above-market rents, reflecting construction and land costs and the high-quality nature of the tenants and buildings involved.
Business Confidence and Industrial Demand
Business confidence, as tracked by the RMB/BER Business Confidence Index, plays a predictive role in industrial property performance. Historically, changes in confidence have led to changes in vacancy rates with a six-quarter lag. When sentiment improves, businesses eventually expand and absorb more space.
Following the lows of 2023, confidence improved due to more stable power supply, lower interest rates, and the establishment of a Government of National Unity (GNU) after the 2024 elections. However, internal disputes between key GNU parties (ANC and DA) over major policies in 2025 have halted momentum, causing renewed uncertainty.
Despite this, current confidence levels remain higher than during previous troughs. Major forecasters have adjusted their GDP growth estimates downward, with the BER expecting 1.5% in 2025 (down from 2%) and the IMF projecting 1%. Even so, this would be a notable improvement from the 0.6% growth in 2024, suggesting continued low vacancy rates ahead.
A potential geopolitical risk remains in the form of South Africa’s strained trade relationship with the USA, particularly around the AGOA agreement. Positive diplomatic engagement, including a meeting between Presidents Ramaphosa and Trump in May 2025, has offered some reassurance.
Real Rentals and Operating Costs
While nominal rentals continue to grow, real rentals (adjusted for construction-cost inflation) have generally trended downward since the late 2000s. Construction costs have outpaced rental growth, reducing the real value of rental income, particularly from a developer’s perspective.
To anticipate future market rental growth, Rode compares current market rents to pioneer rentals — the rates achieved on newly built, bespoke properties. These higher rents reflect today’s building and land costs and serve as a forward-looking benchmark for future market values as supply tightens.
Operating expenses also affect the profitability of industrial properties. These typically exclude utilities (which are borne by tenants), but sharp increases in utility costs — often exceeding inflation — can erode tenants’ capacity to absorb rent increases.
Regional Trends and Observations
In Q1 2025, Cape Town and Durban recorded converging rental levels for the first time since 2005. Cape Town saw a 15% year-on-year rental increase, reflecting high demand and limited supply. Durban’s rentals remained stable at elevated levels, influenced by the city’s challenging topography and slow land releases.
Rental growth across key regions since 2019 has ranged from 19% to 35%, highlighting broad-based strength in the industrial market, though Durban has underperformed slightly over this period.
In terms of vacancy rates, most regions maintained healthy levels under 5%. Cape Town and the East Rand recorded slight improvements, while Gqeberha also saw reduced vacancies. Central Witwatersrand, though slightly higher at 3.4%, still qualifies as a low vacancy rate.
Meanwhile, speculative development remains constrained due to high construction costs and developer concerns about return on investment, ensuring that supply does not outstrip demand.
The South African industrial property market continues to show resilience and strength in 2025, backed by:
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Low vacancy rates
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Sustained rental growth
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Shifting demand toward modern logistics and warehouse space
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Stable capitalisation rates and cautious development activity
Despite challenges in the manufacturing sector and global uncertainty, factors like online retail growth, rising take-home pay, and improved consumer confidence underpin strong fundamentals. Unless macroeconomic or political conditions deteriorate sharply, the sector is well-positioned to maintain its outperformance relative to office and retail segments.