MSCI Inc, a global company providing real estate market data for over 32 countries, recently identified South Africa’s industrial property sector as the country’s strongest performer in 2016. Although the country’s complete property returns were down 190 base points from 13% in 2015 (to 11.1%), the industrial property sector continues to perform well.
Why has there been an average decline in returns?
Low capital growth due to factors such as volatile socio-political conditions as well as red tape for business owners has affected the office sector. This sector of the commercial real estate market only saw returns of 7.6% in 2016. According to SA Property Insider, property in CBDs as well as decentralised office facilities were among the worst performers.
The decline from 13% returns in 2015 to 11.1% overall commercial real estate returns in 2016 is also due to South Africa’s weakened economy. The real estate market will typically mirror the country’s broader economic climate.
Why have industrial property returns remained strong?
There are multiple reasons why industrial property has continued to yield higher returns for investors in South Africa. For one, the contractual income base of the sector, where businesses take out longer leases (typically between 5 and 10 years), has helped to keep the sector stable. Commercial real estate has also continued to provide good returns because cost management in this sector is rigorous.
What sectors of commercial real estate performed best in 2016?
The best performing segments in the commercial real estate market in 2016 were high tech industrial property and neighbourhood shopping centres. The former yielded whopping returns of 18.1%, while shopping centres yielded 20.3% returns.
BusinessLIVE claims that industrial property in South Africa ‘is no longer real estate’s ugly cousin.’ The publication lists some of the factors for industrial property’s strong returns in 2016. One is the demand for distribution warehouse space. As more people embrace online shopping (as the ecommerce space in South Africa has grown increasingly competitive), distribution warehouses experience higher demand. The industrial property upswing is also being fuelled by increased product imports.
Robin Lockhart-Ross, managing executive at Nedbank CIB Property Finance, points out that there has been a trend towards better returns in industrial property investment for years. According to Lockhart-Ross, ‘The majority of our new lending has been for the funding of large-scale logistics, distribution and assembly facilities in industrial and activity parks.’
What does the future for industrial property returns look like?
Pundits such as Engelbert Binedell, the industrial divisional director at Growthpoint Properties, say industrial property will continue to yield healthy returns for months to come, even if growth is slowed due to the country’s background economic woes. Because lease terms for industrial property can last for 5 to 10 years, landlords gain reliable income from large-scale operations, even during tougher economic times.
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