A MANUFACTURING recession, which some economists have said is a possibility, may have a detrimental effect on industrial property and cause vacancies to increase.
But property pundits say industrial property, which has been the top-performing commercial property sector over the past two years and has extremely low vacancy levels, will hold its own if economic growth is marginal or even flat. Manufacturing output stuttered in May, with the annual pace of growth slowing to 0,7%, reinforcing concerns the economy’s second-biggest sector may be sliding into a recession.
According to Statistics SA, production in May fell 3,8%, but this largely reflected a surge in April prompted by more working days.
Growthpoint Properties, SA’s largest listed property company, is reasonably confident the industrial property sector’s fundamentals will remain “quite firm” if there is any growth in the economy or “even if it remains flat”.
Growthpoint fund executive Estienne de Klerk says Growthpoint’s industrial portfolio is worth about R5,5bn and is probably the largest industrial portfolio in SA. “I think from our point of view if there is a recession and the production and logistics sectors reduce in size, then it would have an effect on our business and we could see an increase in vacancies,” says De Klerk.
“However, if there is any growth in the economy, or even if it remains flat, we are reasonably bullish the fundamentals will remain quite firm. The reason for this opinion is that there are several barriers to increasing industrial building supply.”
He says these barriers include a shortage of zoned industrial land and electrical supply. “Then, obviously the cost of construction, compounded by a higher interest rate environment, make industrial development quite difficult and not feasible at current rental levels.”
De Klerk believes opportunity lies in the refurbishment of industrial facilities, which will become more attractive because they have zoning and utility supply.
“The quality of facility and the quality of the client will also have an effect on the sustainability of income. This is where you separate the men from the boys, and the good quality properties with good clients will prevail.”
JSE-listed Vukile Property Fund, which has a 17% exposure to industrial property, says the industrial properties it owns are geared to distribution more than manufacturing.
CEO Gerhard van Zyl says if there is a “recession in the manufacturing sector” it will increase vacancies in industrial properties in general.
Property economist Francois Viruly, of Viruly Consulting, says industrial property has been a top performer in the commercial property sector over the past two years and he expects it to continue to perform “very well” this year .