Why investors opt for Industrial Property
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Why investors opt for industrial property
11 Feb 2015
Commercial property in South Africa continues to present lucrative investment opportunities, specifically within the industrial sector, and provides consistent returns for discerning investors.
Rod Harris says as South Africa’seconomic output shifts and relies less on heavy manufacturing, the industrial sector has adapted, resulting in an increased demand for quality warehousing facilities.
A stronger shift towards warehousing and distribution facilities has changed the profile of industrial property over the last few years, and this change offers more rewarding opportunities.
This is according to Rod Harris from Sheldon Harris Properties, who says as South Africa’s economic output shifts and relies less on heavy manufacturing, the industrial sector has adapted, resulting in an increased demand for quality warehousing facilities.
The Investment Property Databank’s (IPD) South Africa Biannual Property Indicator, measured over the six months to 30 June 2014, indicates that the industrial sector outperformed the other sectors, with a 9.8% total return (5.1% income, 4.7% capital growth). With vacancies at a low level of 2.7%, it indicates a supply shortage in the sector.
Harris says if one examines the market place and understands the source of current demand, identifying a suitable asset need not be challenging.
He says understanding the trends affecting industrial property enables them to advise their clients when to take advantage of those shifts in the market.
Industrial property is often avoided as an investment option as the dynamics in acquiring such an asset is multi-faceted, and can be arduous. Like any top-end investment, it requires a great deal of consideration and getting insightful advice will help an investor to select a quality property.
Harris says potential investors should keep the following in mind:
Identifying the asset
Harris says properties best suited to accommodate this demand consist of larger warehouses, small office components and a proportionate amount of yard for loading. Yard space is critical to accommodate sizable delivery vehicles, as is docking and dispatch facilities.
For this profile of user, the power requirements are minimal compared to that of a manufacturing concern. These businesses operate with fewer staff and provided that the facility is maintained effectively, the tenant is likely to remain in place for the long term.
He says for an investor, the opportunity is to buy a sizable, free standing property in a prime industrial node at a lower cost per square metre relative to commercial, retail or residential investments, and enjoy an income from a relatively low maintenance tenant for a longer term.
Ross Sheldon, from Sheldon Harris Properties, says a recent example of this is a property in Airport Industria, Cape Town, which was sold for R22 Million to a local investor, who identified a national tenant. The client was able to pay a small premium and make the transaction viable based on the strength of the lease.
The right node
There are a combination of factors required to achieve this result, most important of which is securing the correct tenant. Logistics, handling and storage companies fit this profile and aim to be located close to the airport and harbour.
Industrial nodes adjacent to every airport and harbour across the globe will generally see high demand. Within South Africa, the same is true and they have seen consistent growth in these nodes, in all the major centres.
Harris says they are seeing an increasing number of investors managing to secure national and international tenants in large industrial facilities with long term leases.
The demand for logistics warehousing is growing and investors are benefiting from secure income over a longer term from a less maintenance intensive asset.
Buying vs building
The buy versus build case should always be considered, provided there is ample land available. Premium land is in short supply, especially in prime industrial nodes, and where this is the case, it becomes necessary to consider expanding or renovating existing properties.
Existing owner-occupiers in these nodes looking to raise further capital for expansion will provide an opportunity for an investor to buy on a sale-and-leaseback basis where the existing owner remains on as a tenant, providing the buyer with immediate income from an occupier already entrenched in the facility.
A sale-and-leaseback agreement offers a one-transaction benefit where the buyer acquires a property with an existing tenant, as opposed to a more laborious and risky two-transaction process where the buyer acquires a vacant property but still needs to secure a suitable tenant.
Sheldon says a prime example is a recent transaction in Epping Industria where the property was sold for R11.8 million subject to the current owner signing a five year lease with a net return of 10.25%.
Author: Rod Harri, Sheldon Harris Properties