A bitter pill for a struggling industrial property market

15-12-2010

Disappointing, although not entirely unexpected, was the waning in overall economic growth in the third quarter of 2010.

The bitter pill to swallow — from an industrial-property point of view — was that the slowdown was in large part attributable to a contraction in manufacturing and spare capacity utilisation. This, given industrial property’s reliance on a strong manufacturing sector, could mean more downward pressure on market rentals. In fact, in the third quarter of 2010, growth in rentals remained poor. The best rental performance came from Port Elizabeth (+1%); followed by the Cape Peninsula, where market rentals showed no growth. On the Central Witwatersrand (-4%) and in Durban (-5%) contractions in market rental were still observed.

For now, lower interest rates — with its hopeful promise of stronger consumer spending and, hence domestic demand for manufactured goods — provides the most hope for the manufacturing sector. However, this hope must be tempered by the lagged effect of changes in interest rates on economic activity, the highly-praised and very necessary National Credit Act, high levels of consumer indebtedness, the new-found conservatism of banks, rising service charges (think Eskom); job uncertainty, prospective hikes in income tax (if only through bracket creep); and so on.

Any help from abroad? Not likely. Think: a strong rand exchange rate and uncertainty regarding economic conditions in most of South Africa’s major trading partners.