Industrial rental and stand value growth fizzling out

26-10-2009

Industrial rental growth in all of the major industrial conurbations is fizzling out, with growth in stand values following suit.

Says economist John Lottering of Rode & Associates: ‘Considering the tremendous strain the manufacturing and retail trade sectors have been under – what with both sectors being the lifeblood of the industrial property market – a deceleration in the remarkable rental growth rates achieved over the past few years, was a given.’

Commenting on this, Erwin Rode, CEO of Rode & Associates, notes: ‘While growth in both industrial rentals and stand values has decelerated significantly over the past few quarters, stands have been hit harder. In fact, in some of the industrial areas stand values are already contracting.’

Furthermore, explains Rode, besides there being a strong positive correlation between rental and stand value growth, past research by Rode & Associates has also found that the latter is also highly leveraged by the former. The reason for this is that land is a residual item in the residual-land-valuation model used by valuers and developers. The effect of this approach is that, in the absence of major building-cost inflation, growth in market rentals will lead to a multiple increase in stand values.

‘And of course, vice versa,’ notes Rode. ‘Decelerating market rental growth can also lead to multiple decreases in stand values. The upside of this is that now might be a good time to buy stands at bargain prices!’