Industrial rentals still drifting lower

29-03-2011

Despite still drifting lower, industrial rentals in the major conurbations managed to end 2010 on a better note.

In the fourth quarter of 2010 — when compared to the same quarter a year earlier — the contractions in market rentals on the Central Witwatersrand (-3%) and Durban (-1%) were at least not as large as in the first three quarters of 2010. In the Cape Peninsula, rentals were at the same level they were a year earlier, while in motor city Port Elizabeth (+8%) the strongest growth in rentals was recorded.

A likely benefit for industrial property must be the improvement in the utilization of manufacturing production capacity. The graph that follows shows how underutilization — due to insufficient demand — has dropped for a number of quarters now. This, naturally, bodes well for industrial property because the demand for industrial space can be said to be a derived demand; that is, firms rent (more) industrial space as an input to (higher) production.

On top of that, domestic consumer demand remains quite strong, in spite of households’ stubbornly high levels of indebtedness. Should these conditions prevail, then industrial property is also likely to benefit.

Having said this, we are of the opinion that there will be so many demands made on the fully-stretched consumer in months and years to come that the outlook for consumer spending − and, therefore, the need for warehousing space from this source – is likely to be modest.