Moderately growing industrial rentals displaying slack demand

22-12-2011

Disappointing for the demand prospects of industrial property must have been the recent moderation in economic activity.

The graph that follows shows the robust inverse relationship between industrial property vacancies and current economic conditions, as proxied by the South African composite coincident business-cycle indicator. (The coincident business-cycle indicator is a broad-based measure of current economic conditions, helping economists and investors to analyze the business cycle.)

We note that during the tentative economic upswing that started in the latter half of 2009, industrial vacancies didn’t come down, thereby (temporarily) discontinuing the strong inverse relationship with economic activity (see shaded area of graph). The loss of confidence among economic actors and the then strong rand are possible explanations for this.

The cooling in economic growth during the third quarter of 2011 and the persistent uncertainty in the global economy have now prompted a growing number of economists to scale down their outlook for the economy. Thus, should economic activity actually continue to stutter and possibly further dent confidence amongst economic actors, the result could – no, would – be sustained feeble demand for industrial space. Naturally, this would in turn not augur well for industrial market rentals.

Meanwhile, slack in the demand for industrial space is already being displayed by the poor to moderate growth in market rentals. In the third quarter of 2011, market rentals on the Central Witwatersrand and in Durban mustered growth of 5% − the best regional performance. The Cape Peninsula followed with growth of 4%, while in Port Elizabeth market rentals were actually somewhat lower (1%) than they were a year ago.

Enjoy the festive season ...