Port Elizabeth industrial rentals gaining ground

05-04-2004

Underdog Port Elizabeth is fast catching up with the industrial rentals of other cities. Since 1999, the city's industrial rentals have grown relatively faster than those of the other main industrial conurbations.

Rode’s Report editor Dirk De Vynck says this improved performance comes on the back of a strong demand for industrial space by especially the automotive and related industries, and to a lesser extent from business related to the Coega development.

According to Graham Boyd from Majola Boyd, the increased demand for space from the automotive industry has come especially from companies whose business is centred on catalytic converters.

The increased demand for space has already led to PE’s industrial vacancies dropping from around 13% at the beginning of 2001 to the current ±7,5%.

Although this decline in vacancies is for all unit sizes combined, there has been a greater demand for larger units than for smaller units and hence one can assume that larger units will have a relative lower vacancy. This is so as larger units are hardly ever built on spec, as opposed to smaller units, resulting in a greater shortage of the former when demand picks up.

The increase in the demand for industrial space can also partly be responsible for the decline (strengthening) in PE’s industrial capitalization rates noted in the last quarter of 2003.

Capitalization rates — the non-listed property sector’s equivalent of the forward earnings yield of shares — decline when prices rise, holding constant market rentals.

However, the increased demand for industrial space has not yet translated into a spate of industrial-building construction. The reason for this is that, despite their increase, industrial rentals are still too low to warrant new industrial developments.

Countrywide, real rentals have been trending downwards since the early 1980s, which is a clear reflection of a contracting demand for industrial space. This was, and is, fuelled by the lack of performance in the manufacturing industry, where the demand for manufactured goods is an important proxy for the demand for industrial space.

Still, the general consensus is that the rand will weaken again, which should underpin domestic exports and hence local manufacturing. At the same time, a recent study by Unisa’s Bureau for Market Research shows that manufacturing could in future increasingly move towards the country's coastal cities because of a greater export focus by SA industry.

“This will further drive up the demand for industrial space in cities like Port Elizabeth, which, together with the expected impetus from Coega, may in a few years lead to rental levels catching up to those of Cape Town, Central Witwatersrand and Durban,” says De Vynck.