Rode raises red flag on industrial property

17-11-2008

Erwin Rode of property economists Rode & Associates has urged investors to exercise caution with industrial property, particularly in the short term.

‘There’s no doubt that industrial property has enjoyed a very good run,’ says Rode. ‘However, the two pillars of industrial property, retail trade (incorporating both warehousing and distribution) on the one hand, and manufacturing and production on the other, are currently under severe economic threat. As we all know, retail has already contracted significantly and this in turn could have a negative effect on manufacturing production. Even exports to a world that is stalling are under threat in spite of the lower external value of the rand.’

Recent research conducted by Rode & Associates already indicates that industrial rental growth in certain areas of the country has started to moderate. Notes Rode: ‘This in turn has important implications for industrial land prices as these are leveraged by industrial rentals.

‘The calculation of the value of land is always a residual item and is therefore very sensitive to the variables that drive this value, such as market rental.’

However, forecasts Rode, the slowdown currently facing industrial rentals and, consequently, land values will in all probability be a temporary one: ‘This is still a fundamentally healthy arena, and what my team and I believe we will see in industrial property is a temporary situation caused by the slowdown in the business cycle, rather than the overall slowdown in the property cycle.’