Property investors need to be able to time their investment at the best stage in the rental cycle because not only does rental growth affect values within the industrial property sector but is a large determinant of business costs.
Knowing precisely what market rentals are doing is also an essential part of all rental negotiations, says Tony Bales of Epping Property.
Furthermore, businesses looking to enter into a new lease must also be aware of the rental cycle as they could lock into a longer-term lease that would limit the upside in rentals if the market rentals are accelerating faster in the short term.
Epping Property has analysed the historical data for industrial rentals in Epping Industria in Cape Town as far back as 38 years and says the findings reveal that periods of low growth and/or periods of high growth can significantly influence shorter-term trends, but that the long-term growth tendencies are nonetheless apparent.
“Average growth in rentals over time, short growth periods, stagnant growth periods and sudden downturns can sometimes skew one’s idea of long-term trends.
“However, the results speak for themselves and industrial rentals have grown by 9.23% per annum compounded over the last 38 years.”
Bales explains that during the higher inflation era of 1980 to 1999 industrial rentals grew by 12.76% per annum, and the average contractual lease escalations were 12% per annum during this period. During the lower inflation era of 1999 to 2018 industrial rentals grew at 5.81% per annum.
“Compounded over the last 12 years, industrial rentals have grown by 8.04% per annum.”
Rentals in Epping Industria are viewed as a good sample for average long-term rentals in Cape Town and, quite possibly, the entire industrial property sector in South Africa, Bales adds.
Due to the depressed state of the economy and the lower GDP cycle, industrial rentals are currently “flat”/in a low growth phase. This means that rental growth in the short term will be limited. It is currently a good time to be negotiating a new (or renewed) lease for industrial property as landlords are keen to retain tenants or fill their vacant spaces. Also, when the market does pick up, industrial rentals will accelerate faster than inflation.
“One does have to be mindful that each set of industrial premises has different attributes. Therefore, each and every premises will have different market rentals at any one point in time,” Bales says.