Industrial Property Investments – A Certain Asset in Uncertain Times.
The uncertainty of global markets currently haunts investors. The certainty of income streams on industrial property is proving to be comforting for commercial and industrial property investors. The industrial real estate sector in South Africa has been the best performing real estate industry during the last year, as recent MSCI statistics show. The MSCI further reports that at an industry level, industrial property was the top performing sector during the year. A total return of 13.6% has been achieved, outperforming retail at 12.6%. The office sector continued to struggle on the back of subdued capital growth. It was particularly hard hit in 2016 with a total return of 7.6%. The graph below confirms the excellent performance by industrially focussed funds.
Tony Bales of Epping Property adds that various tenants are feeling the squeeze, and interest rates are probably at the bottom of their cycle. On the whole, income streams from industrial property investments have held up well in South Africa. The Epping Industrial Property Index indicates the strong growth in rental income and the low levels of vacant space to let.
“Investors have been reluctant to sell their income producing property assets. These assets are currently showing their resilience to downturns. The listed real estate sector has been one of the best performing sectors on the JSE in the last few years. Also, companies have continued to increase net incomes year-on-year. Rental growth should continue in this sector for some years, albeit at a slightly reduced rate.”
According to Bales, property assets that do not show a positive cash flow have been put under severe pressure. Vacant land and vacant buildings are proving harder to sell in the current market – even if purely because financiers are taking a far more conservative approach. Making sure one’s industrial lease contracts are correctly structured is important to lock in those cashflows.
“With the global turmoil likely to last longer than initially anticipated, commercial and industrial property investors need to plan accordingly. Tenants wanting longer leases should be taken seriously. Whatever can be done to enhance the medium term certainty of income streams will improve a property’s value. It is this certainty that many current investors (and financiers) are seeking.”
“Conversely, value investors are circling like vultures on any opportunity that may show uncertainty and so a perceived reduced price. These investors often have the cash and knowledge to re-position and re-tenant buildings and hence add significant value.”
“Add certainty to one’s income streams, and more value will automatically follow,” concludes Bales.