Potential seen in Industrial Property Sector

ompared particularly to the retail market, less so the office sector, there is a growing view in the market that the industrial property sector is worthy of a more detailed assessment.

Listed property groups are shifting to clean industrial properties focussed on light manufacturing, warehousing and distribution as harder manufacturing struggles.

Despite weak economic growth in SA, experts believe the industrial property sector offers great potential for growth, especially in developing specialised warehousing and distribution centres.

“We are working in a very low growth environment in SA with a challenging labour market and there is not much demand for new factories and the like. Nevertheless, there is demand for logistics and warehousing, where owners and operators specialise,” said Fortress Income Fund CEO Mark Stevens.

Last year, Fortress took over Capital Property Fund in the largest merger in the history of the South African listed property sector.

Through the deal, Fortress, which had a focus on retail shopping centres that served transport nodes, was able to enhance its industrial offering.

The takeover of Capital by Fortress created a megafund and has generated strong returns for Fortress’ investors already. Fortress’ assets more than doubled to R55bn after the merger.

The company has a directly held R24.28bn property portfolio, which has a 48.4% weighting towards logistics and industrial buildings.

Dividend payouts to Fortress B shareholders for the 12 months to June increased 95.28% to 137.50c per share. This was the highest growth declared by the company since listing in October 2009. Fortress has separately traded A and B shares, and the A shares receive 5% distribution growth each period.

Stevens said Fortress was large enough and had enough expertise to service large retail, construction and engineering tenants who had more complicated requirements than many smaller tenants.

“There are opportunities in industrial property but it helps if you are large enough and have enough expertise to serve tenants whose desires are often shaped by global trends.

“These include the use of more efficient materials, building buildings higher rather than longer and green aspects,” said Stevens.

But some experts argue offshore industrial opportunities could be more attractive than domestic ones.

“We are very positive on international industrial property,” said Garreth Elston, portfolio manager at Alternative Real Estate Capital Management.

“The sector has benefited markedly from the shift of consumers to online shopping and has seen robust demand,” Elston said.

“Locally, the market has struggled along with the economy, and our view is that without a return to growth the local industrial sector will lag somewhat. As long as economic growth remains constrained in SA, industrial developments will struggle to replace lost tenants, and tenants have the upper hand versus landlords at the moment,” Elston said.

“Globally, the industrial sector and more specifically big-box distribution centres have been doing incredibly well on the back of increased demand and little or no new supply,” said Grindrod Asset Management chief investment officer Ian Anderson.

A major driver of demand had been increased online retailing, with retailers now needing more warehousing.

“This is different in SA, where we have seen an increase in development activity and significantly less demand from online retailing,” Anderson said.

Another specialised industrial property owner that is performing relatively strongly is Equites Property Fund.

Since listing in June 2014, Equites’s share price has risen about 46% to close at R15 on Monday.