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Industrial rentals are on the rise as vacancies in Durban

Posted On Monday, 04 October 2004 02:00 Published by
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Price surges in residential property have finally spilt over into the industrial property market, according to Adrian Raw, the KwaZulu-Natal chairman of the SA Property Owners' Association

October 3, 2004

By Rodney Hayter

Durban - Price surges in residential property have finally spilt over into the industrial property market, according to Adrian Raw, the KwaZulu-Natal chairman of the SA Property Owners' Association, who gave notice this week of a marked firming over the past six months of gross rentals in industrial leases on existing stock to more than R20 per square metre.

He was referring to contract renewals on five-year lease terms for good quality space in the New Germany area. However, good industrial rental growth is being achieved in most locations.
The trend, according to Raw, who bases this recent growth on current demand and dwindling vacancies in good industrial space, carries all the hallmarks of further price surges and the inevitability of industrialists having to invest in new buildings.

Demand, underpinned by the rise of business sentiment to its highest ever level, as measured by the SA Chamber of Business, has all but wiped out the city's traditional industrial property vacancy of the past few years.

New Germany is fully taken up, Mahogany Ridge is inching towards full capacity, and Jacobs, Mobeni and Maydon Wharf are extremely limited in vacancy in terms of quality, size and access.

Riverhorse Valley industrial park, the province's new 300ha industrial flagship, has experienced a steady take-up.

The process from land acquisition to building readiness has become an expensive exercise. Apart from the installation of essential services, Riverhorse's costs have been exacerbated by extensive excavation and levelling. Building land is being offered to developers in Riverhorse for about R300 per square metre.

Gross rental rates required at Riverhorse to make an investment attractive to developers and property owners range between R28 and R33 per square metre. Industrialists need to recognise that a property development cost is made up of a number of different aspects. Rentals are a factor of the total development cost, not just the construction cost of the building.

This is something that is not always understood by property agents, who are often the conduit between the industrialist and the developer or property owner.

Firstly, the land cost needs to be taken into account. In an example of an industrialist requiring a standard warehousing facility of 5 000m2, Raw advised that a site area of 8 000m2 might be required to cater for parking, loading, truck-turning space and yard storage, which would give a land cost as a factor of the building size of R480 per square metre.  

Secondly, building construction costs vary according to the industrialist's requirements of racking height, office component size and finish specification, power requirements, yard finish specification and security requirements. Raw advised that a construction cost (including external works) of R1 400 per square metre was not unreasonable.

Thirdly, professional fees for the design of the building, the services of a quantity surveyor to handle the tender process and engineer's design and supervision input could easily be 10 percent of the construction cost, which in the example would equate to R140 per square metre. Should a developer be involved in the process, a project management and development facilitation fee of 3 percent could easily be expected, adding R42 per square metre to the cost.

Finally, other costs need to be taken into account, which could include insurance during construction, municipal rates during construction, loss of interest on borrowed finance during the development process, plan approval fees, survey fees, legal fees, transfer costs, marketing costs and leasing commissions to a property agent if applicable. These costs, when added, could equal as much as R300 per square metre.

Thus, in our example, the total development cost would equal R2 360 per square metre. This is the number that a property owner would then use to determine a starting rental for the industrialist. For a modest initial return of 12 percent, a net monthly rental of R23.60 per square metre would be required.

Operating expenses to cover rates and taxes, security, water, landscaping, garden maintenance and general repairs and maintenance may add a further R5 per square metre to that net rental to give a gross starting rental rate of R28.60 per square metre a month.

Lease agreements on new developments are unlikely to be less than five years in durtion and industrialists can expect escalations of 10 percent a year. The argument that this ran ahead of inflation was irrelevant as the inflation rate was volatile and industrial rentals did not form part of the basket of goods used to determine the consumer price index.

The take-up of Durban's industrial space coupled with the improving economic conditions and projections of stable interest rates make it attractive for investors to move into new developments.

Potential tenants must be aware of the upward pressure on rentals as a result of rising stock shortages and the unavoidable costs of new development.

Publisher: Cape Argus
Source: Cape Argus
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