The driver of this expected surge in income distribution will be strong fundamentals.

CEO Erwin Rode says the listed property sector has shown strong distribution growth over the past four years or so but generally this applied to companies and funds with large retail property exposures.

“Now the time has come for those with greater exposure to offices and industrial property to start accelerating distributions. We believe funds with serious exposure to offices and industrial property could see distribution growth topping 15%-20% over the next few years. This is (due to) strong property fundamentals.”

He says shopping centre distribution income will “decelerate to below 10%” because of strong supply and moderating consumer spending.

Brian Azizollahoff, CEO of listed property loan stock company Redefine Income Fund, agrees with some of what Rode says. There is “no doubt” industrial rentals are increasing at a “rapid pace”, and 15%-20% growth is possible. “But there are a number of factors that need to be considered. Where leases expire and the lease periods were long with escalations of say 12%, what you will probably find is the leases expire at current market levels or even higher. That is not where the growth will come from.”

Azizollahoff says the growth potential is in older industrial properties in traditionally less prime industrial areas, as those leases will have started from a lower base and will have risen at a slower rate.

“Expiry rentals will be substantially below market rentals. That is where you will get high levels of growth because there has been very little industrial development over the past few years so existing industrial space will command market rental rates.”

He says there is strong demand for industrial warehousing, and locations previously not considered to be in prime areas, for example Wadeville in Germiston, are now in demand. Rentals are expected to rise in these areas.

“To build new buildings today, rentals have to be at R25/m² and more to justify the building costs of about R3000/m² (for industrial property), which is why existing space where rentals range up to R17/m² can easily be renewed at substantially higher rentals. There are also many older leases expiring at between R12/m² and R15/m² in the prime areas and where it is possible to achieve between R20/m² and R22/m².”

Economic growth of about 5% will drive office performance as many companies have outgrown their space. “The supply of offices has not kept pace with the increased demand from expanding businesses and new businesses, which means the demand for existing offices has had the effect of driving rentals upwards.”

New prime offices cost about R13000/m² to build, requiring rentals of R100/m² and more to make them attractive to developers, Azizollahoff says. “Portfolios that own substantial holdings of offices will benefit where leases expire at rentals below market levels and where vacancies are filled at current market rates.”

Azizollahoff does not expect an immediate fall-off in income distributions from retail property: “There is still sufficient consumer spending which is driving turnover rentals…. Possibly over time the growth will not be as robust but there won’t be a drop.”

Ndabe Mkhize, investment analyst at Coronation Fund Managers, says occupancy rates are high in the industrial sector and the lack of existing space puts upward pressure on rentals. “This scenario is likely to persist until after 2010.”

Mkhize says listed property unit trust SA Corporate, which he believes has a good industrial portfolio, has seen growth of 28% in industrial rentals on leases expiring between January and June.

But he says the office sector has “not come to the party convincingly” as some of the major office nodes are reporting low nominal growth, according to the Rode’s Report. “The occupancy rates are also as high as the industrial ones. We have to see vacancy rates dropping to below 5% before the office rentals grow exponentially. If current economic conditions persist, it’s a matter of time before the office sector starts firing on all cylinders.”