29 Oct The light industrial opportunity at the end of the tunnel
While South Africa remains stuck in the longest business cycle downward phase since World War II, the light industrial property market has quietly transformed, offering investors a glimmer of hope in an otherwise dreary economy.
According to independent lending specialist, Paragon Lending Solutions, light industrial property (buildings smaller than 1000 square metres, typically used for assembling, repairing, packaging etc.) is delivering enticing returns.
“The smart money is going after light industrial properties. This property class is appealing to investors who are looking for better alternatives to the low yield in residential, retail or office space over the last few years. Light industrial is enjoying yields of around 11 and 12 percent and investors are paying attention,” explains Wilhelm Jonker, business developer at Paragon Lending Solutions.
Jonker says there are a number of reasons for the rise in light industrial property as an investment class:
“From shared office space to micro-apartments, there is a general move towards smaller space for businesses and individuals alike. Industrial is no different. Smaller spaces translate into lower overheads and allow flexibility. These properties are in demand and vacancies in the sector are low. It is also a relatively safe investment class because there will always be small businesses in need of premises to trade from, despite economic conditions. Maintenance costs are low and ownership is comparatively hassle free.”
Guy De La Porte, head of Airport Property adds: “Properties with tenants and a predictable income stream are easier to finance and always in good demand. Also in demand are mini warehouse units for sale with tenants in secure parks, although buyers expect higher yields on purchase price in this market. A clear trend I can see is in the UK and USA where growth in industrial demand has been for large “Big Box” logistics warehouses driven by growth in online retailing. This is happening here to a lesser extent but I expect this to increase in the future”.
Rick de Sousa, Commercial Executive at financial service provider, Fedgroup, says he has definitely seen an uptick in interest for this property class.
“While property value across all asset classes have been flat for the past few years, industrial is performing better. We aren’t seeing many new builds, but the number of transactions has remained fairly high which drives the prices up. We see most of these coming from tenants who are performing well and who want to expand, or who want to move to a better area.”
Jonker says there are definitely benefits to owning an industrial property.
“Tenants tend to be longer-term and they pay all the costs relating to the property due to triple-net leases, making it much easier to manage. From the landlord’s perspective a commercial lease can be a more secure income stream than residential, as it is easier to act against a defaulting commercial client than their residential counterpart. For property owners burnt by tenants in the residential space, this can be an attractive selling point,” he says.
The sentiment is borne out by the Rode and Associates Q2 State of the Property Market that points to industrial property’s inflation-beating rentals and low vacancy.
Caveat Emptor still applies
While the opportunity in light industrial is clear, finding the right finance can be tricky.
“Banks are forced to be a bit more conservative on the loan to value side. If it’s a specialised property, they would usually limit the loan to 70 percent, although some will approach 90 percent if it is owner occupied,” Jonker explains. “The financing process can be complicated, as the assessment of a business or group of businesses’ financial performance and ability to repay a loan is a much more in-depth process than, for instance, an individual applying for a home loan.
The other key cautionary of the asset class is location. While light industrial is less price sensitive, de Sousa warns that if you are left with a vacant property, it may take longer to fill than a residential property.
“Larger properties outside the traditional nodes can be snapped up at real bargains, delivering excellent yields. However, should something go wrong you could be left standing with a property that is hard to lease. Properties closer to the traditional nodes are generally a safer investment. On the whole, light industrial is a safe investment. You can claim your VAT back so it reduces your investment and the triple net lease means all your expenses are covered,” de Sousa explains.
Given how light industrial is performing, investors would be wise to investigate opportunities in this asset class.
“We see real opportunity in this space. However, it is not a simple task to get into the game. There will be challenges when it comes to financing the investment. Working with a lending specialist will allow you to cut through the complexities. We know what is required and can work with you to avoid pitfalls. We also have an extensive network to tap into should you need to access alternative capital,” Jonker concludes.