What do the high industrial property prices mean for PUTs?

Prices of industrial land and property have been reaching record highs, but what is the implication for Property Unit Trusts (PUTs)?

Hardly a week goes by without an article being written about industrial land and property prices shooting the lights out, with terms such as "sky-high" and "top dollar" being bandied about. The situation has been described as a "crisis".

In line with the traditional laws of supply and demand, industrial land and property prices have rocketed off the chart as demand has raced ahead while supply is not keeping pace.

The South African economy has shown continual expansion since 1999, with real growth accelerating in the past three years to average around 5% p.a. This is the longest period of economic upturn in the post-war era and such expansion has resulted in unprecedented demand for industrial property.

However, as Craig Hallowes, spokesperson for the Association of Property Unit Trusts (APUT), notes: "The supply of zoned industrial land, with the adequate provision of bulk services, has simply not been able to keep pace with the growth in demand. Not many new townships are being planned, but more significantly, approval times for rezoning and for land subdivision can result in delays of up to 18 months and, in some cases, over two years. At the same time, environmental impact assessments, especially in the case of heavy industry, are a further hindrance.

The depiction hasnt exaggerated the situation: zoned industrial land is now seeing prices 100% higher than a year ago and in some parts of Midrand, prices are over 150% up on levels ruling just 18 months ago. Record prices are being fetched across the country.

But what does this mean for Property Unit Trusts (PUTs)?

"The cost to develop industrial property is rising on the back of both the substantially higher land prices as well as much higher building costs. As a result, rental income from industrial property is expected to rise," notes Hallowes.

There are essentially two PUTs with good exposure to industrial property: SA Corporate Real Estate fund (SA Corp), which has some 61% of its portfolio value in industrial property, and Capital Property Fund with 44% of it portfolio in industrial property.

"I don't believe that it is too late to buy PUTs to benefit from this phenomenon," states Hallowes. "The funds already have exposure to the industrial sector and, with rentals being continuously renegotiated, this will flow through to unitholders."

A further factor which is likely to see rentals rising is the low level of vacancies in industrial property. SA Corp has already seen its industrial portfolio perform ahead of expectations and currently has no vacant space in the portfolio. The situation is similar across most portfolios: the Investment Property Database (IPD) index released early in April shows that the vacancy rate for South African industrial property fell to 3% in 2006, from a peak of 12% in 2001.

With the existing constraints in the market, the situation is unlikely to be relieved in the near (or even medium) term, so PUTs which already have industrial exposure are likely to continue to benefit.