You may be aware that commercial property is a fair investment option – and sometimes even more profitable than private property.
But did you know that focusing on industrial property could also offer you good returns? We look at what this entails, and the additional benefits this presents.
Tip: Don’t leave your savings depreciating in a general bank account. Put it in a unit trust instead.
What differentiates industrial and commercial property?
According to Rael Levitt, CEO of Inospace, commercial property is built and used solely for business purposes and it can be divided into three categories - retail, office, and industrial. “Therefore, industrial property is a sub-sector of the larger commercial property market,” says Levitt.
“Industrial property is used for industrial purposes. That sounds obvious, but it comes in more shapes and sizes than the other two sectors, and it covers a huge range of business types,” says Levitt.
He explains that in South Africa industrial property can be broken down into three types - manufacturing, warehousing, and logistics and storage. He points out the following types of use within the category:
- Industrial property can be used to house offices that service the industrial user and can be used for selling goods on a wholesale basis.
- Small industrial sites include single- or double-storey buildings zoned for industrial use. These often have flexible interior space, usually a mix of warehouse and office space.
- Mini factories or mini-industrial spaces are used by small businesses such as mechanics, small distributors, and manufactures.
- Larger industrial properties include medium- to large warehouses and factories that are designed to manufacture or store goods. They include distribution companies such as third-party logistics.
- Self-storage also falls under the industrial property sector. Most of the sites operated by companies such as Stor-Age, are industrial sites.
- On the larger end of the scale are the “big box” industrial spaces. These enormous industrial properties are used as logistics centres that store and distribute finished goods to stores, or directly to customers. Takealot and Shoprite Checkers operate such facilities.
READ MORE: Is property a good investment?
The benefits of investing in industrial property
Levitt says that investing in industrial real estate has been good business for investors globally over the last three years.
“Industrial property has gone from the ugly duckling of commercial property to the darling in a short period of time,” says Levitt.
“This is due to online shopping or e-commerce, which has been the driver for the rapid acceleration of warehouse demand across the world. This has resulted in an ultra-competitive environment for potential investors of these properties,” he adds.
Levitt explains that, according to global real estate company CBRE, at the end of 2019, US e-commerce sales accounted for 15% of overall retail sales. By 2030, e-commerce sales are projected to account for 43% of overall retail sales.
“These stats have been accelerated by Covid-19 as most consumers were forced to buy goods and groceries online, many of whom were adopting online shopping for the first time,” says Levitt.
“However, it’s important to note that e-commerce users only account for a quarter of the overall industrial market, so the demand from all industrial users will be an even higher number,” he adds.
He points out that industrial property is generally functional and well-located. Most industrial properties border urban areas and have low maintenance costs.
“They offer investors an excellent opportunity to achieve higher yields than any other property type,” says Levitt.
He explains that the demand for industrial property used to be strongly correlated with consumer spending, so it was very much tied to the state of the economy. Presently, market demand is also correlated to how a consumer spends, this being online shopping, and this provides the industrial market a healthier, more stable, and resilient source of demand.
“Investors are betting this demand will provide stability, rent growth, and appreciation into the future,” says Levitt.
How can you invest in industrial property?
Levitt says that there are a few ways to invest in industrial property, the first of which is to purchase shares in listed property funds and property REITs (real estate investment trusts) that are listed on the JSE.
“Although most of the South African REITs are not industrially oriented, many have varying degrees of exposure to industrial property. That said, these broad-based commercial property investors have not performed well over the last year and have shown investors poor returns,” says Levitt.
The REITs that have focused on industrial property (and their various sub-sectors) have been the strongest performing commercial real estate property companies. This includes Equitus (big box logistics), Stor-Age (self-storage), Sirius (multi-use industrial parks in Germany) and Stenprop (multi-use mini industrial properties or rentals in the United Kingdom).
“Purchasing shares in the listed sector is a more liquid form of holding property, but it also suffers from the fluctuations of the stock market,” says Levitt.
He explains that directly purchased industrial property, the most widely used method of ownership, can be acquired vacant or with tenants. There is a wide range of options for investors, and most commercial real estate brokers have a list of industrial properties on the market.
“Companies like Inospace sell smaller sectional title spaces in branded industrial parks, while larger developers sell larger units. Investors would typically have to put down 20-30% in cash and they could fund the rest of the purchase with most of the traditional South African banks,” says Levitt.
Always diversify your investments
According to Scott Picken, CEO of Wealth Migrate, the bottom line is that diversification is key. You should be diversified across multiple assets, countries, currencies, and partners.
“The benefit of technology is that you can access most investments. There are many other good quality investments out there and, as an investor, you should certainly keep your ears and eyes open but, more importantly, be aware of the risks,” says Picken.
He insists that you should never keep all your eggs in one basket. You need to be aware that you can access investments across the globe.
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