INDUSTRIAL

MARKET ENVIRONMENT

FY15 has been a tale of two markets. Industries and exports less dependent on utilities, like warehousing, remain more resilient. Conversely, those industries with exposure to commodities and Rand weakness were most sluggish. This trend was clear in our diversified industrial portfolio.

The slowdown in developments resulted in the gradual take-up of the overhang of new industrial property stock, so normality is returning to the market. In addition, there is less exuberance in the market, making expectations more realistic now.

User commitment remains intact, albeit with shorter lease terms and less capital commitment. South Africa traditionally has a resilient culture and its people have a tendency to find new ways to thrive in changing conditions.

There is an increased appreciation of industrial property as a subsector, with its perceived resilience, historical lower rentals and higher capitalisation rates. Our talented industrial team includes skilled people who together have weathered negative cycles before, so we are also enjoying the benefits of a stable, experienced group of specialised industrial property professionals.

Our sector faces challenges from the rising interest rate environment, water and electricity cost increases, load shedding, labour unrest, declining commodity prices and the slump in retail sales. Motor vehicle sales, considered a proxy for the industrial property sector, were negative. Manufacturing confidence is the lowest in 10 years. We also face infrastructure failure and an increasing number of business failures and business rescues. The failure of Ellerines is one of the most significant examples, leaving Growthpoint’s industrial portfolio with a 46 000m² vacancy.

The industrial sector’s performance in FY15 was largely sentiment driven. There was less commitment to expansion, lower capital investment and our users had a distinct focus on cost-cutting. Responding to this, we have applied significant focus on ways of reducing energy consumption and recovering utilities costs. Research around sustainability initiatives has also accelerated, driven by market conditions. We’ve also explored other revenue streams.

PERFORMANCE

Three years ago we identified a difficult cycle approaching as telegraphed in our report of FY14. It is firmly here.

The performance of our diversified portfolio remains positive, although different subsectors are affected differently by the prevailing cycle.

We have kept rental escalations positive, in excess of 8.0%. We’ve also kept our arrears at satisfactory levels and placed strong emphasis on utilities management and recoveries. However, vacancies are increasing, renewal growth is mid-single digit and lease terms are shorter.

The impact of the Ellerines business failure was significant for us. Several other large vacancies also occurred during the year, mostly because of the underlying economic forces. For a short time, our vacancy factor reached the highest level it had been in five years. This has already improved. We’ve achieved significant lettings that will bring vacancies down to market-related levels.

Rent renewals remained under pressure. For us the emphasis was strongly on keeping clients, especially as we believe the sector will remain under pressure for the foreseeable future.

Bringing world-class facilities to market at attractive yields

ENVIRONMENTAL COMMITMENT

After the success of our environmentally innovative Grundfos development, which achieved the first Green Star SA rating for an integrated industrial and office development, we have actively explored including sustainable elements in all our developments and redevelopments. Greenfield Industrial Park is one such development.

There is still no green rating tool for the sector, so we are continually learning and applying the skills from our counterparts in the office and retail sectors. However, there is now a GBCSA Green Star SA tool under development. GBCSA has accepted our Greenfields Industrial Park development, near Cape Town International Airport, as a pilot project for its Green Star SA Industrial building rating tool. This confirms our cutting-edge position in providing green industrial buildings.

One of our latest initiatives is to integrate solar PV on rooftops. This has huge potential benefits for our clients.

Where possible, we use clients as the suppliers of the materials, skills and services we need. This vertical integration within our portfolio also provides business-to-business opportunities for our clients. It has really taken off and is proving to be yet another important advantage for our clients.

INDUSTRIAL VALUE BY TYPE

PROSPECTS

After experiencing tough trading for FY15, largely due to the Ellerines demise and several other large vacancies, we believe our diversified portfolio should offer some resilience in FY16.

The negative drivers of the sector are all factors outside our control. We remain focused on that which we do well and can control. Our focus is on our core portfolio, our clients, lease retention and value extraction from the portfolio.

We have a solid development pipeline to stand us in good stead and have some superb land opportunities, specifically Samrand, Wadeville and a site on the R300 in Cape Town. In addition, acquisitive growth has become a reality because of normalising capitalisation rates and seller expectations.

Besides seeking alternative revenue streams, we are fortunate our portfolio values per square metre and in-force gross rentals are still relatively low. This creates an opportunity for upward adjustment. We also have a solid team with vast experience.

All this places us in a position to weather the storm of the coming year.

Offering a full range of industrial facilities to our client base

Value adding joint ventures

Strategic land acquisitions

Key performance areas

	FY15		FY14		Increase/ (decrease)
Gross property revenue (R’million)	1 149		1 074		75
Property expenses (R’million)	(257)		(235)		22
Net property income (R’million)	892		8398		53
Property expense ratio (%)	22.4		21.9		0.5
Vacancies (%)	5.3		3.0		2.3
Arrears (R’million)	9,3		4,9		4,4
Bad debt provision (R’million)	3,8		1,7		2,1
Average gross rental (R per m2/month)	43		42		1
Forward yield (%)	10.1		10.1		–
Average in-force escalation (%)	8.4		8.3		0.1
Weighted average lease period (years)	2.8		2.9		(0.1)
Asset value (R’billion)	10,4		9,3		1,1
Number of properties	229		230		(1)
GLA (m2)	2 225 075		2 194 459		30 616
Value (excluding bulk) per m2 (R)	4 589		4 127		462
Capital expenditure (R’million)	530		234		296

Top 10 industrial tenants

	Tenant	GLA* m2		% of total industrial GLA
1	The Bidvest Group Limited	57 036		2.7
2	Adcock Ingram Holdings Limited	27 280		1.3
3	Scania SA Proprietary Limited	23 341		1.1
4	Kulingile Metals Proprietary Limited (Robor)	49 000		2.3
5	Distell Limited	45 658		2.2
6	The Laser Transport Group Proprietary Limited	36 013		1.7
7	Allied Electronics Corporation Limited	27 872		1.3
8	Pioneer Foods Proprietary Limited	20 734		1.0
9	Barloworld Limited	18 516		0.9
10	DCD Dorbyl Proprietary Limited	72 252		3.4
Total of Top 10		377 702		17.9

* Ranked in terms of gross monthly rental

Top 10 industrial properties by value

	Property name		Location	Value Rm		% of total industrial portfolio		GLA* m2		% of industrial GLA
1	Growthpoint Industrial Estate		Germiston	388		3.7		61 245		2.8
2	Hilltop Industrial Park		Germiston	325		3.1		74 089		3.3
3	Montague Business Park (25%)		Cape Town	322		3.1		19 470		0.9
4	Adcock Ingram		Johannesburg	205		2.0		21 536		1.0
5	Rivonia Crossing 2		Sandton	186		1.8		19 778		0.9
6	N1 Business Park (20%)		Midrand	183		1.8		18 937		0.9
7	Omni Park		Johannesburg	178		1.7		41 331		1.9
8	Central Park		Cape Town	163		1.6		49 135		2.2
9	Kulungile Building		Kempton Park	153		1.5		49 000		2.2
10	Meadowbrook Estate		Germiston	142		1.4		9 684		0.4
Total of Top 10				2 245		21.7		364 205		16.5

INDUSTRIAL PROPERTIES TOP 10 BY VALUE

2 225 075m2 total GLA

R1,1 billion total revenue

We believe our diversified portfolio should offer some resilience in FY16

GROWTHPOINT INDUSTRIAL ESTATE GERMISTON The 61 245m2 A-grade industrial park is situated on a 259 455m2 site in the Route 24 node in Meadowdale. Valued at R388 million, it provides around-the- clock cutting-edge security in an environmentally respectful and energy efficient setting for 32 businesses. It is 96% let and major tenants include Barloworld Logistics, Avon Justine, Fast & Furious and Ricoh SA. Growthpoint Industrial Estate has 40 000m2 of available bulk for tenant driven developments.
HILLTOP INDUSTRIAL PARK GERMISTON With superb highway frontage and access, Hilltop Industrial Estate encompasses some of the most functional industrial premises in South Africa. This B-grade industrial park is valued at R325 million and is currently undergoing a major upgrade. It comprises 19 businesses in 74 089m2 of lettable area on a 263 446m2 site area. It is 95% let and major tenants include Scania, Cartoon Candy, Capital Africa Steel and MAN Diesel and Turbo SA.
MONTAGUE BUSINESS PARK (25%) CAPE TOWN Growthpoint’s 25% joint ownership of this newly developed industrial park is valued at R322 million and represents a current GLA of 19 470m². This A-grade industrial park, in the sought after Montague node, is home to 18 businesses, which include leading brands such as Takealot.com, Supergroup, ABB SA and The Radiant Group. There is high demand for further development of the park’s available bulk.
ADCOCK INGRAM JOHANNESBURG This 21 536m2 A-grade property is a key facility for leading South African pharmaceutical company Adcock Ingram Healthcare. It has a site area of 47 011m2, is fully let to Adcock Ingram and valued at R205 million.

RIVONIA CROSSING 2 SANDTON This well-located showroom and value centre spans 19 778m2 of A-grade lettable area on a 37 933m2 site. This multi-tenant centre is fully let and houses 17 tenants and is valued at R186 million. Its major tenants include Honda Rivonia, The Barnyard Theatre and Safari and Outdoor Warehouse.
N1 BUSINESS PARK (20%) MIDRAND Growthpoint’s 20% stake in the well located park between Midrand and Pretoria is valued at R183 million and represents a GLA of 18 937m². With superb visibility to the busy N1 motorway, this A-grade industrial park is home to 14 businesses including Shoprite, Mazda SA, Elliot Mobility, Zodiac, Tevo and MTN. The landscaped and high security N1 Business Park is almost completely developed.
OMNI PARK JOHANNESBURG With its superb position in the high-demand Aeroton industrial node, this industrial park is 85% let. It provides 41 331m2 of B-grade industrial space on an 85 014m2 site area. The property’s appeal is underpinned by excellent highway access, to both the north and south of Johannesburg. It is valued at R178 million and major tenants include BCE Food Services and Brandcorp.
CENTRAL PARK CAPE TOWN This landscaped industrial park provides exceptional security and good access to main arterials for 24 businesses in 49 135m2 of A-grade space on a site area of 97 216m2. Valued at R163 million, it is fully let and is home to major tenants Retail Logistics, Fawecia Emissions Control and Conop Projects.
KULUNGILE BUILDING KEMPTON PARK This single tenanted, large industrial facility is situated in the prominent industrial node of Isando. With a lettable area of 49 000m² under roof, gantries and cranes in all bays and large yard areas this industrial facility is valued at R153 million.
MEADOWBROOK ESTATE GERMISTON Home to Grundfos, this 9 684m² facility is situated on the very prominent intersection of the N12 and R24 interchange. This high–tech facility, with superb visibility to two major motorways, is valued at R142 million. This 5-Star, Green Accredited, integrated office and industrial facility represents the very best of South African property innovation and is the first property to have been awarded this accolade.