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Industrial land values become moving targets

Monday, August 13, 2007

Industrial land values are now in the same prime position that residential property found itself in during the last few years.

At some stages of the recent residential upswing, property values were changing at such a rapid pace that it became risky to use recent sales to establish current market value. The same can now be said of industrial stand values, which are being propelled to new highs daily by low industrial vacancies, strong demand, high building costs, and hence, strong rental growth.

According to surveys conducted by Rode & Associates during the first quarter of 2007, industrial stand values grew at double-digit rates during the last year — the Cape Peninsula’s stand values were up by 63%, Central Witwatersrand’s were 68% higher, Durban’s 90%, and Port Elizabeth’s by a staggering 103%.

Although industrial rentals also grew phenomenally over this period, stand values produced much higher growth.

The reason for the relative out-performance by stands, says Erwin Rode, is that land is a residual item in the so-called residual-land-valuation model used by valuers and developers alike. “The effect of this approach,” says Rode, “is that, in the absence of major building-cost growth, growth in market rentals will lead to a multiple increase in stand values — i.e. rising rentals have a leveraging effect on land values.”

The following table illustrates that a 20% increase in rentals coupled with only a 10% increase in building costs, will allow developers to pay as much as 48% more for a stand.

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