Sectional title industrial property: It makes good business sense for SMEs.
The greater need for faster delivery of goods requires more efficient space utilization – and thus smaller space requirements. Why's this phenomenon so beneficial for SMEs?
You mean, stop renting? Yes.
In the new post-pandemic world, factors like low interest rates, and the availability of smaller 'micro-industrial' spaces combine with industrial sector-specific variables – like high rental returns and longer average occupancy – to produce a very real investment opportunity for small and medium-sized enterprises:
What's more, industrial property that has always been tightly held by institutional investors is now available to smaller businesses and investors.
The ownership rights
While "freehold" or "full title" describes the transfer of full ownership rights when an SME owns a property, which includes the building and the land beneath it, "sectional title" describes separate ownership of units or sections within a development or park. By buying into a sectional title scheme, the SME acquires a section or sections and an undivided share of the common property.
At Inospace, we're seeing significant growth and opportunity in the industrial category, due to the greater need for speedier delivery of goods, the knock-on effect on e-commerce and logistics, and users scrambling for smaller spaces.
This is why we've set up sectional title schemes at specific Inospace parks. The land and common property are jointly owned by all owners in the scheme, managed by a body corporate. And the costs of maintaining the greater park are shared.
Plus, sectional title ownership in an Inospace park typically comes with parking bays and exclusive use yards – in addition to all the benefits and services of our serviced business park offering.
The sector itself
"But the property sector is in decline!" If you believe this, you're not in industrial property. Industrial is booming. And if you want to hear this from someone other than me, what about Dror Poleg, in his book Rethinking Real Estate (2020).
He confirms, "Compared to other commercial assets, industrial properties have so far retained the classical characteristics that institutional investors know and love:
low re-tenanting costs and healthy demand from occupiers that sign long leases and pay on time".
e-Commerce was here to stay long before the pandemic; it has simply been accelerated, with penetration growing in leaps and bounds since March 2020. Industrial properties are no longer just quiet places to store goods. They are logistics and fulfilment centres, the launching pads for direct-to-consumer delivery.
In many instances, the last mile begins at an industrial property.
"From the outside," adds Poleg, "industrial space may seem dull: a bunch of lightweight structures full of cardboard boxes or machines located next to major transport hubs... But industrial assets can be more dynamic than many office or residential buildings."
This is born out by the data coming out of South Africa, where only the industrial sector has managed to recover to an activity rating above its pre-lockdown first-quarter-2020 level – while retail and office ratings remain well below pre-lockdown levels.
These days, industrial assets also enjoy higher liquidity, making them easier to acquire and exit. As such, industrial assets currently seem to be a safe haven. After all, goods sold online must be made and stored somewhere. Local supply chains remain necessary, whether or not people work from home.
The fact remains that, without industrial property – in the form of a storage facility, a distribution facility, a manufacturing facility, a production facility, or an R&D facility – the global economy as it is at the moment simply can't function.
Enter the SME
The greater need for faster delivery of goods requires more efficient space utilisation – and thus smaller space requirements. Why's this phenomenon so beneficial for SMEs? Because industrial units come in a large range of interesting sizes.
Gone, or less prevalent at least, are the mammoth "take it or leave it" spaces of the past, offered by a small cadre of dominant players.
Today, the SME who has had to rent for years can leverage low interest rates and greater bank support to buy a space and make it exactly what they want, with their own custom structures, hardware systems, and distribution channels.
They can own the unit more quickly, given that the norm is a 10-year bond, not the 20-25-year-bond we're accustomed to in residential property. For owner-occupiers, buying is a great way to avoid annual rent escalations.
Are there downsides? Yes. Finance can be a hurdle, but this is likely to be mitigated by interest rates and by banks becoming increasingly aware of and sensitive to this market. And the need for a deposit (which, at 20-30%, is sizeable compared to residential property) can bean inhibitor, especially given COVID-19-era cash flow.
But the fact remains that sectional title makes industrial property more affordable for smaller sector investors. So, as larger spaces become vacant, we are creating smaller units from them –ready and waiting for the SME to buy a 'home' there.