Strong drivers supporting robust SA, CEE logistics real estate sectors

Despite facing various challenges, such as slow economic growth, political instability, supply chain disruptions and rising municipal rates and insurance costs, South Africa’s industrial property market has demonstrated remarkable resilience and adaptability, with the warehousing and logistics sector delivering robust performance.

The South African Association of Freight Forwarders (SAAFF) Cargo Movement Update for October highlighted various challenges in the global logistics sector. Adverse weather, labour strikes, port congestion, and regional conflicts contributed to global supply chain disruptions that affected the local market.

Locally, the critical work of the National Logistics Command Centre (NLCC) and its efforts to stabilise operations, modernise infrastructure, and foster an enabling environment for trade is bearing fruit. These reforms continue to pave the way for a more robust and efficient logistics network in South Africa.

While the future looks promising, global supply chain disruptions continue to impact the industrial and logistics real estate sector, boosting demand for warehouse space as companies look to secure storage for their goods to create a buffer against shipping delays and unpredictability. Security remains essential for existing tenants looking to grow their footprint or new tenants looking to enter a specific location or market. Fortress’s logistics parks provide tenants comprehensive security measures, including 24-hour offsite video monitoring and highly trained on-site security officers. Furthermore, the logistics parks have all been recently developed using the latest designs, which minimise energy consumption, maximise fire protection and offer solar, fibre and water backup solutions.

This increased demand led to higher prices and a shortage of available space, according to the JLL.Africa Q1 South Africa CRE Market Snapshot report, the industrial sector continues to see above-inflationary rental growth supported by positive supply-demand dynamics. The report puts the national vacancy rate of more than 20,000m² for logistics properties at 0.5%.

This trend is evident in the R15.3 billion Fortress South Africa logistics portfolio, which exceeded expectations in the company’s latest financial report. This reflects strong demand for high-quality warehouses in prime locations, as evidenced by the like-for-like net income growth of 7.7% for the 2024 financial year.

Based on the gross lettable area (GLA), vacancy in the logistics portfolio increased slightly from 1,2% on 31 December 2023 to 1,8% on 30 June 2024. This remains low by historical standards, allowing Fortress a more selective tenanting approach and greater flexibility in negotiating terms with new or existing tenants.

The looming festive season will add demand as businesses prepare for this critical shopping period to mitigate or avoid stockouts and delayed deliveries. The industrial and logistics real estate market dynamics suggest that these demand-side pressures are unlikely to abate soon.

In response to these challenges, companies are exploring various strategies, such as implementing smart technologies to improve inventory management, optimise space utilisation, and use green solutions to reduce operating costs.
In response to the growing demand for energy-efficient warehouses, which minimise ongoing energy usage and carbon emissions, Fortress plans to develop and expand its existing portfolio with energy efficiency at the forefront of its mind. To formalise this, Fortress has undertaken a project to obtain sustainability ratings on all our logistics parks, and we have completed BREEAM ratings on our entire CEE portfolio, which obtained ratings of excellent and above, as well as EDGE ratings for our latest developments in South Africa.

Additionally, ongoing investment continues to develop new industrial real estate projects to meet soaring demand. In this regard, Fortress has a logistics development pipeline of 165,000 m² in South Africa at an estimated cost of R1,1bn to complete. If favourable market conditions persist, completion is estimated within three or four years.

Similar trends are emerging in the Central and Eastern Europe (CEE) markets, which are becoming increasingly attractive hubs for industrial and logistics investment.

Strong demand for industrial and logistics space has been driven mainly by the third-party logistics (3PL) and retail sectors. Domestic consumption has risen due to improving living standards and higher disposable incomes, necessitating more efficient supply chain solutions for both e-commerce and physical retail offerings.
The region also supports diversifying and expanding economies, leveraging connectivity to major European markets via the continent’s well-developed transportation infrastructure, including a network of highways, railways, and airports, to support growth.

The R3,6 billion Fortress CEE logistics portfolio is primarily invested in Poland, where it recently completed developments in Łódz, Zabrze, and Bydgoszcz. Fortress also has a logistics park in Bucharest, Romania.

According to CBRE forecasts, prime rents will increase by around 4% at an aggregate European level, driven by occupiers looking to maximise efficiency and comply with sustainability goals. With inflation easing, this moderate prime rental growth in 2024 should still represent an increase in real terms.