SA REMAINS THE LARGEST, MOST SOPHISTICATED WAREHOUSING AND LOGISTICS MARKET ACROSS AFRICA
Despite South Africa's weak economic climate outlook, demand remains stable for prime warehouse and logistics assets according to Knight Frank's Africa Logistics & Industrial Review H2 2021, with logistics facilities remaining the best performing commercial asset class in South Africa.
Most occupier activity is confined to lease renewals and the consolidation of space, which is in turn, linked to a flight to quality. As a result, prime rents have remained stable at approximately USD$5.50 per square metre in Johannesburg, with this trend expected throughout 2021.
Furthermore, anecdotal evidence indicates that demand for the prime warehousing sector is set to increase, underpinned by the vibrant e-commerce sector leading to the emergence of a distinct two-tier market.
Mixed rental performance
Nairobi has remained the best warehousing and logistics market over the past year, recording the highest increase in rents between 2019 and 2021. Furthermore, evidence of the city's rising profile is reflected in the fact that it accounts for 50% of new space requirements.
Across the 29 cities that Knight Frank monitors, a huge disparity in rent exists. At USD$10 per square metre and USD$9.80, Kinshasa and Dakar, for example, rank as some of the most expensive cities for prime warehousing in Africa, while Blantyre (USD$2.50 per square metre) is the cheapest.
Luanda, on the other hand, experienced the most substantial fall in average warehouse lease rates, which currently stand at USD$5.50 per square metre, down from USD$10 per square metre in 2018. Furthermore, prime rents have remained stable in some cities including Cairo, Algiers, and Maputo.
Despite this varying performance, anecdotal evidence suggests occupier activity in the sector is increase across the continent. For example, new warehousing and logistics requirements were up by 13% quarter-on-quarter (q/q) in Q2. These requirements have been underpinned by the agriculture, FMCG, and manufacturing sectors with overall requirements ranging between 5 000 - 10 000 square feet size brackets.
Demand is eclipsing supply in some markets
The demand for the best warehouses continues to eclipse supply across most cities that Knight Frank monitors. In Nigeria, for example, the long-term scarcity of quality warehousing has led to most multinational blue-chip occupiers, operating out of purpose-built, owned facilities around Ikeja, Sagamu, and Agbarawe. This trend means that demand for purpose-built prime warehousing space remains robust.
Knight Frank estimates that there is a total requirement of approximately 1 million square metres across the south-west region of Nigeria and within proximity to Lagos, underpinned by the agriculture, retail, and manufacturing sectors.
For context, the total size of the purpose-built warehousing market in Nigeria currently stands at approximately 300 000 square metres. Already, developers such as Agility, are leveraging on this opportunity with plans underway to develop 270 000 square metres of warehousing space. Furthermore, Agbara Logistics Parks are set to develop an additional 35 000 square metres to their existing stock.
In sharp contract to the dearth of stock in Nigeria, developers in Kenya have been responsive to growing demand, delivering over 170 000 square metres of speculative prime warehousing over the last 5 years, prior to which the prime market was confined to a limited number of developments.
A further boost to supply is expected to materialise in the form of developers such as Improvon and Africa Logistics Properties' plans to deliver over 400 000 square metres of speculative space to the market by the end of 2024.
Despite most stock being built speculatively, absorption rates remain high, driven by the agriculture and FMCG sectors. Unsurprisingly, average occupancy rates stand at 80%.
The buoyancy of demand is clearly reflected in the active development pipeline, but also in the performance of rents. In comparison to pre-pandemic rates, Nairobi recorded the highest increase in average prime rents across Africa, from USD$4.70 per square metre in 2018 to USD$6.
Demand for urban locations driving up land values
Across the continent, declining land supply, coupled with increased demand, is putting upward pressure on land prices, as owner occupiers compete with institutional investors for the best locations.
Some cities' land values in established industrial nodes have grown between 2015 and 2021 such as Lagos (58%) and Nairobi (42%). In addition, infrastructure developments such as the Chinese-built ring-road network in Nairobi are prompting some occupiers to explore areas beyond traditional industrial hotspots.
As a result, these areas in the periphery of some cities have seen industrial land values appreciate by as much as 35% in the Namanve (Uganda) region and 34% in Nairobi between 2015 and 2021. With access to urban industrial land expected to remain a key barrier in the sector, due to competing land uses, the value of prime industrial land in some cities appears set to continue rising for the foreseeable future.
Investment appetite is high but stock is limited
Appetite for industrial stock across Africa remains strong with investors attracted to the sector's strong income profile and positive market fundamentals such as rising urbanization levels, which is driving demand for urban logistics facilities.
In addition, industrial assets, command attractive yields of approximately 12% on average compared to 9% for both retail and offices and 6% for residential.
Overall, South Africa remains the largest and most sophisticated warehousing and logistics market across the continent, recording over 450 000 square metres of sales transactions in 2020 (RCA). For the rest of the continent, attracting global institutional capital has been a challenge due to the lack of investible grade assets.
However, this is changing with some developers looking to plug this gap. For instance, Kuwait-based Agility is developing over 1 million square metres of warehousing across Lagos, Abidjan, Maputo, and Accra, with plans to expand into other cities.
In addition, regional developers such as South-African based Improvon and Africa Logistics Properties are set to deliver over 100 000 square metres of purpose-built warehousing space in Nairobi by 2024.
Anecdotal evidence suggests that investor interest is steadily growing which has been demonstrated by key transactions over the past 5 years with a recent example being GRIT's landmark sale and leaseback deal with Orbit Africa.
3 key drivers for prime warehousing demand
- E-commerce to drive future uptake
While the penetration of e-commerce was already rising pre-Covid-19, online sales revenue increased by over 28% to USD$27 billion in 2020, compared to 2019, across Africa. This uptick in online retail sales is set to continue with e-commerce revenue expected to almost double to USD$46 million by 2025 (Statista).
As a result, Knight Frank expects this will bolster demand for warehouse and distribution space. In South Africa, for example, requirements for new, modern, and efficient distribution centres remains stable and demand has outperformed all other asset classes and industrial sub-segments resulting in an overall income return of 9.2% and capital growth of 0.8% over the past 12 months.
A good example of the focus on prime warehousing space has been Takealot's recent leasing of approximately 11 000 square metres of space in Montague Park in Montague Gardens, Cape Town. In addition, global e-commerce giants are also fuelling this flight to quality. Amazon's inauguration of the largest logistics centre in Africa, against the backdrop of their formal entry into Egypt, is evidence of this.
2. Over USD$400 billion in infrastructure development set to boost industrial activity
The fast-paced development of major industrial corners in recent years has played a significant role in transforming the warehousing and logistics sector which has long been held back by poor infrastructure.
According to the 2018 Logistics Performance Index (LPI), a World Bank survey of operators providing feedback on the logistics 'friendliness' of countries, logistics infrastructure across Sub-Sahara Africa scored 2.20 out of 5, highlighting the need for increased investment in the sector.
This compares to a score of 4.37 in Germany - the highest ranked nation in the LPI. At present, Knight Frank estimates that there are over USD$400 billion worth of rail and road developments taking place across the continent. These developments are set to drive increased intra-Africa trading.
In Eastern Africa, for example, increased infrastructure development along the northern corridor that links Kenya to Uganda (and the Democratic Republic of Congo) has resulted in over 150 000 square metres of prime warehousing being developed in Nairobi alone in less than 6 years - almost 90% of all stock delivered during this period.
Furthermore, due to improvements along the north-south corridor that links South Africa to other Southern Africa countries, anecdotal evidence shows 3PL's in Johannesburg are relocating to the eastern and north-eastern parts of the city, attracted by the superior and extensive road network infrastructure.
In addition, infrastructure development along the West Africa Growth Ring, that links countries such as Ghana, Côte d'Ivoire, and Burkina Faso, are set to unleash more than 1 million square metres of purpose-built prime warehousing according to Knight Frank's estimates. Knight Frank forecasts that cities such as Lagos, Accra, and Abidjan, are likely to be prime beneficiaries.
At a more macro level, alongside increased infrastructure developments, the implementation of the African Free Trade Agreement will also be key lynchpins to the growth of the prime industrial sector.
3. Governments are setting the stage for growth
Across Africa, most governments have ramped up initiatives on manufacturing and industrialisation as part of measures to boost economic activity in the wake of the pandemic. Increased competition for international investment has sparked a wave of new industrial policies and subsequently, a boom in the creation of Special Economic Zones (SEZs) has ensued across Africa.
The UN Centre for Trade and Development (UNCTAD) estimates that there are currently over 180 SEZs in Africa, with a further 51 SEZs under development. Kenya (61) has the highest concentration of SEZs, followed by Nigeria (38) and Ethiopia (18).
In addition, several governments are facilitating the development of industrial parks within these zones to drive foreign direct investment. In Ethiopia, for example, the establishment of the Ethiopian Industrial Parks Development Corporation has aided the delivery of over 15 million square metres of warehousing in just 6 years.
This initiative has been instrumental in generating over USD$735 million in government revenue and creating over 80 000 jobs. Furthermore, Uganda's government has ramped up its industrialisation efforts by unveiling plans to expand the Kampala Industrial and Business Park (KIBP). The 4 million square metre park expansion will take the total number of companies at KIBP to 500 with a total investment capacity of USD$3.5 trillion.
Once fully completed and occupied, KIBP is expected to increase the total number of people employed on the estate to 200 000 and to generate USD$540 million in taxed per annum.