Commercial property - highs and lows

30 Oct 2012

According to the South African Property Owners Association and Investment Property Databank South African Biannual Property Indicator, there was a moderate improvement in the property market over the past six months.

Manhattan Plaza located on Edward Street in Tygervalley, Cape Town is owned by Spear Properties and the company says they have a 3.5 percent vacancy rate in their portfolio and attributes this to transparency when dealing with tenants.

The report reveals that overall property investment returns recorded a 5.9 percent comprised of 1.5 percent capital growth and 4.4 percent income return for the first six months of 2012.

Operating costs were cited as an obstacle outstripping income growth and pushing cost ratios to unattractive levels.

Electricity costs continue to increase and now make up one third of the total operating cost bill for property owners while rates and taxes constitute a further 20 percent of the total, according to the report.

As of June 2012, the office market vacancies reached 15.0 percent from 12.1 percent in December 2011, with rental growth of 0.1 percent.

Office properties have also seen the highest growth in operating costs across all property sectors, according to the report.

Org Geldenhuys, managing director of property of Abacus DIVISIONS, says while it was generally expected that there would be an uptick in the commercial property sector in the fourth quarter of this year, it seems this recovery will now be delayed until the first and second of next year – at least.

He says some operating costs – such as general municipal bills have increased above the CPI rate.

“Property rates are now increasing year-on-year at double the inflation rate – and the ever-increasing charges from an embattled Eskom are also taking their toll.”

Landlords sit on vacancy levels that are still too high – and are not coming down as fast as they had wished for and in an endeavour to get vacancy levels down – they offer the market “special short-term offers” on office space, he explains.

Read the article on rentals and tenants here.

“We are seeing this in a number of office parks, such as Highveld Techno Park in Centurion, which is on a special drive to lure tenants during the next few months with really attractive rental offerings.”

Operating costs were cited as an obstacle outstripping income growth and pushing cost ratios to unattractive levels.

According to Quintin Rossi, managing director at Spear Properties, the commercial property market is in a very interesting and exciting phase for nodes such as Sandton, Rosebank and Longmeadow in Gauteng, La Lucia Ridge and the developing areas around Umhlanga in KwaZulu-Natal and V&A Waterfront and Century City in Cape Town.

Rossi says he does not believe that the general commercial market in historic CBDs (excluding Pretoria CBD) and established office nodes have been basking in the sun of tenant abundance over the past three years.

This he says is because of the global financial crisis and the impact it has had on the sector, in particular the commercial office market, seeing dozens of companies moving towards space optimisation and telecommuting as opposed to increased overheads on office space.

In Cape Town, he notes major 2012 property developments such as the new Old Mutual Portside development along with the new office development for law firm Bowman Gilfillan in the CBD and the new Chevron head Office in Century City along with various other developments underway in this precinct.

However, he says the reality is that these tenants must emanate from somewhere and in this current market, very few new developments are as a result of new tenants entering the market but rather due to tenant relocations, which inevitably result in competition for tenants by landlords as opposed to a decrease in vacancy rate.

“We will continue to see higher than normal vacancy rates in the nodes that have an oversupply of office space in particular the Cape Town CBD and I wouldn’t believe there to be any major rental growth for these nodes over the next two to three years placing even further strain on property yields,” notes Rossi.

He firmly believes in the attractiveness of the industrial warehousing sector and wishes to invest even further in this node in future.

“Over the past two to three years Cape Town has seen an increase in demand for quality industrial warehousing driven by demand from large retailers wishing to optimise their supply chain operations.”

He points out that recently they have seen the completion of the new JD Group distribution centre situated at the Cape Town International Airport and various other large distribution centres across Cape Town.

The need for the latter mentioned distribution centres will increase as communities become more technology savvy given that we can place an order for a DVD or CD via our smartphones giving rise to smaller retail footprints as less purchases take place at actual retail stores and more purchases take place online.

Quintin Rossi, managing director at Spear Properties, says as owners it is their responsibility to ensure their properties are energy efficient and they have recently appointed a utilities management specialist company to co-develop with them a strategy that will be rolled out across their portfolio and would result in savings for both landlord and tenant.

Rossi says the industrial market is experiencing higher demand currently, which results in property developers seeking land at the right price or older buildings to consolidate and develop / redevelop to meet this rising demand for warehousing in both Cape Town and greater South Africa. 

He says the property market will recover with time - some sectors faster than others while the office and manufacturing sectors’ tough trading conditions will persists probably for the next 24 months with growth and recovery signs in the industrial warehousing and retail sector.

Asked about vacancy rates and retaining tenants in this market, he says they only have a 3.5 percent vacancy rate in their portfolio and attributes this to transparency when dealing with tenants.

As an example, he says the open relationships they nurture with tenants results in successful renewal terms being concluded and new lets enhancing revenue streams.

The company has undertaken refurbishment of its properties over the past 12 months, a factor that bodes well with tenants.

“I personally visit every property that we own two to three times a week to ensure that our assets are being managed to our high standards and our tenants are satisfied with the product we have supplied them with.”

He says often a disconnect occurs between landlord and tenant due to various factors.

These include exponential portfolio growth or the sale of one’s portfolio to a less hands-on owner.

As a result, asset neglect may set in and would eventually lead to a rising vacancy rate in the portfolio – tenants know when the landlord sweats the asset beyond a certain point or have grown so big that they lose touch with their tenant base.

Rossi says municipal costs and the increased cost of electricity has definitely had a negative impact on achievable rentals, both on new deals and renewals, as manufacturing tenants / businesses struggle to survive and trade out of a post recessionary economy with the added burden of these increased costs.

“There is a direct correlation between less than satisfactory rental growth and the increase in municipal charges in particular in the case of tenants in the manufacturing sector.”

For example, he says in some circumstances, they have noted that medium-sized manufacturers have indicated a desire to remain in tenancy, but have requested to downsize as a result of their operational costs being too high and have cited the increase in municipal costs as one of the contributing factors.

Len Pears, director at Quagga Property Brokers, since the latest drop of 0.5 percent in the prime lending rate, they have seen an increase in investors and owner occupiers buying commercial and industrial properties as opposed to renting.

“As owners, it is our responsibility to ensure our properties are energy efficient and we have recently appointed a utilities management specialist company to co-develop with us a strategy that will be rolled out across our portfolio and would result in savings for both landlord and tenant,” he says.

Meanwhile, the southern suburbs of Cape Town are sought-after nodes for industrial parks popping up all over due to businesses sourcing new premises for expansion or rationalising on space required. 

According to Len Pears, director at Quagga Property Brokers, since the latest drop of 0.5 percent in the prime lending rate, they have seen an increase in investors and owner occupiers buying commercial and industrial properties as opposed to renting.

He notes that the opening of developments such as the Westside Industrial Park has seen many businesses move their operations from traditional commercial and industrial areas to the southern suburbs.

They have recently placed Winfar Surgical at Prime Park in Diep River, acquired land and developed a new state-of-the-art laboratory for Edelweiss Pharmaceuticals at Capricorn Business Park and assisted Douglas-Jones in the purchase of additional industrial space in Diep River, almost doubling their operation, he explains.

Asked about drivers of demand for space in these nodes, he says a lot of the big manufacturers are outsourcing, giving opportunities to previous managers or department heads to set up their own businesses supplying the holding company.

“Retrenching having increased across the board has out of necessity created entrepreneurs with great start-up ideas who are taking up many of the 150 to 250 square metre factory units in the southern suburbs.”

Rentals range from as little as R35 per square metre in Capricorn Park and Ottery and up to R65 per square metre in Westlake/Tokai.

Demand is huge for space as long as the location is in good condition, offering day and night time accessibility and parking security in areas including Westlake/Tokai, Retreat, Diep River, Ottery, Claremont and Capricorn Park.

Sought-after offices are located in Steenberg (Tokai), Constantia, Upper Wynberg, Claremont and Rondebosch.

A-grade offices command rentals of between R95 and R135 per square metre, B-grade between R65 and R95 per square metre, while basement parking bays are priced between R550 to R650 a bay and open bays between R400 and R500 a bay.

On vacancies, he says their internal estimates indicate that office vacancies are now at 3.4 percent and industrial vacancies 4.8 percent. – Denise Mhlanga

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