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Expensive office rental properties

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20 Jan 2012

Prime offices in Illovo Johannesburg currently command the highest gross asking rentals, according to a recent office vacancy survey report.

Illovo in Johannesburg is the priciest location with prime grade offices carrying a price tag of R200 per square metre gross asking rentals.

The South African Property Owners Association (Sapoa) and Investment Property Databank (IPD) Q4 2011 report revealed that prime office properties in Johannesburg locations including Illovo, Melrose/Waverley, Rosebank and Sandton & environs are pricey when compared to other cities in the country.

Illovo is the priciest location with prime grade offices carrying a price tag of R200 per square metre gross asking rentals.

This is followed by prime offices in Melrose/Waverley at R195 per square metre, Rosebank at R181.50 and Sandton & environs at R165 per square metre.

According to Jones Lang LaSalle, the popularity of Illovo among its corporate occupants is underpinned by its ideal location between Sandton, Hyde Park and Rosebank.

Illovo is also surrounded by prestigious residential suburbs of Dunkeld, Melrose and Sandhurst.

They say the Illovo office area can be subdivided into two sub-nodes, namely the Oxford/Rivonia Road activity spine and the Illovo Boulevard.

Although the Illovo node has no Gautrain station, it lies along the Gautrain bus route and has therefore been able to capitalise on the increased accessibility that the Gautrain route provides, says Ndibu Motaung, head of research at Jones Lang LaSalle.

Writing in the Rosebank and Illovo Market profile report for November 2011, she noted that the Illovo office market has the second lowest vacancy rate with a current office vacancy level of 2.9 percent.

Motaung explains that demand for prime offices is driven by the shortage of premium space resulting in prime buildings in the decentralised areas in Johannesburg achieving rentals above R185 per square metre.

“Demand is also driven by the type of tenants concentrated in a node such as Sandton, as this area is home to the country’s leading law firms and financial services and international blue chip companies.”

The Jones Lang LaSalle report on Sandton reveals that Sandton is the largest commercial real estate node in the decentralised area in Johannesburg.

Although not as pricey as Illovo, Sandton is still very much in vogue and continues to attract tenants who can afford to pay rentals for offices in the financial district.

She says the Sandton Gautrain station has increased accessibility into the area and has complimented other existing available transport modes such as the Metro buses, Putco buses and mini bus taxis that service the area.

Click here to read the report.

“Overall, the area offers a mixed use of office, hotel, residential and retail space, thus it will always be an attractive node for corporates.”  

Although not as pricey as Illovo, Sandton is still very much in vogue and continues to attract tenants who can afford to pay rentals for offices in the financial district.

She says Sandton has a number of planned developed and approved rights for future developments with new stock being added to the market, albeit at lesser levels.

Motaung says nodes such as Rosebank and Illovo, are typically small in size compared to Sandton, therefore with the quality of stock available in the market it would drive up the achievable rental and these areas have reportedly lower vacancies. 

Prominent companies found in the node include media company Avusa, investment management company, Thebe and petroleum corporates, Sasol and Total who both have head offices in the area.

The Rosebank Gautrain station which has significantly improved accessibility to the area has also led to increased property development in the node.

One of these projects is Standard Bank’s 69 000 square metre office development located close to the Rosebank Gautrain station and is due for completion this year, she says.

Motaung explains that the Johannesburg office property market this year will remain tenant driven at least for the next 18 months.

Motaung says nodes such as Rosebank and Illovo, are typically small in size compared to Sandton, therefore with the quality of stock available in the market would drive up the achievable rental and these areas have reportedly lower vacancies.

There is limited speculative development as more companies are rather consolidating and are taking advantage of efficient space use.

Landlords are also providing more incentives such as additional tenant installation and rent free periods to lure tenants and reduce their vacancies.

“Due to demand for quality stock, prime building rentals are expected to remain stable in the short run with notable low vacancies.”

According to the Sapoa/IPD Office Vacancy Survey, Cape Town does not have Prime grade space available.

The most expensive offices in Cape Town are A grade type at R160 per square metre in Waterfront and B office grade in the same area are charged at R135 per square metre.

In Rondebosch and Newlands, A grade offices are charged at R115 per square metre.

According to Galetti Commercial and Industrial, it is always important to understand the difference between marketed asking price and achieved price, which in most cases is below the asking price in the current market.

They say Cape Town has several new developments being planned such as the R1.6 billion FirstRand and Old Mutual offices at the Portside site in the Cape Town CBD scheduled for completion in March 2014.

Galetti Commercial and Industrial says these upmarket properties will demand higher rentals than are currently being charged in the region.

Tony Galetti, director at Galetti Commercial and Industrial says Century City region has previously achieved high rentals at R140 per square metre, an indication that it is an established node and in some cases preferred commercial node.

He concurs with the Sapoa/IPD findings saying the Waterfront office node is unquestionably one of the best locations and most expensive areas in Cape Town.

Asked about what drives demand for A grade offices in Cape Town, he explains that traditionally, demand for office space is spurred by two separate types of businesses in general terms.

These include businesses designed around and supporting the actual region and those with footprints in the Western Cape as a subsidiary office with their head offices typically in Cape Town.

He says over the last few years there has been an increasing trend for business's to set up or relocate their head offices to Cape Town.

“This is spurring demand for larger office and commercial enquiries with head offices requiring a more corporate image than a satellite office.”

He believes in most cases the type of business and proximity to client base determines the area as opposed to the budget or quality of space as most grades are available in the different key nodes.

He reckons 2012 will be another difficult year for B and C grade offices in Cape Town.

The most expensive offices in Cape Town are A grade type at R160 per square metre in Waterfront and B office grade in the same area are charged at R135 per square metre. In Rondebosch and Newlands, A grade offices are charged at R115 per square metre.

As newer buildings constructed at the height of the recession have come on stream, landlords have been aggressively offering fantastic rentals to secure better tenants, he says.

“Vacancies have increased as such, tenants have often been able to move to much better space for the same price or put downward pressure on rentals.”

Galetti believes there is a shortage of good quality and reasonably priced A grade commercial space.

He reckons that the market will start to improve during the course of the year with upward pressure on rentals in the A grade segment.

Cape Town is still away off the R180 per square metre plus rentals being achieved in certain areas of Gauteng.

Galetti says they are fairly positive about the commercial and industrial property sector adding there might be pressure on sales as too many landlords still charge pre-2008 prices when there has been a significant downward movement in values across the board.

In Durban prime grade offices in Umhlanga and La Lucia are priced at R115 per square metre while A grade in Westville cost R119 per square metre, according to the Sapoa/IPD survey.

Craig Davis from Growthpoint Properties says notwithstanding the fact that vacancies are high, there remains demand for premium space in prime nodes, which will continue to outperform A and B grade offices.  

He says prime office nodes within Westville are Essex Terrace/Derby Downs and the Westway Office Park.

In Essex Terrace and Derby Downs, there are limited development opportunities and these are dominated by A and B grade buildings commanding gross rentals of between R85 and R100 per square metre.

Demand within these nodes is driven by convenience, fair rentals, close proximity to adjacent residential areas and a secure business park, he says.

Typical tenants at these locations are national regional office and small independent businesses.

The Westway Office Park is home to multiple national tenants and a large proportion of the park comprises of A grade buildings with fewer P grade buildings under construction.

In Durban prime grade offices in Umhlanga and La Lucia are priced at R115 per square metre while A grade in Westville cost R119 per square metre according to the Sapoa/IPD survey.

“Gross rentals achieved range between R105 to R120 per square metre.”

Davis says in excess of 25 000 square metres of office bulk is currently under construction driven by demand from large national clients looking to take advantage of a great location off the N3 national freeway and close proximity to public transport and shopping facilities.

In Umhlanga and La Lucia Ridge, one will find lots of are A grade buildings with the new Ridgeside and Parkside precincts accommodating the P grade buildings.

Some of the P grade have employed premium finishes and in some instances embraced green principles in their design and construction.

Gross rentals range between R100 and R110 per square metre for A grade buildings and R130 to R140 per square metre for new P grade buildings.

“Demand is driven by smaller independent tenants looking for new modern offices within sectional title developments and also larger national tenants relocating from the CBD seeking to position their brand both within a new regional office and a new office precinct.”

He says there is over 20 000 square metres of office space available or due to come onto the market by mid 2012.

Davis says rentals will remain under pressure in Durban due to an increase in vacancies and oversupply of office developments coming onto the market in specific nodes.

In Port Elizabeth, the Sapoa/IPD survey found that P grade offices command gross rentals of R125 in Greenacres and R120 in Newton Park.

According to Arnie Katz, director of Broll Property Group, new A grade offices in Greenacres command gross rentals of R125 to R135 per square metre while in Newton Park, offices in good condition can range from R65 upwards for B grade and A grade offices from around R95.

Katz says tenants are attracted to these office building as this is the centre of activity with typical tenants including the likes of branch offices of national or international and established local businesses.

Katz reckons the office market in Port Elizabeth will grow with the possibility of expansion into the Coega area and new office blocks to cater for Governments departments needed to monitor the port and other traffic.

“Port Elizabeth will experience further demand for good quality office space with tenants being prepared to pay premium rentals.”

A new multi-tenanted office and retail development, The Acres situated on Norvic Drive in Greenacres is currently under construction with the retail component scheduled for completion in June 2012. Rentals at this premier location are set at R125 per square metre.

A new multi-tenanted office and retail development, The Acres situated on Norvic Drive in Greenacres is currently under construction with the retail component scheduled for completion in June 2012.

Rentals at this premier location are set at R125 per square metre.

In Pretoria, P grade offices in Lynnwood, Menlo Park, Persequor Park and Hazelwood are priced at R155 per square metre while Highveld Techno Park and extensions, A grade offices are charged at R131.50, according to the Sapoa/IPD survey.

According to Jan Oelofse, leasing and sales broker for JHI Properties, the urban sprawl to the East and South of Pretoria and the decentralisation from the CBD of Pretoria resulted in the formation of nine basic office nodes.

These are Arcadia, Brooklyn, Hatfield and Lynnwood/Menlo Park and Menlyn/Faerie Glen and Pretoria Eastern suburbs, the new east Centurion and Highveld Techno Park developed in the south.

The Brooklyn and surrounding nodes provides a total of approximately 162 000 square metres of P and A grade office space developed around the shopping mall. 

Its popularity stems from its proximity to the CBD with average tenant profile varying from small (100 square metre) to medium (2000 square metre)  businesses, interspersed with government tenancies of which South African Revenue Services is a main office user.

Vacancies are low at between two and three percent. Gross rentals range from R100 to R130 per square metre.

The Lynnwood/Menlo Park node is well developed in established upmarket residential areas, mainly along major arterial roads, following retail developments. 

Lynnwood Bridge lifestyle and office park development which is being developed in phases, houses City Lodge Hotel, 15 000 square metres of office space and 13 000 square metres of retail.

Gross rentals for P grade office space in Lynnwood Bridge vary between R140 and R155 while a grade A offices are priced at R100 per square metre.

He says the recent industry figures indicate that the area has a vacancy rate of 6.5 percent for P and A grade offices.

The Menlyn/Faerie Glen office node is developed around the Atterbury/N1 on-off ramp and P grade offices are charging in excess of R155 while A grade are priced between R105 and R145 per square metre.

Oelofse explains that the area attracts corporates wanting to establish head and regional offices. 

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In Pretoria, P grade offices in Lynnwood, Menlo Park, Persequor Park and Hazelwood are priced at R155 per square metre while Highveld Techno Park and extensions A grade offices are charged at R131.50, according to the Sapoa/IPD survey.

These tenants take a long term strategic view and the growth of the node coupled with the accessibility, parking and modern facilities will provide it with a stable and economic viable asset.

Corporate companies committed to the area include Price Waterhouse, Coopers, Nedbank, Softline VIP and the Road Accident Fund among others.

The Centurion/Highveld Techno Park development node have a combined office supply of mainly A and B grade office space amounting to approximately 817 892 square metres with a reported vacancy rate of 9.1 percent.

This node was specifically established to cater for commercial growth and it therefore does not suffer the growth restrictions experienced by the other nodes.

He says the Gautrain Stations in Centurion and Highveld Techno Park have improved accessibility to the area.

Oelofse notes that demand and supply controls the expansion and development of rental accommodation. 

Building costs and rentals to be achieved converted into an acceptable return on investments will dictate the pace of the development of new buildings.

He adds that new buildings provide for economic space planning, coupled with modern facilities designed to lower and contain operating costs and these factors are important for tenancies when rentals are considered. – Denise Mhlanga

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