A huge oversupply of offices – with more than a million square metres of vacant office space across SA – is putting rentals under pressure.

At the same time, a considerable amount of new space is coming to the market.

The rental growth attained by some of the listed property companies over the last year, through new rental contracts and existing contracts that were renewed, is below average at the moment.

It is evident from the recent results of most of the listed property companies that vacancies have climbed in office portfolios. It is in contrast to a report of the South African Property Owners Association (SAPOA) for the second quarter (2Q) 2010 which pointed to a recovery.

Against this background, role players are wondering if there really is a turnaround in the situation with vacant space.

Anton de Goede, property portfolio manager at Coronation, foresees that the office sector will remain under pressure for the next 12 months.

He says some 1,3 million sqm of office space, or 8,8% of the total office space, is vacant at the moment.

“This is a significant percentage of space that has to be absorbed, while 4% of the total office space is currently being built.”

This is all occurring in a time characterised by a few users of office space.

Keillen Ndlovu, co-head of Stanlib, says it seems as if office vacancy rates have reached a turning point, but it will take rentals a while to recover, in light of the high vacancy rates.

“Most of the pain is still being reflected in the figures of listed property companies.”

The oversupply of office space makes it a tenant’s market, says Norbert Sasse, CE of Growthpoint, which released its results for the year end-June.

“Market conditions are still difficult and tenants have lots of choice and adaptability and can easily move from one building to another.”

He says building owners have to come up with competitive rentals, as well as tenant installation incentives and low increases.

During this period the vacancy rates of Growthpoint’s office portfolio grew to 8% from 6,2% in June 2009.

He says the group made an extraordinary effort to let some of its speculative development space during this time by asking lower rentals than initially budgeted for. The vacancy rate of the development space subsequently fell to 1% from 2,7% in 2009.

He expects rentals to remain under pressure for the next 12 to 18 months.

In the six months since December last year vacancy rates for Pangbourne’s office portfolio grew to 10,9% from 8,3% in December 2009.

Pangbourne mentioned in its results that competition for tenants has led to lower rentals in certain areas as owners of speculative developments made desperate attempts to get tenants in their buildings.

The vacancy rate in Emira’s office portfolio was 16,2% at the end of June compared with 15,3% in December 2009.

James Templeton, CE of Emira, says the company had to work defensively with rentals in order to lure new tenants and retain existing ones.

De Goede says Growthpoint achieved 6,3% rental growth in the year until end-June for new rental contracts and existing contracts that have been renewed.

Emira’s office portfolio achieved average rental growth of 3,6% during the same period. “It is less than the average growth in office rentals of between 8% and 10%.”

Sasse says vacancy rates have to be below 5% before real rental growth will resume. – Elma Kloppers, Sake24

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