24 Apr 2013
In 2012, the South African property market saw capital growth of 1.9 percent, 9.8 percent income return and a total return of 11.9 percent.
Of the three sectors, the office sector was the worst performer with vacancies recording a high of 12.5 percent and low rental growth of 3.6 percent, according to the Sapoa/IPD Index Results 2012.
Writing in the report, Jess Cleland, research director at IPD South Africa says the office vacancies are still stubbornly high and the sector underperforming on almost every metric.
She points out that operating costs are still rising above inflation with municipal charges showing the highest cost year-on-year.
Lowest vacancies were recorded in Rosebank, Bloemfontein CBD, Houghton/Illovo and Cape Town, while largest vacancy decrease was seen in Midrand, West Rand, Houghton/Illovo, Cape Town CBD, and Hyde Park.
According to the report, lowest capital growth was seen in locations including Braamfontein, Randburg, Arcadia/Sunnyside, Hyde Park and Pretoria with highest vacancies seen in Durban CBD, Hatfield/Hillcrest, Centurion Randburg and Rivonia/Edenburg while the largest vacancy increase was seen in Hatfield/Hillcrest, Sunninghill/Fourways, Pretoria East, Arcadia/Sunnyside and Centurion.
According to John Roberts, chief executive officer of the Just Property Group, more than any other province Gauteng is a hub of infrastructural change mainly as a result of major projects now reaching completion including the Gautrain and Rea Vaya BRT (Bus Rapid Transport System), as well as unprecedented road and traffic upgrades.
As a consequence, whole commercial growth nodes are emerging, while the improved transport systems will see far greater movement and integration across regions as well as changes to traditional urban structures, he says.
“These major infrastructural projects present positive opportunities for the commercial property sector and will have a profound effect on the way commercial and office tenants view lease renewals in the forthcoming year,” he says.
According to Roberts, less than 12 months ago, good quality sectional title office space was available between R12 000 and R14 000 per square metre.
Currently, prices range from R16 000 to R20 000 per square metre in office nodes in Sandton and the northern Johannesburg areas.
Building operating costs, especially security and municipal service costs continue to rise faster than inflation with Eskom’s price increases of 8 percent a year over the next five years one example, according to the annual Broll Property Report 2013.
Cash strapped municipalities will also seek to increase revenue from commercial property rates to meet the growing demands of township residents.
The impact is continued pressure on net property incomes, especially where landlords are unable to pass on cost increases to tenants, according to Broll.
Furthermore, the report notes that downward pressure on rentals and fast-increasing building costs mean that land values are unlikely to increase during 2013, other than in very high-demand areas like the Sandton CBD.
On demand, the report reveals that there is strong demand and restricted supply, which underpins prime office rents in niche nodes such as the Sandton CBD in Johannesburg.
Constrained supply in that node is said to have a ripple effect on the demand for office space in secondary buildings and in adjoining nodes where there are signs of both enhanced investor confidence and better opportunity for capital growth.
In the main urban centres, subdued demand is impacting on rental growth, particularly in decentralised locations which are not particularly attractive to investors currently.
Investors are instead opting for properties where rental cash flows are underpinned by strong financial covenants, says Broll.
The significance of Gauteng in the South African office market is reflected by the fact that 77 percent of the combined office stock of Pretoria, Johannesburg, Durban and Cape Town is situated in the province.
Gauteng’s dominant position is likely to strengthen as more companies centralise and locate their head offices in Johannesburg.
Decentralised office space has continued to grow as a proportion of total office supply in Johannesburg and Pretoria in recent years.
Currently, 70 percent of the space in Pretoria is decentralised, although this may reduce in the future if government proceeds with plans to locate more departments in the CBD.
This shift maybe limited by low vacancies in the CBD’s A-grade market, the preferred quality of space required by Government.
The move to decentralise continues in greater Johannesburg, as evidenced by the fact that 40 000 square metres of speculative office space is currently under construction in the Sandton CBD, with a further 500 000 square metres of office rights available for development.
New prime office space generally has less than a 2 percent vacancy rate, whereas A- and B-grade space in decentralised locations seeing vacancies between 5 and 13 percent, depending on the region. CBDs tend to display the widest range of vacancies at between 2 percent and 20 percent, reveals the report.
Trends and rentals
Tenants are reportedly demanding more efficient use of space and operating cost increases.
According to Broll, tenants continue to strive for greater utilisation of leased space (referred to as ‘compression’), increasing staff density rates to levels in line with those seen in the more developed economies.
This reduces take up of additional space on lease renewals, but also puts pressure on the provision of on-site parking - 4 bays per 100 square metres in an open-plan environment does not typically provide the bays required.
As a result, there is increased pressure on public transport services to improve as staff seek alternative modes of transport.
The report reveals that prime-grade new buildings in Braamfontein are letting for R185 to R200 per square metre gross, with operating costs at levels of R35 square metre, A-grade rentals in greater Sandton are at around R140 to R150 square metres gross.
Office vacancies average 7 percent in the greater Sandton area and around 5 percent in the prime Sandton CBD, while basement parking in Sandton CBD costs about R900 per bay per month.
Pretoria East and Centurion are key nodes for office property to look out for this year as they are expected to see high levels of development and leasing activity.
According to Broll, Pretoria East attracts premium rentals, partly because of the exceptional location but also because of a lack of A-grade office space.
Furthermore, the Menlyn Main mixed-use development project is likely to appeal to corporate tenants.
Asking rentals in Durban CBD have remained under extreme pressure due to very limited demand, with the Department of Public Works being the only enquirer for any significant amount of space.
A recently upgraded CBD office portfolio, is now offering prime A-grade space with harbour views at rentals of between R65 and R75 per square metre – and according to Broll, these asking rentals have declined over the last 18 months by close to 10 percent in real terms.
Interestingly, Durban investors are said to have entered the sectional title market, creating speculative stock and tenants are taking the opportunity of the tenant’s market to upgrade accommodation to prime space at similar rentals to those they were paying for A-grade premises.
In Cape Town CBD, vacancy rate for Q4 2012 dropped to 13.1 percent from of 14.7 percent in Q3 2012 and the total available space for leasing across all office grades is 115 000 square metres mainly in the A- and B-grade categories.
Prime-grade vacancy rate stands at 5 percent.
B+-grade offices command gross asking rentals of R95 per square metre and parking is pricey with rentals around R1 100 per bay per month at a ratio 2 to 3 parking bays per 100 square metres.
Lease escalations in the CBD range from 8 to 9 percent.
In Century City, Broll reports that vacancies across all grades stand at 5.7 percent down from a high of 8.4 percent in Q1 2012.
Century City has approximately 9 000 square metres of prime office space currently under construction and offices have a minimum of three parking bays per 100 square metres with park and ride facilities within the greater Century City precinct for tenants who are looking for additional parking.
Rentals for parking remain at around R850 to R950 per bay per month while escalation rates are in the 8 to 9 percent range.
Much of the space along these arterials is strip development, while the office node in Greenacres is centred around the 86 000 square metre regional shopping centre.
Meanwhile, according to Mike Spencer of Platinum Global, there has been a definite slowdown in the demand for office suites with noticeable vacancies in Westdene.
He says some of this over supply may well be because of the level of rentals that are being demanded in the area as more reasonably priced units continue to be fully let.
Affordable, small and even single offices continue to do well and demand is there for different types of office space with many tenants looking towards the central city and off city centre buildings.
“Landlords need to ensure that any vacant office space is in the best condition possible to make them as attractive as possible to increase their let ability.”
He says offices that are priced right will always have tenants.- Denise Mhlanga
About the Author
House for sale in Tokai R 3 950 000
Apartment / Flat for sale in Kempton Park R 320 000
House for sale in Die Heuwel R 2 000 000
House for sale in Rensburg R 945 000
House for sale in Lovemore Heights R 2 199 000
House for sale in Del Judor Ext 2 R 1 712 000
House for sale in Homes Haven Ext 23 R 1 719 000
House for sale in Del Judor Ext 1 R 1 445 000
Townhouse for sale in Elarduspark R 920 000
House for sale in Del Judor R 1 350 000
If you are using Internet Explorer 8 or higher, please verify that your Internet Explorer compatibility view settings are not enabled.
For the best browsing experience, update to the latest Version of Internet Explorer or try out Google Chrome or Mozilla Firefox.
Please contact our Property24 Support Team for further assistance. Tel. +27 (0)861 111 724