Office property market losing shine

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Office rentals in Sandton, South Africa’s financial hub and premier office node, are shrinking, according to the latest Rode’s Report on the SA Property Market. Office rentals in Sandton, South Africa’s financial hub and premier office node, are shrinking, according to the latest Rode’s Report on the SA Property Market.

The office property market is a long way from solving the problem of high vacancy levels, according to the latest Rode’s Report on the SA Property Market.

On the office front, the report shows that office rentals in Sandton, the country’s financial hub and premier office node, are shrinking.

Erwin Rode, CEO of Rode & Associates, publishers of the report says the current poor performance of rentals in Sandton comes as no surprise, given office vacancy rates that have been ballooning in recent years.

In the fourth quarter of 2014, market rentals for grade-A multi-tenanted office property in Sandton were down by roughly 4%. Of concern, mentions Rode, is the fact that committed new office developments continue to grow. The square metreage of committed new office developments in Sandton has now moved past the highs of the period 2006 to 2008. This was when the economy was booming whilst office vacancy rates were low and declining.

Similar to Sandton, the performance of rentals in other top suburban office nodes in Johannesburg was also poor to modest. As a result, Johannesburg decentralized as a whole recorded growth of only 2%. On average, rentals in Pretoria (+5%) and Durban decentralized (+4%) fared slightly better. The best performance, however, came from Cape Town decentralized. Thanks to office vacancy rates that were able to move south, the growth in market rentals in Cape Town accelerated to 10%.

Industrial Market

An important pillar of the industrial property market, namely the manufacturing sector, remains stuck in a rut. This would explain why growth in industrial market rentals stayed well below the growth in replacement costs.

In the fourth quarter of 2014, the best growth in nominal rentals came from Durban and the Cape Peninsula, where rentals were up by 7%. On the Central Witwatersrand and the East Rand, rentals showed slightly lower growth of 5%. Over the same period, building-cost inflation — as measured by the BER BCI — came in with growth of roughly 9%. This implies that in all of these important industrial conurbations, industrial rentals again contracted in real terms.

The implication of this is that the development of new industrial space is becoming more and more uneconomical, unless a long lease can be signed with a tenant at rentals that reflect a return on building-construction costs.

House Price Growth

At the end of last year, house prices in Cape Town and Bloemfontein were accelerating, while the exact opposite was happening in Port Elizabeth.

Rode compared the unemployment rate in the country’s major metros to house-price growth to find possible reasons behind these trends.

Cape Town, with the lowest unemployment rate, in recent years also recorded the strongest growth in house prices. On the other end is the Port Elizabeth-Uitenhage metropolitan area with the highest unemployment rate and poorest growth in house prices.

The robust inverse relationship between these variables again confirmed that house prices are largely driven by the performance of the local economy – holding constant differences in new supply, said Rode.

An anomaly was Bloemfontein. Despite having a higher unemployment rate, it was able to show growth in house prices at a par with Cape Town.

Mike Spencer of Platinum Global, an expert on the Bloemfontein market, said that the explanation for Bloemfontein’s performance could be found on both the demand and the supply side. “On the supply side, while there is a Spatial Development Plan (SDP), there has been little planning by Mangaung for infrastructure like roads, sewage, water and electricity.” In addition, the demand for houses might have been supported by strong growth in the number of public-sector employees, as well as their unsustainably strong salary increases, he said.

Flat rentals are at least gaining momentum. However, whether this trend will continue is moot, in light of households that remain financially stretched, and are about to become even more so. Noteworthy growth rates were as follows: Pretoria (+8%), the East Rand (+7%), Durban (+5%), Johannesburg (+5%) and Cape Town (+5%). These growth rates compare with the CPI of 6% (excl. home owners’ equivalent rent) in the reporting quarter.


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