Sandton is feeling the squeeze

The Sandton skyline is dominated by skyscrapers, including the iconic Sandton City tower and the prestigious Michelangelo Towers.

But cranes and scaffolding have become another seemingly permanent feature of the landscape. It appears that as soon as one skyscraper is completed, construction on another begins.

This is despite the countless "to let" signs in front of new office blocks. But don't let them fool you — at 8.5%, Sandton's office vacancy rate is almost half the global average.

Those wanting to be at the centre of it all are paying a pretty penny too, and major corporates such as Sasol, Webber Wentzel and EY (formerly Ernst & Young) are planning to do the same.

With this rapid development comes an ever-growing stream of traffic, as 100 000 people, and counting, inch into and out of Sandton each day.

Traffic has become such a concern that plans are afoot to find solutions, which may include widening the roads and encouraging the use of bicycles or public transport, including buses.

Businesses drive development
Rudolf Pienaar, divisional director of the office sector at Growthpoint Properties, said development is being driven by businesses wanting to consolidate.

With a higher densification, they can reduce their office space and save costs. Modern, greener buildings also reduce electricity consumption.

According to Pienaar — and keeping in mind there are huge differences in land costs, building costs and specifications — building top-of-the-range office space in Sandton can cost between R24 000 and R27 000 a square metre.

For example, if the maximum estimate applies to Sasol's new 67 000m2 premises, the Mail & Guardian estimated the cost to be as high as R1.8-billion — although, the company said, all options considered, the building offers the best value for money.

Alexander Forbes moved into its 37 000m2 four-star Green Star building last year, which cost R840-million.

EY's director of African strategy, Grant Brewer, said the company's move to a 37 000m2 building on Rivonia Road, slated for 2016, is a good economic deal.

Vacancy rates a problem countrywide
But the knock-on effect is that it is leaving a lot of B-grade vacant space on the market.

Marc Wainer, chief executive of Redefine Properties, which has an exposure of R3.4-billion in the Sandton area, said vacancy rates are a problem countrywide.

"If we don't have GDP [gross domestic profit] growth of 3.5%, there is very little demand for new office space," he said.

What is happening is a bit of "musical chairs" and often there is very little vacancy in the newest premium-grade buildings.

The Sandton office towers, for example, are being refurbished as demand for older, lower-graded office space is low.

But some developers still take the risk of speculative building in the hope that the location will ensure that tenants take up the space.

Large projectsBut, generally, large projects in Sandton are built to specification for a particular anchor tenant.

Property services company Eris has been in existence for about 20 years and developed Merchant Place in 1995 — the first big venture in the area and the second-tallest building on the Sandton skyline.

Its executive director, Hugh Basel, said speculative building is uncommon and 50% to 60% of the space of bigger buildings is rented before building begins.

Even where there is no vacancy, the "to let" signs are often left up to attract prospective tenants who can be placed in other buildings.

According to the South African Property Owners' Association, the office-vacancy-rate data for the third quarter of 2013 showed that the area is faring better than many others, with a vacancy rate of 8.5% based on 1.5-million square metres of rentable space.

Of the committed new developments, which will produce 173 400m2, 135 400m2 are available for leasing — despite a rental asking price of R165/m2, second only to the Melrose/Waverley area, where the price is R210/m2.

Johannesburg CBD
The Johannesburg central business district has 1.9-million square metres of total rentable space with a vacancy rate of 19.4% and an average asking price of R75/m2.

All 40 000m2 of committed new developments in the district are available for leasing.

According to the global real estate services firm, Jones Lang LaSalle, the global office vacancy rate across 98 markets edged down during the third quarter of 2013 to 13.2%, having fluctuated between 13% and 13.5% for the past two years.

Basel said there are both push and pull factors to the growth in Sandton.

In the Johannesburg CBD, there were issues such as a lack of adequate parking space, coupled with few alternative transport options, as well as the inevitable rise in crime and deterioration of infrastructure.

Another key factor is that, historically, property was typically held by pension funds, but over the years there has been a significant shift as bigger corporates have realised the value of property ownership.

A lot of open land
Consequently, they began to consider constructing and owning their own premises and to look for space where they could do that.

Sandton was the next biggest available infrastructure hub in terms of availability and size.

"In Sandton there was a lot of open land … It allowed for some very clever planning," Basel said.

Of course, it helped that a major shopping centre, Sandton City, had already been established on the peri-urban land in the 1970s.

The Liberty Group was the first to jump into the area, with the development of the mall, and is the majority owner of the complex, which consists of retail space, hotels, office facilities and the Sandton Convention Centre.

Liberty noted that positive infrastructural developments such as the Gautrain have further enhanced the demand to be in the area.

Infrastructure is problematic
Sandton, Wainer said, is not overdeveloped, but infrastructure is problematic: "Electricity is always one. We struggle to get enough power to do a building … [but] one of the biggest problems we have seen is the congestion, which is getting worse."

The new headquarters of Sasol, EY and Webber Wentzel alone are expected to bring in 10 000 more vehicles a day.

"Sandton has the infrastructure to handle things like electricity demand and sewerage, but they are certainly under a lot of strain," Basel said.

"Does it currently have the capacity to handle roads and traffic? It's a yes and no answer and part of why the Gautrain [station] was built there. The council wants to densify the area around the Gautrain."

Elaine Jack, the city improvement district manager for the Sandton central management district, which is funded by commercial property owners and has a mandate to maintain public spaces in the area, said problems have arisen because of all the development, which happened without much of a plan.

Traffic is definitely a big problem. "Sandton itself doesn't have peak times any more; we don't have off-peak. If we don't start doing things about roads, we are going to run into trouble. Already it is an issue."

A busy district
The district is busy with a Sandton transportation study in the hope of finding ways to make it easier for commuters.

Simon van Jaarsveld, an associate at Arup transport planning, which is conducting the study, said improvements could be made such as widening the roads or building a flyover at the Grayston Drive and M1 interchange.

But "we are at a point that just car-based transport is not enough. You won't be able to build yourself out of the congestion."

More than half the people who travel to the centre of Sandton every day live within a 7km radius of it, Van Jaarsveld said.

"What we want to do is propose an alternative for people living in that area by providing good public transport."

He said his company is talking to Gautrain about the possible use of its buses and exploring the possibility of providing a priority bus lane.

Rea Vaya begins construction of Sandton route
The Johannesburg bus rapid transit system, Rea Vaya, will begin construction of its Sandton route in 2014.

"There is also a significant cycle network we are investigating, with potential cycle lanes, which cover everything within a 5km or 6km radius," he said.

It is also important that developers start looking at building high-density residential developments in the area so that public transport can feed off that.

The number of commuters to Sandton is growing at an average of 2% a year, Van Jaarsveld said.

"It's good that it happens; it needs to happen for Sandton. But you have to have a handle on the supply of your infrastructure; you have to keep on chipping away at the problem. It is not something you will manage to solve in one go. Every five years, new interventions will be needed."

High rates affect development
As development in Sandton booms, rates and taxes are a concern for developers and tenants.

Elaine Jack, city improvement district manager for the Sandton central management district, said: "Our levies are based on a percentage of the property valuation; we know for a fact in Sandton the valuations are very high. Property owners are complaining … it becomes unaffordable."

Marc Wainer, chief executive of Redefine Properties, agreed. He said developers are being penalised by local authorities.

According to the City of Jo'burg, all business properties are valued on the same basis and the value of a property determines the rates.

Business property rates are calculated at a ratio to rates for residential properties of 3:1.

To calculate the rates, the city multiplies the value of the property by 0.017604, so if a property is valued at R8-million, rates and taxes would be R11 736 a month.

Wainer said the issue is the valuation of the properties.

"The more you spend, the more you pay"
"The more you spend on improving your property the more you pay. We are subjected to the normal annual increases as well as valuations every three years. If the local authority used a valuation basis of a fixed rate per square metre for all commercial buildings in an area … this would incentivise owners to upgrade."

Wainer said a "rates holiday" should also be considered for a developer who builds a new building and is already paying rates.

"[Not increasing the rates for two years] would encourage development and make initial rentals more affordable."

Wainer said if the issue worsened there are other choices for development — such as Waterfall Park in Midrand, where there is less congestion, and rates are better.

"Then Sandton and Johannesburg are going to be the losers."

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