Uptick in SA's property business
With the listed property sector having grown from a market capitalisation of R5-billion in 2001 to approximately R230-billion in just 13 years, contributing approximately 6% of the country’s GDP according to the Bureau of Economic Research, it’s clear that the commercial property market (including office, retail and industrial properties) is big business.
Estienne de Klerk, group executive of Growthpoint, president of the South African Property Owners’ Association (Sapoa) and chairman of the South African Real Estate Investment Trust (Sareit) Association’s tax and regulations committee, says that the sector is strong despite the economy’s sluggish 1.9% growth rate. Closely involved with creating the new real estate investment trust (Reit) recently adopted by the JSE, De Klerk adds that one of the biggest challenges that the industry faces is a raft of proposed new legislation — more than 90 bills that will directly or indirectly affect South Africa’s commercial property industry were reviewed last year by Sapoa.
“The good news is that the Reit legislation recognises property as a separate asset class, which will help to boost local and foreign investment in South African real estate,” De Klerk says.
“In fact, South Africa has become the eighth largest Reit destination in the world, reassuring investors that rules governing the sector don’t inhibit growth, and will yield great growth in the future. “While it is not compulsory for listed property owners to convert to a Reit, the tax benefits make it the smart thing to do.”
Although the office market has some massive projects coming on line in the next five years, De Klerk believes that the retail sector is likely to be slow as it comes under increasing pressure from interest rate growth — which he expects to be up to 250 basis points in the next three years.
“South Africa is quite well serviced in the retail space, and is urbanising at a remarkable pace, but there are a few large developments currently under construction in Johannesburg and Port Elizabeth. Apart from these, the sector is likely to consolidate for a while, rather than seeing the rapid growth that it has enjoyed in recent years,” he says.
The industrial sector — warehousing, manufacturing and logistics sites — is the best-performing sector, according to De Klerk, with national vacancy rates below 5% at present. Although the manufacturing sector is slowing, logistics and warehousing are experiencing significant demand (even though supply has not kept pace), not least due to South Africa’s status as a hub for distribution within sub-Saharan Africa. “An interesting dynamic is the move towards online retail in South Africa, which may be putting limited pressure on the retail environment, but it is in turn creating demand in the industrial sector,” De Klerk says.
“This is simply because online shopping is a logistics business and requires significant warehousing for it to benefit from scale.”
Other factors that continue to impact the commercial property market negatively are the increases in municipal rates, with recent legislation determining rates based on a valuation of the building, multiplied by a rate in the rand that has escalated annually. With multiple compounding from the rate in the rand and the revaluations over the years, these increases are felt directly by tenants. However, De Klerk says that Sapoa has engaged with city mayors to “find ways to discuss international best practice, with a view to reducing the impact of rates expenses” on the commercial property sector.
According to a report issued by Jones Lang Lasalle, a global real estate services firm, optimism in the market due to projected global growth is expected to lift the mood in the South African commercial real estate sector. The impact of such a recovery is expected later this year, as both business and consumers struggle in the current high cost environment.
The report highlights that 59% of developments currently under development in the Johannesburg office market are non-speculative, reinforcing the trend of consolidation into new quality developments to curb the costs of occupying secondary buildings. It notes an upward trend in vacancies, resting at 11.2% nationally at the end of 2014, and expects this to be further exacerbated by additional new stock under construction.
Tapping into local trends
A drive through the likes of Sandton might make one think that the area is an apocalyptic destruction site rather than the richest square mile in Africa, but the focus is on destroying old, wasteful buildings and replacing them with new, more efficient buildings that have a greater earning potential.
Businesses are breaking down walls and insisting on open plan environments to save space, while at the same time choosing buildings that have been created with energy efficient principles in mind, to reduce utility costs. Any new building is subject to recent legislation governing the overall energy efficiency of the building, but tenants are mostly looking for four or five Green Star rated buildings, says Fran Teagle, director of the commercial broking division at Broll Property Group.
“New green-rated buildings can save tenants 50% or more of their present utility costs, while open plan offices mean more people per square meter and hence a reduction in overall rental,” she says. “There is a cost of up to R10 per m2 to getting the official [Green Star] rating, so tenants and owners can opt for green interventions such as double glazing, grey-water harvesting and treatment, rain water harvesting and motion-sensor lighting to make the savings, without the formal certification.”
She adds that in Sandton, the council is actively encouraging high-rise buildings and is gaining high bulk rates. Building owners can achieve two or three times the income by developing taller buildings on their sites. Teagle points out, however, that one of the challenges of putting more people into spaces is that a high parking ratio of five to six bays per 100m2 is required — and developers have to take this into account.
With heavy hitters like Sasol, Alexander Forbes, Norton Rose and Webber Wentzel dominating the changing Sandton skyline, what choices are there for smaller companies who still seek premium office space within easy access to the commercial hubs of Johannesburg? “Parktown offers good value for money as it has a number of older buildings which have been refurbished rather than redeveloped, and therefore prices are lower.
Other areas offering attractive rentals are Bedfordview, Midrand and Randburg,” she says. Bonolo Gueye, property executive at Growthpoint, says that the Gautrain has had a remarkable impact on the property sector in Johannesburg, with demand being driven along the train’s route, particularly in Rosebank and Sandton. In Cape Town, ever under pressure from increased demand and a shortage of space in premium areas due to restricted land, the V&A Waterfront remains one of the most exciting areas in the city, with significant investment in the precinct expected in coming years.
The city’s CBD is experiencing a rise in the co-working phenomenon, a trend that sees consultants, freelancers and entrepreneurs clubbing together to share office space in arguably one of the most inspiring locations in the world. Similarly, several small businesses are clubbing together to gain the efficiencies of larger organisations, while maintaining their own identities, according to Rob Kane, the chairperson of the Central City Improvement District, quoted in a recent article.
In the Eastern Cape, Arnie Katz, director at Broll Property Group, says that the commercial property market in the Port Elizabeth area has slowed significantly, frequently in response to the trend of companies reducing their footprint to operate more efficiently. “For example, Absa recently reduced its footprint to a third of its previous space, simply by enabling workers to operate remotely, and by changing its working environment to a more open-plan collaborative one.”
Katz says the change in industrial property is buoyed by logistics and distribution, particularly with Port Elizabeth’s port status and the investment in the Coega development zone. “With the dramatic decline in the use of rail transport, industrial warehousing and logistics customers are looking for properties that offer large turning circles for their trucks — a simple, yet vital factor.”
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