While some nodes in parts of the country such as Sandton in Johannesburg are reportedly thriving, in Cape Town, the office property market remains under pressure characterised by increasing vacancies, moderate rental growth in a number of nodes that could be further compounded by additional new stock in the market.
According to the Cape Town Office Market Overview Q3 2013 report by Jones Lang LaSalle and Baker Street Properties, overall Cape Town vacancies increased to 10.4 percent from 9.8 percent in Q2 2013.
According to the Cape Town Office Market Overview Q3 2013 report by Jones Lang LaSalle and Baker Street Properties, overall Cape Town vacancies increased to 10.4 percent from 9.8 percent in Q2 2013.
The bulk of these vacancies are in the secondary office market where some space has been vacant for long periods and show little chance of being filled as some landlords continue to pitch asking rentals above market expectations, reveals the report.
Furthermore, the Cape Town CBD’s secondary buildings in particular are mainly contributing to the rising vacancies with Grade B reaching 13.7 percent and Grade C now 26.9 percent.
The new stock scheduled to come on stream in the next few months will further add to escalating vacancies in the City of Cape Town, explain report writers, Ndibu Motaung, head of research at Jones Lang LaSalle and Dave Russell, commercial leasing and sales director at Baker Street Properties.
According to Andrew Kendall, Eris Property Group leasing and investment broking manager, the CBD has vacancies, and he points out that these are mostly found in older buildings that still claim A or even B grade status, but in terms of the South African Property Owners Associations’ (Sapoa) rating just don’t make the mark, and without serious renovations and revamp, never will.
Kendall explains that one can have a building such as The Terraces (34 Bree Street) where Growthpoint is achieving rentals of R110 and R120 per square, and just 200 metres down the road there is a building that was great in its heyday, but hasn’t been upgraded in decades.
Completed development projects increased to 46 800 square metres from 35 000 square metres in Q2 2013 and these include the new 18 000 square metre Allan Gray at the Waterfront, 10 000 square metre Bowman Gilfillan office property in the Cape Town CBD and a 5 800 square metre Park Lane precinct in Century City, while a further 7 000 square metres is scheduled for completion in Q4 2013 in Century City.
Its occupancy currently stands at only 30 percent, which means that even at its R85 per square metre asking price, it’s still considered to be too high for the condition of the building.
“It’s stuck back in the 1970s when it was built – the modern trend is for hot desking, green park environments, trendy and open plan,” notes Kendall.
He says new buildings coming on line are built from the start to state-of-the-art standards, but you can do amazing things with old buildings too - one simply has to look at the brilliant transformation of Newspaper House in St George’s Mall.
Rentals
Motaung and Russell say prime properties rental remained flat with the top monthly gross rental of R160 per square metre.
On an annual basis, rentals increased by 0.8 percent (Prime Grade), 4.0 percent (A Grade) and 0.5 percent (B Grade).
“The meaningful increase in the average rent for A Grade buildings is mainly attributed to the demand for quality buildings in the prime, Waterfront area,” according to the report writers.
Kendall says Prime Grade buildings are in most demand pointing out that the CBD boasts just under 25 percent of all P and A grade office space in the city.
He says according to the recent Sapoa quarterly report, average A grade rentals are R100 per square metre from R97.50 per square metre in Q1 2013.
Kendall says P Grade in the Central City is looking at rentals of R185 per square metre, for example, in Old Mutual and FirstRand Bank’s joint venture, Portside on the corners of Bree and Hans Strijdom Streets, which recently achieved a 5 Green Star SA Office Design rating from the Green Building Council of South Africa), and R160 per square metre at 22 Bree (law firm Bowman Gilfillan’s new building.)
Currently under construction, both buildings are set to welcome their new tenants during the course of the next six months, he says.
Motaung and Russell say prime properties rental remained flat with the top monthly gross rental of R160 per square metre.
The report notes that new speculative developments being added to the market address the need for quality buildings and are not driven by business growth.
This will add further pressure on the already high vacancies in the Cape Town CBD secondary market as occupiers upgrade to meet their corporate image. Rentals in the Cape Town CBD are therefore expected to remain flat.
Demand and supply
According to the report, new business growth that should translate to new demand for offices is still limited, with take up activity only evident in large corporates currently consolidating offices.
A notable deal during this quarter was seen in the Southern Suburbs in Claremont which saw a large take up of office space by a call centre company.
The South African Property Owners Association's (Sapoa) total stock recorded increased by 94 456 square metres to 2 284 981 square metres in Q3 2013.
Completed development projects increased to 46 800 square metres from 35 000 square metres in Q2 2013 and these include the new 18 000 square metre Allan Gray at the Waterfront, 10 000 square metre Bowman Gilfillan office property in the Cape Town CBD and a 5 800 square metre Park Lane precinct in Century City, while a further 7 000 square metres is scheduled for completion in Q4 2013 in Century City.
With slow growth in the economy, office property demand is set to remain low, driven mainly by corporate consolidations and marginal take up of quality office space, leaving secondary buildings with large vacancies particularly in the CBD, according to the report. – Denise Mhlanga
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