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Is Sandton’s construction development too fast, too soon?

Property developer sees additional 400 000m² developed in three to four years.

Sandton, Africa’s richest square mile, is dotted with skyscrapers of multinational corporations that helped catapult it into becoming the financial and economic hub of the continent.

The envisaged node will see infrastructure developments and the uptake of commercial space around Grayston Drive, Sandton Drive, Rivonia Road and Katherine Street.

Being close to a Gautrain station, as well as Sandton City and multinational corporations, the location is strategic. Companies that will soon call Sandton their home include Webber Wentzel, EY (formally known as Ernst & Young), Sasol, and Discovery, which is consolidating its various Sandton offices into one building. (See the map at the end of the article).

The current Sandton office supply amounts to 1.5 million square metres, according to commercial and industrial property consultancy, Jones Lang LaSalle South Africa (JLL). After the completion of all construction developments, JLL anticipates Sandton’s office supply to increase to 1.9 million square metres over the next three to four years.

JLL says further that current developments underway amount to over 261 000 square metres, with approximately 130 000 square metres due for completion in 2014. The Sasol head office, for example, will occupy 67 000 square metres; Webber Wentzel will take up 25,000 square metres; and EY will have 25 000 square metres.

The node not only bolsters Sandton’s financial and economic reputation, but also causes an influx of people into the precinct.

In total we reckon that in the next three to four years there is going to be an additional 400 000 square metres being developed in Sandton,” Craig Hean, JLL managing director told Moneyweb.

Infrastructure concerns

Hean says the commercial node development will increase the total commuter traffic into Sandton to approximately 126 000 people daily.

 “There is talk about improving all major intersections going into Sandton. They have to improve, they are already under pressure given the current size of Sandton,” Hean says.

“The Johannesburg Roads Agency (JRA) and city council have taken a very proactive role with developers in improving circulation within the commercial boundaries of Sandton, for example by the development of “mid-roads” to reduce the size of the city blocks”, he says.

Traffic and transport infrastructure is set to expand with the Rea Vaya Bus Rapid Transit System (BRT), according to Sandton Central Management District manager, Nabeelah Bagus.

Bagus adds that the Department of Transport will be bringing the BRT to Sandton, and this, together with the Gautrain, will enhance accessibility. Municipal infrastructure will also be improved.  

Plans have been proposed to expand the traffic and road infrastructure in tandem with the commercial node, but there are concerns as to who will foot the bill. Hean says that, in such cases, the City of Johannesburg and the JRA will look to property developers to bear the road infrastructure expansion costs.

Why the rush to Sandton?

Despite infrastructure constraints, corporates are in a rush to be located in the financial hub. Sandton’s construction boom will also see a large concentration of capital in the node, backed up by local and international companies.

EY’s recent move to Rivonia Road in a 37 000 square metre building, was due to “Sandton’s growth strategy that will afford the company a bigger work space,” according to the firm’s director of African strategy, Grant Brewer. He added that it allowed EY to be “closer to the hub of industry.”

CEO of Redefine Properties Mark Weiner says the group will have invested R890 million in building Webber Wentzel’s new headquarters and a 20 000 square metre building.

But, detracting from the hub’s attractiveness are financial challenges for property developers, especially with the increase in the bond rate (the borrowing fixed rate) by 2 percentage points.

“So now we find for average developers your interest rate on five-year monies is in excess of 10%,” says Weiner. “Your building costs are going up somewhere between 8% and 10% this year.”

Striking a balance between getting a return on investment and investing in developments, is going to slow down a lot of the developments that have been proposed, Weiner says.

He adds: “You have to get a net rental of in access of R200 a square metre and the current market is around R155 and R165 level and people are battling to achieve that. So the big question is, are we able to see further large development in Sandton until such time as rentals get to a required level?”

Office vacancy rate

While there is a hive of construction developments, ‘to let’ signs are common in Sandton, raising questions about whether the area is overdeveloping at a fast rate. According to research by JLL, entitled Sandton Office Market Overview, the overall office vacancy rate increased in the current quarter (Q4:2013) from 9.4% to 11.8%, due to a wider choice of “quality buildings”.

On the average gross rentals front, the Sandton office market has remained “stable over the past year and this is mainly attributed to the moderate demand in the rental market, high vacancy rates which are exacerbated by the increasing competition for quality buildings in prime nodes”.

The demand and valuation of classes of buildings, in terms of quality, are showing different performances. JLL’s research indicates that Grade B vacancies are showing a significant decline over time, due to demolition and redevelopment of older buildings in the area.

However, surrounding areas, such as the Johannesburg CBD, are still attractive for property developers and corporates. Managing director at Lightstone, Andrew Watt, says that there are certain companies bucking the trend, especially banks that have not abandoned the inner city.

“There are limited transport nodes in Sandton and it is getting more problematic to get into it. So it doesn’t make sense to move everything into Sandton and completely abandon the inner city where there is plenty well-built and established properties or space for development,” Watt explains. 

Map number

Tenant

Size (m2)

Occupation date

Number of cars entering the Sandton area

1

To be confirmed

100 000

2017

5 000

2

Sasol

68 000

2016

3 300

3

Webber Wentzel

40 000

2016

2 000

4

Ernst & Young

32 000

2014

1 400

5

Alexander Forbes

31 000

2013

1 400

6

Multiple (Katherine & West)

18 500

2014

800

7

To be confirmed

35 000

2017

1 500

8

Marsh, Standard Bank, Sanlam, Bowman Gilfillian

66 500

                                     2014 & 2016

3 300

9

Multiple (15 Alice Lane)

18 000

2014

800

10

Multiple – speculative development

8 000

2014

360

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