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SA office property development activity falls to 14-year low

While the average national office vacancy rate remains in the double digits.

New developments under construction in SA’s office property sector have decelerated to their lowest level since the last quarter of 2005, while average national office vacancies remain in the double digits at 11%.

This is according to the South African Property Owners Association (Sapoa) Office Vacancy Report for the third quarter of 2019. The report, published last week, was compiled by global research group MSCI on behalf of Sapoa.

“Development activity in the office sector has been on a downward trend since 2015 amid poor business confidence and low growth,” notes the report, adding that by the end of the third quarter “developments under construction totalled 378 000m2 – the lowest level since Q4 2005.”

Read: Capital flight: SA property companies invest billions more offshore

The report points out that SA’s “muted employment growth” and low economic growth continues to dampen the office property sector’s hopes for a short-term recovery.

It states that for the sector’s vacancy rate to drop to 5%, it will require at least 75 000 new office-based jobs to be created.

Speaking to Moneyweb, Sapoa CEO Neil Gopal says it all comes down to SA’s lacklustre economic growth over the past decade. “Everything is underpinned by GDP growth. We need much stronger GDP growth to kickstart the economy and to create jobs.”

Neil Gopal, CEO of the South African Property Owners Association. Image: Supplied

Reiterating the sentiments in the report, Gopal notes that uncertainty around government policy, the country’s credit rating and Eskom remain major concerns.

“Policy certainty will no doubt help, but the government will also have to address Eskom, which remains the elephant in the room. The sudden bout of load shedding [on Wednesday] is not good and could not have come at a worse time. Hopefully it is short-lived.”

Gopal says government will also need to up its investment into infrastructure to bolster growth. “I don’t have a crystal ball to know how things will turn out, but if government sorts out policy issues and significantly increases spending on infrastructure, it will lead to the private sector increasing its investment in SA.”

He says there are some positive signs that private- and JSE-listed players in SA’s property industry are looking to invest, but the pace will be based on how long it takes for the economy to be turned around.

“Just look at Atterbury’s new multi-billion-rand Castle Gate development in Pretoria and Growthpoint’s plans around the new Sandton Summit precinct,” he adds. “It shows that SA property companies are willing to invest in long-term developments in the country – however, government needs to create a better environment for business to invest.”

Read: Atterbury’s R6bn mega property project breaks ground in Pretoria and

Exclusive: Growthpoint’s ambitious Sandton Summit plan 

Gopal stresses that besides policy certainty and macro-economic issues at national level, service delivery at municipal level needs to be significantly improved. “We as the property industry have complained about planning delays, poor service delivery and infrastructure challenges at municipalities. Improvements at local government level will also contribute to increased growth and investment by the property sector.”

Double-digit vacancies

Commenting on the newly-released Sapoa Office Vacancy Report, Simon Wilkins of commercial property brokerage Galetti says the reduction in development activity is a direct result of falling demand.

“Office tenants are typically renewing leases in their existing buildings at very competitive rates currently and landlords are on strong retention drives, seeking to actively manage their renewals,” he notes.

“There is no real growth in the economy, therefore tenants are largely moving around within existing vacancies instead of approaching developers to build new office buildings.

“Most developments you see going up now were largely committed to three years ago and therefore the supply is still coming to market, albeit at a reduced level,” adds Wilkins.

Phil Barttram, an executive director at MSCI, says the decline in office property development activity is not necessarily a bad thing, considering the double-digit vacancies in the market. “I am happy that developers have pulled back and are not adding massive new office supply in a tough SA market.”

Read: Office vacancies a ‘big risk’ for listed property

The Sapoa report shows that SA office vacancies slightly improved from a national average of 11.3% in the second quarter of 2019, to 11% in the third quarter. “The improved vacancy rate did come at the cost of rental growth, as asking rentals nationally declined by 1% year on year,” it notes.

Wilkins remarks that overall vacancies in the office sector nationally remain persistent. “Nevertheless, the vacancy rate is being contained by developers decreasing the supply of new office space coming into the market.

“In addition, there is the growing trend of office-to-residential conversions,” he adds.

“We see this largely in the C-grade [lowest specification available] office market where a building is far past its sell-by date and gets repurposed to residential.”

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the owners and landlords of these Malls and luxury big corporate buildings have lost touch with reality with their arrogant attitude towards tenants,exorbitant rentals and killer lease agreements.Good luck. It will now bite them.

Its just crazy what some businesses have pay for rent.
My friend have sell loads of beer to pay his R22k rent.

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