Sandton’s skyline may boast a vast amount of world-class buildings, with others in the process of being built, but this could come at a cost to the listed property sector, says Bandile Zondo, executive head of financial sector equity research at Standard Bank Group Securities.
Speaking at the South African Property Owner’s Association (Sapoa) 2019 convention in Cape Town on Wednesday, Zondo said office vacancies had hit 18% in the prime area of the Sandton CBD due to an oversupply of stock.
SA’s challenging economic environment negatively impacted the local listed property sector in 2018, which has previously been one of the best-performing local asset classes. Listed property delivered -25.2% for the 12 months to December 2018, taking the three-year return to a mere -1.1%, according to figures from Morningstar Investment Management.
Speaking on the panel with Zondo, Estienne de Klerk, CEO of Growthpoint Properties South Africa, noted that while “there were some green shoots” in the listed property sector, the reality is that it currently is “one of the worst environments” he has ever experienced.
The risk of vacancies
Zondo warned that office vacancies could top 20% in the core Sandton node, the country’s financial hub. The average office vacancy rate nationally is now in the double digits at around 11%.
“We see office vacancies as the biggest risk to the (listed property) sector. What is even more concerning is that there is still a lot of supply coming onto the market and a lot of this is focused on Sandton. According to a study carried out by Sapoa, Sandton accounts for 26% of new office space coming onto the market,” he noted.
He added that some 56% of new supply is currently concentrated in three Johannesburg nodes; Sandton, Waterfall and Rosebank. “We estimate that, based on supply coming up, vacancies could rise to 20% in Sandton alone, where most of the new developments are concentrated. Talking to some of the landlords, the claim is that if you don’t bring new, better quality office space, you will lose tenants to other landlords.”
Office vacancies climbing since 2008
Zondo added: “The office property sector has been under pressure for the longest of times. It makes up about 25% of listed real estate investment trusts (Reits), but office vacancies have been climbing since 2008. In fact, in the first quarter of this year vacancies have accelerated across all grades of office space in the market.
“Even if you look at P-grade [defined by Sapoa as top quality] offices, vacancies have gone up from 6% to 8% in a single quarter. Consequently, annual rents are either flat or negative. In real terms, office rentals have gone backwards some 10% over the last 10 years or so. However, the new buzzword is co-working office spaces which are at least expected to have some impact on impairing office vacancies.”
Vacancies in retail space
On the retail property front, Zondo said about 60% of the local Reit sector (excluding offshore exposure) is made up of retail, which is in-line with the fact that 60% of SA’s GDP is driven by the consumer. However, he notes that trading densities have dropped significantly over the years and currently average around 2.5%.
“Retail reversions are screening negatively currently for most of the big property funds. There are some that are doing positive numbers, but because of the weak trading [environment], the cost of occupying space for retailers is rising.”
“Retail property vacancies currently average around 4.2%, however, according to the South African Council of Shopping Centres, our country commands the third-highest retail exposure per unit of GDP after the US and Canada.”
Zondo added that questions have also been asked around whether there is too much retail supply structurally in SA. He highlights developments such as the expansion of Fourways Mall, which is still to come onto the market.
On industrial property, he noted that while there were relatively low vacancy levels, the sector could come under pressure and see a spike in vacancies considering SA’s shock -3.2% decline in GDP for the first quarter of the year.
‘Confidence crisis’ in listed property
Zondo said that overall, the listed property sector was under pressure and there was too much supply coming through. While yields are “attractive”, he asked how one could be optimistic because “if you look at deal activity in the sector, there’s a ‘confidence crisis’ in listed property.”
The SA listed property sector used to comfortably raise between R40 billion to R50 billion in equity per annum a few years ago. We are already halfway through 2019 and the sector has only raised about R2 billion this year.”
He added that the bottom line is that the sector needs the economy to growth to generate better earnings.
Delta Property Fund CEO, Sandile Nomvete, said the major issue affecting the sector and the South African economy at large is “political risk” linked to policy uncertainty. However, he sees potential for consolidation in the Reit sector.
Suren Naidoo was hosted at the Sapoa Convention in Cape Town.