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What SA’s biggest office landlords aren’t saying …

Are the country’s listed funds ignorant, or simply putting on a brave face?
The sector is facing challenges on numerous fronts. Image: Shutterstock

It cannot be overstated just how significant Nedbank’s announcement last week is. One of the country’s largest banks will permanently shift to a “hybrid workforce model” where only 60% of office staff will be on its campuses on any given day.

Nedbank did not make this decision overnight. It would’ve debated this and considered it carefully. Nor did it make it in isolation. In fact, it stated plainly in its April annual report that it had planned to optimise its office portfolio “by enhancing workstation utilisation to greater than 100% (from the current 94%)”.

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In plain terms, this means strategies like hot desking.

With so many staff involved in meetings at any given point in time, why should more space be used than is actually required (such as their desk which is unoccupied as well as a seat at a boardroom table)?

Not only has Covid-19 accelerated the normalisation of work-from-home for information workers, it has also changed ways of working.

Steady reduction

The bank has been steadily reducing office space requirements, with cuts totalling 69 000m2 since 2016. For perspective, this is more than double the size of the old PwC head office in Sunninghill (or about 1.5 times the size of the new PwC tower or Deloitte campus at Waterfall). Its long-term target is 120 000m2. But that’ll surely be reached in the next year or two once the shift to its hybrid model is complete.

That means it will be removing the equivalent of the Portside Tower in Cape Town (just over 51 500m2) from its corporate office space.

It is therefore surprising to read some comments by three of the country’s biggest landlords on Business Live. While they’re likely correct that a shift to permanently working from home is ‘unfeasible’, describing the decision facing corporates as a binary one (work at the office or work from home) is disingenuous.

It is likely that many corporates will follow the examples already seen globally and embrace a hybrid model.

Pressure for some time

The listed property sector, particularly those real estate investment trusts (Reits) and funds with a large exposure to offices, are facing immense headwinds in an economy battered by Covid-19. The major trend towards consolidation of office space by corporates was firmly in place long before the pandemic.

This has placed significant downward pressure on the market.

For every lease signed for a glass tower in Sandton, a dozen or more leases were vacated, with landlords battling to fill the space.

At risk are secondary nodes and secondary grade (B-grade or lower) buildings. In Johannesburg, the shift away from a node like Sunninghill, for example, over the past five to seven years has been pronounced and plain to see.

Large tenants will continue to consolidate their office locations, favouring more and more centralisation as they exit legacy leases for their smaller offices (regional offices or those that exist for historical reasons).

Big moves in the past 10 years

Over the last decade, we’ve seen some significant moves. Standard Bank’s Rosebank head office for its “dispersed business units”, which opened in 2013, saw it exit the majority of its smaller leases in Joburg.

So too with Sasol’s consolidation to Sandton, which had a huge effect on Rosebank (and, to a lesser extent, Randburg), or Sanlam’s new regional office on Alice Lane. Discovery’s new head office saw it practically vacate a city block in Sandton (some of this space remains vacant).

The recent shifts in the technology and telecoms sector are another example.

By the end of the 2020 financial year, EOH had exited 57 000m2 of office space across 81 buildings. So far in 2021, it has exited a further (roughly) 10 000m2, mostly in the Gauteng, Cape Town and Durban nodes.

And Altron’s move to a single head office at Woodlands (Woodmead) has reduced its office space from 47 000m2 to 29 000m2. Telkom’s BCX’s move to Centurion had a similar effect (not to mention Telkom’s exit from the Pretoria CBD).

Factor in a flatlining economy (mining boom aside), and it’s obvious why there are ‘To let’ signs everywhere.

Plus, it is not only exits from consolidations placing pressure on the market. Tenants are forcing the renegotiation of existing leases.

Vacancies are high, and rising

As at the end of February Redefine, which has 1.2 million square metres of office space, reported an “active” vacancy of 14.6% (the actual vacancy, excluding properties undergoing refurbishment was 14.9%). It says its renewal success rate – by gross lettable area (GLA) – was 29%. This means it achieved renewals on less than a third of the space it was trying to renew.

More horrifyingly, it reported renewal reversions of -24.5%.

This means leases are being renewed at an average of around a quarter less than tenants were paying.

Growthpoint, with 1.68 million square metres of office space, reports a vacancy rate of 19.5% as at end-March. It says: “Our most significant concentration of offices is in Sandton, where 21.1% of the total office gross lettable area (GLA) is located. It is also where we have our biggest vacancy exposure at around 84 000m2 or 25.4% of total office vacancies.”

Note that in this deft bit of linguistic gymnastics, it doesn’t specifically disclose the vacancy rate in its Sandton buildings. You can calculate it, however. Vacancies in Growthpoint’s Sandton office portfolio are 23.65%. That’s nearly a quarter of its space that’s not let.

Across its portfolio, it had a 19.5% vacancy at the end of March, with “weighted average renewal growth” of -15% for the nine months. Renewals have been done at a reduction of as much as -19% and -17.6% in the last three months of 2020 and the first three of 2021 respectively.

It says “tenants have many options when looking at new premises, including sub-let[ting] space from other downsizing businesses that is fitted out and often furnished.

“In Gauteng, vacancies are pervasive … With an oversupply of space in the market and pressure on occupancy levels, rental renewal growth will inevitably face continued downward pressure across the entire sector.”

Also excluded from many of these ‘vacancy’ disclosures are monthly leases, where landlords tolerate tenants who can’t/won’t commit on any long-term basis, simply to avoid space standing vacant.

And what of the gleaming head offices in Sandton? They will prevail, certainly for the foreseeable future. But perhaps executives are realising that many of these skyscrapers were overbuilt to begin with.

Already some are sub-letting. These so-called ‘ghost vacancies’ are real and growing, based on quiet whispers among those in the sector.

Moneyweb is aware of one top 40 company that has quietly leased a not-insignificant amount of space in its new head office in Sandton to a multinational.

In its recent pre-close statement, Growthpoint is blunt, describing the conditions facing the South African business as “tough” and warning of “a further deterioration in all property KPIs (key performance indicators) expected”.

Things are going to get worse before they get better.

Listen to Simon Brown’s interview with Chantal Marx of FNB in this MoneywebNOW podcast (or read the transcript here): 

COMMENTS   14

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When selling my last (residential) property, the Agent said that his dream has always been to build up a Commercial property portfolio. Then Covid hit just before he pulled the trigger.

The guy dodged a major bullet…

Or maybe now is the time buy cheap?

not to mention shopping centres
sat fr over 3 hours yesterday at 4 ways mall , most clothes shops closed and those that were open had no clientele
our genius govt has shut booze and restaurants . whe r in big trouble
grntd more emigration when people can travel again

seems they have also taken away English spelling and vocab at an elementary level…

lil echo
the ultimate backseat driver

Well you know how it is with shopping centres since this week… here today, gone tomorrow.

1. Who has recently heard of anybody increasing or even maintaining office space?

2. When valuations for repurposing office space to residential are drawn up : the old PWC campus was sold at R1,000 per square. Likely those offices are presently and after many many journal entries, sitting in the books at 20k per sqm or more.

3. Escalations are going to reset from the ‘standard’ 8% to something more like longterm JIBAR or prime minus 1% or 2%.

THIS COULD BE A TIME TO BUY.

The property sector is a barometer for the rule of law, and purchasing property is a vote of confidence in the governing party. Do I have to expand on this topic?

What about residential property in the Cape, same applies?

I can’t say that I’m surprised Sandton is emptying out.

Who wants to spend your life in your car, or leave your home at 04:30 in the mornings, to get to your Sandton office, with Sandton’s horrendous pre-lockdown traffic? Easily took half an hour to just get on the highways from the Sandton CBD, and then, whether you’re on the N1 north, south or N3, you’re stuck for another hour to get home.

I took a rather large knock in salary about 12 years ago and gave up on working in Sandton. Best decision ever. A better quality of life, seeing your kids for a few more hours per day and not spending 3 hours in your car every day, is worth every cent.

That world seems a lifetime away at the moment…

Good man, wise choice. You will pick the fruit of your decision one day

The listed funds are headed by management teams that are only interested in their own butts and bonuses, not shareholder value or downside protections.

So it is not ignorance, but greed.

Just look at L2D’s head who previously tried to get a REIT off the ground in W Africa, and destroyed a lot of shareholder value.

End of comments.

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