Office Market Analysis

Transcription

1 Q Accelerating success. Office Market Analysis Western Cape Report

2 Contents Highlights 1 Summary 2 Statistics 2 Climate 3 Supply 5 Demand 8 Vacancies 9 Western Cape Rental Rates 10 Prognosis 11

3 Report Highlights The office market in the Western Cape in Q1 was tenant-driven and characterised in general by very positive demand levels. The quarter also saw an oversupply of both A and P-Grade stock the same trend seen in Gauteng. Cape Town's vacancy rate was also the lowest nationally for a third consecutive quarter. The economy remained under pressure in Q1. A weaker Rand continued to be at the mercy of US interest rates, and the country s economic growth forecast for 2015 was set at 2.4%, although the Reserve Bank recently suggested that it could be closer to 2%. Inflation declined considerably in the last quarter as a sreult of the fall in oil price.

4 Report Summary Colliers International South Africa s Q Office Market Analysis provides a brief overview of the key factors impacting the Western Cape office market and future prognosis for the market. The Analysis focuses specifically on the Cape Town area and close surrounds within the Western Cape. Western Cape Summary Statistics Prime Gross Rent (R/m²) Prime Yield (%) Overall Vacancies WC (%) National P-Grade Vacancies (%) Year-On-Year Change +30 Year-On-Year Change 0bps Year-On-Year Change -70bps Year-On-Year Change -90bps 6 month outlook 6 month outlook 6 month outlook 6 month outlook

5 Macro-Economic Climate Inflation (Past 6 Months) 6.4% MAR 2015* AUG %* Inflation declined considerably in both Q1 of this year and Q4 of last year, reaching 3.9% in February 2015 from a peak of 6.4% in August *The decrease in inflation has almost exclusively been the result of the decline in the oil price. Overall the economy slowed in Q1 of this year, partly due to base considerations following the stronger finish to This however is largely due to the effect of ongoing power disruptions, poor business confidence and weak external demand. Growth in 2015 will hopefully receive a boost from lower energy prices, as well as lower-for-longer interest rates, but much will depend on the stability of the labour market, how well businesses adapt to the electricity constraint, and how quickly government is able to deregulate to allow private sector solutions. Economic Growth (GDP) This suggests that underlying inflation remained relatively high, and that once the oil price recovers and food prices rise as expected, headline inflation will start to climb rapidly. February 2015 was likely the last of the inflation good news, with the petrol price increasing by 10% in mid-march and another 13.1% in April as a result of the recovery in oil price, higher fuel levies and the weaker Rand. The biggest risk to the inflation outlook remains the Rand, which has weakened almost 4% since the beginningof 2015 and has remained vulnerable to any news, however tenuous, that might suggest that the US might normalise rates sooner than expected. Inflation is likely to end 2015 just below the Reserve Bank s 6% upper target range. 1.5% 2.4% CPI 4% Q Despite Q1 s poor economic growth, it is expected that overall growth will average at 2.4% in 2015, up from 1.5% in 2014, provided there is no repeat of last year s devastating strike actions in the mining and manufacturing sectors. This still remains unimpressive, as base effects stemming from weak economic growth recorded in 2014 will add only around one percentage point. In Q1 and likely going into Q also, growth will be supported by the drop in petrol price. The lack of reliable power supply, poor labour relations, limited and expensive transport and other economic infrastructure, rising production costs and increasing interventionist and unpredictable economic policies, will weigh heavily on business and consumer confidence and put a ceiling on growth in Already the Reserve Bank reduced short-term potenial growth to between 2% - 2.5% emphasising that electricity supply shortages were party to blame. When we refer to the rate of inflation in South Africa, this often refers to the rate of inflation based on the Consumer Price Index (CPI). The South African CPI measures changes in the prices paid by consumers for a standard basket of goods and services on a monthly basis. In order to measure inflation, an assessment is made of how much the CPI has risen in percentage terms over a given period compared to the CPI in a preceding period. If prices have fallen this is called deflation. The headline CPI (for all urban areas) annual inflation rate at the end of Q was 4%. This rate was 0,1 of a percentage point higher than the corresponding annual inflation rate of 3,9%. On average, prices increased by 1.4% between February 2015 and March 2015.

6 The Rand lost almost 5% against the US Dollar in Q1 of this year, breaching the R12.00 level to reach lows last seen in The weakness was mainly in response to better-than-expected US jobs data, however the week in which the most severe fall in currency was recorded coincided with the suspension of top executives at the country s power utility. The Rand looked slightly more promising against the Euro, and gained 7% in the last quarter as a result of quantitative easing in the Euro area. In the medium term, trajectory of the Rand will mainly be dependent on global monetary policy events, the biggest being the timing of the normalisation of US interest rates. Prime bank lending rates ended the quarter at 9.25%. The South African Reserve Bank (SARB) left repurchase interest rates unchanged at 5.75% at last quarter close. It signalled however that a raise may be coming soon forced by an increase in inflationary pressures. Global economic growth was slow and uneven in Q1, with expansion continuing but at a fragile and uneven pace. Prospects in Europe and the US improved, but the US momentum was affected by once-off factors. Developing countries continued to experience difficult conditions, hurt by weak global trade. In China, further signs of slower growth prompted the government to set a lower GDP growth target of 7% for 2015, after maintaining 7.5% for the last three years. The International Monetary Fund (IMF) downgraded its global gdp growth forecast for the next two years, following similar moves by the World Bank and the Organisation for Economic Growth and Development (OECD). The IMF expects global GDP growth of 3.5% in 2015 and 3.7% in 2016 lower than the 3.6% and 4% it projected in October last year. Developing economies are projected to grow by 4.3% (revised from 5%) in 2015, and 4.7% (revised from 5.2%) in CHINA GDP 7% Q Q Global GDP Growth Forecasts % % 3.5% 3.7%

7 Supply In the last quarter, the CBD, V&A Waterfront, Century City and Foreshore were the main office nodes to experience increased levels of activity. Following a similar trend as was seen in Gauteng in Q1 of this year, there was also an oversupply of both A and P-Grade office stock in Cape Town, particluarly in the CBD. Rentals very much favoured the tenant overall. It is thought in property circles that with the saturated supply levels that have been seen, it looks quite likely that the highly successful Century City will experience a temporary oversupply of office space for the near future. This is owing to new office developments being brought to market. Noteworthy completions in Q1 in the Western Cape included, but were not limited to: - ETV Offices (Roeland Park, 16,000m²) - The Edge (Tyger Valley, 11,000m²) - Park Lane (Century City, 3,000m²) Please refer to Fig 1 on the following page for a selection of ongoing, new and planned construction projects in the Western Cape.

8 Supply Fig. 1 SELECTED KWAZULU-NATAL OFFICE DEVELOPMENTS UNDER CONSTRUCTION Development Status Completion Location Size Standard Bank Centre Under construction Q Cape Town CBD 60,000m² Roeland Park Under construction Construction Ongoing Cape Town CBD 26,000m² 117 Strand (Hotel & Offices) Under construction Q Cape Town CBD 18,000m² Touchstone House Under construction Q Cape Town CBD ±11,350m² Twinell Building Under construction Q Cape Town CBD 6,500m² PWC Under construction Q V&A Waterfront ±8,200m² Silo 4 Under construction Q V&A Waterfront ±2,500m² Yacht Club Planned Estimated Start on Site Q Gateway to the V&A Waterfront 40,000m² Citadel Under construction Q Claremont ±5,000m² Bridge Park Under construction Q Century City ±18,000m² *Fig 1 above shows a selection of the Western Cape office developments currently under construction and planned. This is a sample list, and not fully indicative of the market as a whole.

9 Supply Fig. 1 SELECTED KWAZULU-NATAL OFFICE DEVELOPMENTS UNDER CONSTRUCTION Development Status Completion Location Size Grosvenor Square Under construction Q Century City ±5,000m² Boundary Campus (Refurbishment) Under construction Q Century City 5,300m² Park Lane Under construction Q Century City ±3,000m² Pam Golding on Main Under construction Q Kenilworth ±3,000m² 5 Brickfield Road Under construction Q Salt River 6,000m² Intaba (Mixed-Use) Under construction Q Foreshore 28,000m² Ducat Tower Under construction Q Foreshore 14,000m² CTICC Phase 2 Under construction Q Foreshore 10,000m² *Fig 1 above shows a selection of the Western Cape office developments currently under construction and planned. This is a sample list, and not fully indicative of the market as a whole. In addition to the developments detailed above, Amdec Group also has a 200,000m² mixed-use scheme planned in Culemborg, Foreshore. The scheme will be a phased development and will be the largest of its kind in Cape Town. A soft launch is planned for later this year.

10 Demand Demand in Q1 was extermely busy, with certain property developers reporting a 100% let status across their Western Cape development portfolios. Leasing activity overall in Q was on par with Q1 2014, with the market still being very much tenant-driven from both a supply and demand perspective. Notable new deals in the Western Cape from Q1 included, but were not limited to: Culemborg - Foreshore - 15,000 m² - 20,000m² - New Deals WNS - Claremont - 4,000m² - New Deal Yacht Club - Gateway to the Waterfront - 3,000m² - 7,000m² - New Deals Moore Stevens - Northgate - 3,500m² - New Deal PSG - The Edge - 3,000m² - New Deal Spearhead Business Park - Montague Gardens - 450m² and 240m² - New Deals 1 Thibault Square - CBD - 400m² - New Deal There were not significant renewals to report from the last quarter.

11 Vacancies National Snapshot As at Q1 2015, the national office vacancy rate as recorded by the South African Property Owners Association (SAPOA) was 11.2% - marginally up from 11.1% in Q and 25bps up on a 12-month basis. In square meters terms, 248,000m² was let nationally during Q1. Overall, the office sector is still in the early phases of a turnaround, with the aggregate vacancy rate having trended sideways since A sustained improvement in the office vacancy rate relies squarely on a strengthening of key drivers such as economic growth and business confidence. The current phase of the cycle should be viewed in the context of the period when both the office vacancy rate and macroeconomic fundamentals were at a similar crossroads. During that period, a spike in interest rates and a weakening currency saw a further deterioration on the office vacancy rate. 11.2% NATIONAL VACANCY RATE 248,000m ² LET SPACE NATIONALLY Currently, the South African currency, inflation, and interest rates to a certain extent, are at the mercy of the US Federal Reserve and their decision on interest rates.

12 Q Q Western Cape On a regional level at quarter end, the lowest vacancy rate nationally was recorded for Cape Town at 9.5%. This is up by 30bps from the previous quarter. Western Cape Rental Rates Please refer to the graphics below for the average gross rental bands for each office grade in the Western Cape for Q compared against Q WC VACANCY 9.5% +30bps Q Q Gross Rent (R/m2) Q R185/m 2 R215/m 2 GRADE P Q R115/m 2 Q R125/m 2 GRADE A GRADE Q R85m 2 B R90m 2

13 Market Prognosis Overall, the short-term outlook for the Cape Town office market remains mildly optimistic, with high-end demand for efficient, modern office space remaining stable. The market is anticipated to be busy, with a positive increase in space enquiries and deal conversions. So far as stock is concerned, the revamp and upgrade of older, vacant, B-Grade buildings to an A-Grade standard will continue to be a must for Landlords wanting to attract new tenants. Operating expenses also continue to be a promiment driver of concern. Businesses are also likely to continue to want to move back into Cape Town. The significant rejuvination of the CBD so far as transport and security is concerned has been phenomenal, and remains a huge draw for corporates. There are also a number of mixed-use lifestyle schemes planned for the area in the coming months. Report Sources: Amdec Group Business Day Colliers International South Africa GlobalRates.com Growthpoint Properties Investment Property Databank (IPD) Nedbank Redefine Properties South African Property Owners Association (SAPOA) South African Reserve Bank (SARB) Statistics South Africa Trading Economics

14 502 offices in 67 countries on 6 continents 1.75 billion in annual revenue Natasha Alomia Research & Marketing Consultant South Africa Mobile natasha.alomia@colliers.com Colliers International Johannesburg 108 Albertyn Avenue Sandton 2146 South Africa Main Fax info.johannesburg@colliers.com Colliers International Cape Town 13th floor, 7 Coen Steyler Avenue Cape Town 8000 South Africa Main Fax info.capetown@colliers.com 1.7 billion square metres under management 16,300 professionals and staff About Colliers International Colliers International is a global leader in commercial real estate services, with over 16,300 professionals operating out of more than 502 offices in 67 countries. A subsidiary of FirstService Corporation, Colliers International delivers a full range of services to real estate users, owners and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, mortgage banking and insightful research. The latest annual survey by the Lipsey Company ranked Colliers International as the second-most recognized commercial real estate firm in the world. colliers.co.za Disclaimer The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.