Office Market Analysis Gauteng Report
Contents Highlights 1 Brexit 2 Summary & Statistics 3 Climate 4 Foreign Investment 6 Listed Property 7 Supply 8 Demand 10 Vacancies & Rental Rates 11 Prognosis 13 Office Market Analysis Gauteng Colliers International South Africa
Report Highlights South African property sector is valued at R5.8 trillion, according to the latest Property Sector Charter Council s (PSCC) report aimed to determine the size of the country s property sector. This study, released today, builds on baseline research that measured the size of the property market in SA at a massive R4.9 trillion at the end of 2010. It shows a meaningful increase of nearly R1 trillion in four years. The Council reviewed market size estimation that provides a snapshot of the South African Property Sector using figures from the financial year 2014/2015. The report comes to clarify the parameters of the PSCC whose property charter was gazetted in June 2012. The charter seeks to ensure participation of black people to the tune of 25% of the total value associated with the property industry within the next few years. It reveals the property sector s size at R5.3 trillion with a further R520 billion land officially zoned for commercial and residential development. Commercial Property carries a value of around R1.3 trillion, up from some R780 billion, with almost R790 billion held by corporates, R300 billion held by REITs, R130 billion by unlisted funds, and R50 billion by life and pension funds. READ: Property Sector backs South African Economy with R191.4 billion 2012) followed by office properties at R357 billion (R228 billion) and industrial properties at R281 billion (R187 billion). Hotels and other property accounted for R94 billion in value (R25 billion). A key finding of the latest research shows that formal residential property still accounts for nearly three-quarters of property owned in South Africa, and grew from an estimated R3.0 trillion at the end of 2010 to R3.9 trillion. For the first time, it also considered informal residential property, although it has no value, which was quantified by the number of households provided by the Department of Human Settlements. READ: South Africa s property sector worth a whopping R4.9 trillion Undeveloped urban land zoned for development remained unchanged around R520 billion (1.1% of total land in SA). The public sector contributed a total of R237 billion, of which around R102 billion is estimated to be in the hands of the Department of Public Works, R66 billion held by SA s 19 largest state-owned enterprises, and R69 billion owned by metros and selected local municipalities. Source: SA Commercial Prop News Of this, retail property has the highest value at R534 billion (R340 billion in Office Market Analysis Gauteng Colliers International South Africa
Brexit Analysis SA s reliance on foreign money to finance the shortfall on its current account makes it the most vulnerable in sub-saharan African to fallout from the UK s vote to quit the EU, Moody s Investors Service has said. SA s current account deficit leaves it vulnerable to short-term capital outflows amid changes in investors risk perception and appetite, Moody s vice-president and senior analyst Zuzana Brixiova wrote in a report released on early July. The extent of SA s integration into global financial markets including its investment and financial links with the UK, means it is the region s most exposed sovereign to the immediate financial sector fallout from Brexit. Africa s most industrialized economy depends on capital inflows to fund the shortfall on its current account, the broadest measure of trade in goods and services, putting it at the mercy of global investor sentiment. The deficit widened to 5% of GDP in the three months through March. SA s currency had initially underperformed most emerging markets after the Brexit vote, reflecting the economy s dependence on investors money and close links with the UK, Moody s said. More global liquidity due to reduced chances of a US rate hike and an expansionary monetary stance by the Bank of England could increase the likelihood of the rand stabilising, the rating agency said. Brixiova also said, while SA would avoid slipping into a recession this year for the first time since 2009, and recovery would be affected adversely any increased risk aversion and reduced investor appetite towards emerging markets. The IMF cut its growth forecast for SA s economy to 0,1% from 0,6%. Low commodity prices and the worse drought in more than a century in SA contributed to a 1,2% contraction in GDP in the first quarter. Moody s left the country s credit rating at two levels above non-investment grade in May. Another view is that Brexit should be positive for emerging markets which benefits from increased liquidity as global capital is forced to search for higher yields. It is interesting to note that approximately $12 trillion is sitting in negative yielding bonds. For the risk averse paying a bank to hold your capital is better than the risk of losing it all. Offshore investors bought government bonds of R14,7 billion during June as opposed to outflows of R6,8 billion in the same period last year. Source: Bloomberg Industrial Market Analysis June Gauteng Colliers International South Africa
Report Summary Summary Statistics Colliers International South Africa s Office Market Analysis provides a brief overview of the key factors impacting the Gauteng office market and future prognosis for the market. The Analysis focuses specifically on the Johannesburg and Tshwane areas within Gauteng. Gauteng Current 190-240 120-160 9,5 11,6 9,2 10,5 8-10 Future 6 month outlook 6 month outlook 6 month outlook 6 month outlook 6 month outlook 6 month outlook 6 month outlook 190-240 110-150 9,5 11,4 9,2 10,7 8-10 Office Market Analysis Gauteng Colliers International South Africa
Macro-Economic Climate South Africa s Economic Growth continued to mirror the effect of the massive slump in the Chinese economy that led to a global slump in commodity prices, which negatively impacted South Africa and in particular the mining and resources industry. The South African Reserve Bank has adjusted it's average growth forecast down to 0,1%, implying that South Africa is on the verge of a recession (the GDP shrank 1,2% in the first two quarters of ). The South African Reserve Bank (MPC) continues to look at raising interest rates, while many countries are looking at cutting interest rates to support their growth. This is in line with inflation targeting policy of the Reserve Bank. It s a juggling act between domestic inflation caused by weak currency versus slow growth of a failing economy. Structural impediments include: Constrained electricity supply, Poor education, Poor labor market flexibility, High unemployment, Significant inequality (leading to corruption) SARB Growth Forecast 0,1% 1.5% Normally interest rates should be coming down due to the weak state of the economy, but unfortunately this is not so. Government spending needs to be more subdued, to prevent the country putting itself at risk for further credit rating downgrades. The solution to South Africa s recovery lies in the addressing of the aforementioned structural issues and the short term pain will outweigh the long term suffering, unless these issues are not addressed. There is a positive spin on the general outlook and the potential for the local economy is significant. More than 60% of the population is of working age, and once unemployment and education are successfully resolved, the sky is the limit. The steady but persistent deterioration of South Africa s governance and institutional ineffectiveness, is counteracted by the conservative Fiscal and Monetary policies, and thankfully this prevents South Africa from a further economic ratings down grade (the second quarter will be telling). A further positive on the economy has been the decrease in the trade deficit for January and February, with a R 18,7 Billion trade surplus in May (all time high). Stable / rising oil prices and the reduction of imports, as well as an increase of exports resulting from strengthening commodity demand eased the pressure on the current account deficits. Inflation Inflation for was steady at roughly 6%. Food prices look set to climb dramatically on the back of an unprecedented drought sweeping across South Africa s agricultural districts, this will put pressure on inflation going forward. Eskom s approved (/2017) 9,4% tariff increases will drive inflation higher. The Reserve Bank continues to use inflation targeting as its policy to determine the Repo Rate. CPI Inflation 6,3% Office Market Analysis Gauteng Colliers International South Africa
Rand vs USD Rand vs Pound Annual Property Escalations The Rand It is key to note that annual commercial property escalations are not necessarily linked to CPI inflation. At quarter-end, commercial property leases were (smoothed) between 8% to 10%, with office properties slightly higher than industrial. Tshwane generally exhibits a higher escalation rate than Johannesburg, Cape Town and Durban. (Tshwane average is closer to 10%) The saving grace is that the economic slow down has dampened the effect of currency depreciation on head line CPI. This means that the economy is doing so badly that manufacturers do not stock at higher imported prices unless absolutely necessary. The volatility of our currency gives major problem to investors, as they lack predictability in their financial modeling. Brexit has forced the Pound Sterling to massively retreat in strength, at the end of. Annual Property Escalations 8-10% Interest Rates An increase of 25bps in January and March saw the Repo rate at 7% at the end of the quarter. Prime bank lending rates ended at 10,5% with increases in January and March synchronised to the Repo rate. The MPC meeting in July it is expected to keep the Repo rate unchanged, as was the case for that meeting. Further rate hikes are not expected during the third quarter. 10,5% Prime Bank Lending Rates 7% SARB Repurchase Rate Office Market Analysis Gauteng Colliers International South Africa
Foreign Investment Currently European markets are the most attractive for South African funds to invest off-shore. In particularly currency depreciation prevents major foreign investors from buying into South Africa s listed property sector at this volatile point in time. Once the rand has stabilised we may find foreign investment returning seeking better yields. Foreign direct investors (FDI) flow into South Africa nosedived by 67% to $1,8 billion for 2015 from $5,7 billion in 2014. Volatile currency, poor industrial relations and unpredictable government policy demands add heavily to economic uncertainty. The South African economy needs to move away from a traditional reliance on commodities. The political climate in South Africa and other emerging markets (BRICS) will have a direct influence on FDI flows into the country in the year ahead. Chinese investors might well seek a better return in Africa (South Africa). Currency volatility remains an impediment. Rand Return (Listed Property) March 9,48% INTU Properties (week after Brexit) -28% Office Market Analysis Gauteng Colliers International South Africa
Listed Property Winds of Change Blow East A stagnant economy and a depreciating currency has ignited a new movement for the listed property sector to look East for better pastures. Particularly Central and Eastern Europe have seen extensive investments from the SA listed property sector. Targeted territories are Poland, Croatia, Montenegro, Romania, Czechoslovakia and Serbia. A major driver of this move is the ability to earn income in Forex but also the ability to borrow at very favorable rate in Euro and other currencies. Typically finance margins run at rates between 2, 5-4% and yields are recorded between 6 10% (Poland 6% & Croatia 10%). This movement was led by NEPI (New Europe Property Investments) an associate of Resilient which got a foothold in to Eastern Europe during 2008, and are currently a major stakeholder in the Romanian retail sector. This particular counter has appreciated of a rate of 850% from R 18,90 in April 2009 (listing price) to R 179,24 in May. That equates to 38% average growth per annum. Rockcastle another affiliate of NEPI has recently acquired a portfolio of retail outlets in Poland. Tower fund acquired various properties (Commercial and Retail) in Croatia during 2015. Hyprop acquired 2 malls in Serbia and Montenegro early February. March, Redefine took a 75% stake in a portfolio of 18 retail and commercial properties in Poland, valued at 1,2 billion which is the largest foreign transaction out of South Africa to date. It is also the largest property transaction in Poland s commercial history. In the interim Redefine has taken onboard 2 additional local investors in the form of Moolman Group and Pivotal Property fund. Sirius Real Estate has further acquired 2 business parks in Germany to add to their exciting portfolio. Funds invested in the UK experienced turbulence after the announcement of the Brexit results, but are expected to stabilise going forward. \With the Pound depreciation many UK funds may now look to South Africa as an investment destination. Accelerate has announced its intention to acquire a portfolio of retail property in Poland and Czechoslovakia. Office Market Analysis Gauteng Colliers International South Africa
Supply Developments Approx. Size (m²) Node Developer Mutual Place 30,000m² Sandton Old Mutual Discovery Building 105,000m² Sandton Growthpoint / Zenprop Sasol 67,000m² Sandton Alchemy Monte Circle 55,000m² Fourways Abland Alice Lane Phase 3 33,000m² Sandton Abland The Central 20,000m² Sandton Investec Webber Wentzel 34,500m² Sandton Redefine Da Vinci Building 40,000m² Sandton Legacy Group Despite an oversupply, Johannesburg will continue to see new developments of 591 000m² going forward. It is noteworthy that most of these developments are in close proximity to the Gautrain stations. Tenant driven supply will become a feature in the next year. Office Market Analysis Gauteng Colliers International South Africa
Supply Developments Approx. Size (m²) Node Developer Melrose Boulevard 15,000m² - 20,000m² Melrose Arch Amdec PWC Head Office 40,000m² Waterfall Business Est Attacq Schneider Electric 14,000m² Waterfall Business Est Attacq CTM & Hilti 7,000m² Waterfall Business Est Attacq Eco Junction 25,600m² Centurion M&T Rosebank Towers 30,000m² Rosebank Abland Oxford and Glenhove 22,000m² Rosebank Barrow The Crossing 4,750m² Bryanston Barrow Culross on Main Extension 2,300m² Bryanston Barrow In addition to the developments detailed above, as reported in the 2015 Gauteng Office Market Analysis, there continues to be a possible ±15,000m² new tenant-drive office scheme being considered for development in Rosebank above the Mews, opposite the Gautrain Station. Office Market Analysis Gauteng Colliers International South Africa
Demand The general economy is on a downward trajectory and all sectors are affected including office space. Businesses look for efficiency and are sensitive to total cost of occupation. Economic pressure means learning how to do more with less including the square meters in the office space. A continuing feature will be office space that is serviced by public transport, which is a key element in reducing parking expenses and time wasted in traffic, avoiding use of private vehicles. This economic climate causes landlords and tenants to innovate with new models for occupiers. Tenants are cautious to enter new premises and prefer to renew and scale down existing space (sub-let s increasing). It also sees long term demand increasing in areas serviced by the Gautrain and other means of public transport. Office Market Analysis Gauteng Colliers International South Africa
Vacancies National Snapshot As at, the national office vacancy rate as recorded by South African Property Owners Association was 10,5% which is 40bps down from the quarter before and a continuation of the broadly sideways trend of the last 5 years. This comes after a promising 60bps improvements in 2015 which was the largest quarter-on-quarter decline since 2008. While the vacancy rate is now 0,1% lower than a year ago, there still isn t a clear downward trend of the last 17 quarters, there were only 7 periods of positive net take-up. Pressure on profitability is seeing a renewed increase in B Grade stock and vacancies in this sector are likely to reduce over the next 6 months. At the closing a total of 825k m² was under construction, of which 85% fell within the Gauteng office nodes. 10,5% NATIONAL VACANCY RATE Office Market Analysis Gauteng Colliers International South Africa
TSHW JHB Vacancies Rental Rates On a regional level, at quarter end, Johannesburg posted an improved vacancy rate of 11,6%, and Tshwane s rate declined to 9,2%. VACANCY 11,6% Johannesburg s office market was the biggest driver of the national improvement in the vacancy rate, by contributing 70bps of the overall 40bps decline. Despite an improvement over the last quarter however, Johannesburg still has the highest vacancy rate among the four major national metros. Tshwane however, saw it s office vacancy rate improve slightly by 0,6% over the course of. Tshwane (9,2%) has the fourth highest office vacancy rate after Nelson Mandela Bay (14,4%), Johannesburg (11,6%), ethekwini (10,7%) among the five major national metros and with Cape Town showing the lowest vacancy at 7,8%. rentals in the greater Gauteng area were generally on a moderate increase with P grade accommodation escalating at above average (9,1%) for the quarter, A and B Grade office space displayed a stagnant rates trend. Seen in context, the modest rise in rental rates translate to deflation in real terms (On an inflation adjusted basis, office rentals are down more than 10% over the past 5 years having grown at only half the rate of inflation recorded over this period) Grade P Grade A Grade B 2015 2015 2015 Average R130/m² Average R145/m² Average R95/m² Average 100/m² Average R187/m² Average R194/m² VACANCY 9,2% Office Market Analysis Gauteng Colliers International South Africa
Market Prognosis Modest signs of a market recovery were noted in Q1, and this recovery trend was predicted for a few quarters going forward. However the economic events of had the effect of stifling those predicted growth trends. The most likely scenario is a stability phase where real growth is unlikely to be recorded in office rentals (operating cost and inflation may well erode profitability). Further absorption of lower grade office buildings into residential conversions in the CBD will contribute to stabilising of the office market in that area. Continued global depression in commodity prices and deteriorating growth in China as well as emerging markets (BRICS) has characterised the last quarter leading to a general lack of business confidence in South Africa, as well as fellow BRICS country's (except India). The weak currency will open an opportunity for certain global organisations to re-look at South Africa as a value driven destination (for selected business operations eg. Call Centres), the office market will remain flat as tenants seek value and landlords look to retain those tenants by offering discounted rates to renew leases. With landlords looking to secure longer leases and more favorable rates on offer, it has the effect of creating long term cash flow stability for investors. This is an ideal opportunity to acquire quality assets in preparation for the next economic recovery. Vacancy rates are becoming noticeably polarised between centralised and decentralised nodes. With centralised nodes (Sandton @ 10,7% / Rosebank @ 6,8%) attracting tenants to the city at the expense of decentralised nodes eg. Morningside vacancies @ 17,7%, and Rivonia vacancies @ 16,2%. Johannesburg CBD has a high vacancy @ 20,6% and it is expected that much of this will find residential conversions going forward. Report Sources Abland Alchemy Properties Atterbury Property Holdings Barrow Properties Business Day Live Colliers International South Africa Fin24.com GlobalRates.com Growthpoint Properties Investment Property Databank (IPD) Nedbank Redefine Properties South African Property Owners Association (SAPOA) South African Reserve Bank (SARB) Trading Economics Office Market Analysis Gauteng Colliers International South Africa
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