Office Market Analysis KwaZulu-Natal Report
Contents Highlights 1 Summary & Statistics 2 Climate 3 Foreign Investment 5 Listed Property 6 Supply 7 Demand 9 Vacancies & Rental Rates 10 Prognosis 12 Office Market Analysis KwaZulu-Natal Colliers International South Africa
Report Highlights State of the Nation SONA was described as more platitudes at a time when much harder discourse was needed to restore confidence. Government would cut bureaucratic excesses Remove red tape and review legislative implementation to ensure consistency and certainty Make it easier to import skilled labor National minimum wage did not undermine small businesses or job creation Budget A balancing act of the need for fiscal consolidation versus the alarming slowdown in the economy. To boost investor confidence, South Africa needs to have a massive intervention to preserve fiscal deficit targets. We spend too much on servicing debt and with a looming downgrade that could rise even further. It requires real expenditure cuts to show meaningful savings but if we slam on the fiscal brakes too hard, we will lose our growth momentum which will be worse. All things being equal it is a very difficult time. Many economist feel the stalemate between Government and Business has been broken and that real structural change will follow. The political center has shifted since the Nenegate and Zuptagate events. Ghordan and treasury have delivered fiscal conservatism to ensure stability but can government ignite confidence and allow growth going forward. The verdict is not yet out but events at SARS and impeachment proceedings against the president are a cause for concern. Office Market Analysis KwaZulu-Natal 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 KwaZulu Natal office market and future prognosis for the market. The Analysis focuses specifically on the Durban area within KwaZulu Natal. KZN Current Future 165 115 9.5 10,9 10,9 8-10 6 month outlook 6 month outlook 6 month outlook 6 month outlook 6 month outlook 6 month outlook 165 115 9,5 11,5 11,2 8-10 Office Market Analysis KwaZulu-Natal 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 0,8%, implying that South Africa is on the verge of a recession (the GDP shrank 1,2% in ). 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. Apart from the Rand depreciation the possibility of high increases in electricity tariffs are also a threat in driving inflation higher. Structural impediments include: Constrained electricity supply, Poor education, Poor labor market flexibility, High unemployment, Significant inequality (leading to corruption) SARB Growth Forecast 0,8% 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 2,9 Billion trade surplus in March. Stable / rising oil prices and the reduction of imports, as well as an increase of exports as a result of strengthening commodities eases the pressure on the current account deficits (4% of GDP for ). Inflation Inflation rose to a high of 7% in February on the back of weak oil prices and less demand from the credit sector of the banking services. 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 expected tariff increases will drive inflation higher. The Reserve Bank continues to use inflation targeting as its policy to determine the Repo Rate. CPI Inflation 6,57% Office Market Analysis KwaZulu-Natal Colliers International South Africa
Annual Property Escalations 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%) At the time of this Analysis being published, SARB had increased its benchmark Repo rate by 25bps on 26 January and a further 25bps on 17 March, as forecast. Further rate hikes are not expected during the second quarter. It is anticipated that a hike in prime interest rates will affect South Africa s commercial property market. Annual Property Escalations 8-10% The Rand Interest Rates An increase of 25bps in January and March saw the Repo rate at 6,75% at the end of the quarter. Prime bank lending rates ended at 10,5% with increases in January and March synchronised with Repo rate. The depreciation of the Rand, (25% of its value in the last year) will have a significant effect on long term inflation. 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. 10,5% Prime Bank Lending Rates 6,75% ASRB Repurchase Rate 25% Office Market Analysis KwaZulu-Natal 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. Foreign direct investors (FDI) flow into South Africa nosedived by 74% to $1,5 billion during 2015. From US $8,3 billion in 2013 and $5,7 billion in 2014. 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% Attacq NAV +24,5% Office Market Analysis KwaZulu-Natal 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. Accelerate has announced its intention to acquire a portfolio of retail property in Poland and Czechoslovakia. 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. Office Market Analysis KwaZulu-Natal Colliers International South Africa
Supply The office market has, by and large, remained stable. The key commercial nodes continue to be La Lucia Ridge and Umhlanga New Town Centre, where a number of developments are coming on stream. There has been active redevelopment of CBD buildings to Retail/Residential similar to the re-development of Braamfontein in Johannesburg five years ago. Developers are actively seeking and purchasing buildings for this purpose in the Durban CBD Office Market Analysis KwaZulu-Natal Colliers International South Africa
Supply SELECTED KWAZULU NATAL OFFICE DEVELOPMENTS UNDER CONSTRUCTION Development Status Completion Location Size Illovo Sugar Head Office Under Construction Parkside, Umhlanga Ridge 8,500m² Growthpoint Ridgeview Under Construction Ridgeside, Umhlanga Ridge 6,500m² The Boulevard (1 st Phase) Under Construction Q2 Umhlanga New Town Centre 5,500m² Redev. Of Upminster Building Under Construction Essex Gardens, Westville 1,370m² Woodford Under Construction Q4 Essex Gardens, Westville ±1,230m² *Fig 1 above shows a selection of the KZN office developments currently under construction. This is a sample list, and not fully indicative of the market as a whole. In addition to the developments detailed above, there is also a significant long-term Tongaat Hulett / ethekwini Municipality joint venture development called Bridge City, which is worth noting in KwaZulu-Natal. Located within the Inanda, Ntuzuma and Kwamashu (INK) region, Bridge City is a 60 hectare development which started in 2008 (estimated completion is 2020), and it sees the conversion of an old, unsold industrial estate into a new Town Centre in a previously underdeveloped region. Based on a successful inter-model facility that includes the Bus Rapid Transport (BRT) and a Rail Station, Bridge City is very well located for convenient access. The entire development includes a mixed-use and residential Town Centre, as well as a Business Estate (a Greenfields development), which is expected to attract public and private investment totalling R10 billion, with the Business Estate set to transform the surrounding communities of Inanda, Ntuzuma and KwaMashu (INK). With the rail line now operational, a significant increase in inquiries for Bridge City have been noted, with Tongaat Hulett having sold three sites in the soonto-be-completed Estate over the past year. A number of new deals are also due to conclude in both the Town Centre and Business Estate over the next few months. Office Market Analysis KwaZulu-Natal 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 public transport. Overall, little change since the previous quarter. Notable new deals and renewals in KwaZulu - Natal from included, but were not limited to: 320 West Street Point Road District Ballito Junction Bridge City Office Market Analysis KwaZulu-Natal Colliers International South Africa
Vacancies National Snapshot As at, the national office vacancy rate as recorded by South African Property Owners Association was 10,9% which is up on the quarter before and a continuation of the broadly sideways trend of the last 5 years. This comes after a promising 60bps improvements in Q2 2015 which was the largest quarter-on-quarter decline since 2008. While the vacancy rate is now 0,3% lower than a year ago, there still isn t a clear downward trend of the last 15 quarters, there were only 6 periods of positive nett 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. During a total of 854k m² was under construction, of which 82% fell within the Gauteng office nodes. 10,9% NATIONAL VACANCY RATE Office Market Analysis KwaZulu-Natal Colliers International South Africa
KZN Vacancies Rental Rates On a regional level at quarter end the vacancy rate was recorded for Durban CBD at 13,4% which is an decrease of 1,3% from Q4 2015. VACANCY 10,9% Greater Durban rentals in the greater Durban area (ethekwini) were characterised by a sideways movement in rentals. Durban CBD and Ballito have shown a modest reduction in vacancies, as a result of landlords reducing and/or maintaining their rental rates in-order to retain tenants. Umhlanga Ridge has shown an increase in vacancies which have stagnated rental rates for that node. Johannesburg s office market was the biggest driver of the national improvement in the vacancy rate, by contributing 50bps of the overall 60bps 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 0,8% over the course of. Tshwane (9,8%) has the fourth highest office vacancy rate after PE (16%), Johannesburg (12,3%), ethekwini (10,9%) among the five major national metros and with Cape Town showing the lowest vacancy at 7,2%. Grade P Grade A Grade B 2015 Q2 2015 2015 Q2 2015 2015 Q2 2015 Average R125/m² R105/m² Average R145/m² Average R110/m² R101/m² Average R115/m² Average R85/m² R84/m² Average R95/m² Office Market Analysis KwaZulu-Natal Colliers International South Africa
Market Prognosis Modest signs of a market recovery were noted in Q4, 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, retreating growth in emerging markets (BRICS) has characterised the last quarter. Political turmoil has further added to a general lack of business confidence in South Africa. 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. Notably between Umhlanga New Town/La Lucia (8,6%) vs Durban CBD (13,4%). 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 KwaZulu-Natal Colliers International South Africa
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