Office Market Analysis Gauteng Report
Contents Highlights 1 Summary 2 Statistics 2 Climate 3 Supply 6 Demand 8 Vacancies 9 Gauteng Rental Rates 10 Prognosis 11
Report Highlights P Grade outperforms A and B Grade despite the current economic climate. P Grade vacancies declines by 3,9% to 5% in the previous quarter. Stronger rental growth achieved for P Grade office space is driven by greater efficiency offered with newer and higher quality buildings, offering long term budget and operating cost savings despite higher rentals. Office vacancy rates in Johannesburg declined in to 11,3% from 12,4% in the same quarter last year. Office stock in Johannesburg was expected to increase by more than 400 000m² by 2017, and the slow growth in demand suggested the market might be in over-supply in the near future. Office demand is expected to remain flat in Johannesburg in 2016, inline with employment outlook for that period.
Report Summary 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 Summary Statistics 200-240 120-160 9,5 11,8 9,8 10,6 8,0-10 6 month outlook 6 month outlook 6 month outlook 6 month outlook 6 month outlook 6 month outlook 6 month outlook 180-220 110-150 9 11,9 9,8 11,0 8.0-10
Macro-Economic Climate South Africa s Economic Growth was marked by the massive slump in the Chinese economy that led to a global slump in commodity prices, which negatively impacted South Africa and its mining and resources industry. The South African Reserve Bank has adjusted it's average growth forecast down to 1.5%, implying that South Africa is on the verge of a recession. The South African Reserve Bank (MPC) continues to look at raising interest rates, while many other commodities / currencies driven 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 between rich and poor, SARB Growth Forecast 1,5% 1.5% South Africa has entered a stagflationary environment. 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 far outweigh the long term suffering, if 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 Monitory policies, and thankfully this prevents South Africa from a further economic ratings down grade. A final positive in the economy has been the narrowing of the trade deficit to 0.9 billion in September. Lower oil prices and the reduction of imports, as a result of the weaker domestic demands eases the pressure on the current account deficits, and may help to underpin the Rand after it fell approximately 25% against the Dollar, in the year to end of. Inflation Inflation has eased to 4.51% 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 further drive inflation higher. The Reserve Bank continues to use inflation targeting as its policy to determine the Repo Rate. CPI Inflation 4,51% 4.51%
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 repurchase interest rate by 25bps on 23 July, as forecast. Further rate hikes are expected towards year-end and in 2016 on the back of mounting inflationary pressures. 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 is expected in Q4 and Q1 2016. Prime bank lending rates ended at 9.50%. The depreciation of the Rand, (25% of its value this 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. Of course when the economy does start to grow again, the effect of the weak rand will hit us hard. +9.50% Prime Bank Lending Rates 6.00% SARB Repurchase Interest Rates 25%
Foreign Investment The South African listed property funds achieved a 13.25% Rand return in the first 9 months of, while North America achieved 14.48%, Australia 13.1%, Europe 27.92% and Globally a 15.43% return. Currently emerging markets are the most attractive. In particularly currency depreciation prevents major foreign investors from buying into the South Africa s listed property sector Interesting to note that 20% of Growthpoint s assets are held by foreign investors, while 23% of Redefines assets are also held by foreign investors. Foreign direct investors (FDI) flow into South Africa are expected to increase this year after a sharp decline in 2014. From US 8.3 billion in 2013 to 5.7 billion in 2014. South Africa needs to move away from a traditional reliance on commodities. The economic climate in China and other emerging markets will have a direct influence on FDI flows into South Africa in the next year. Chinese investors might well seek a better return in Africa (South Africa). Rand Return 13.25% Growthpoint 20% Foreign Investor Assets
Supply 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. Developments Under Construction Approx. Size (m²) Node Developer Discovery Head Office 87,000m² Sandton Growthpoint / Zenprop Sasol 67,000m² Sandton Alchemy Alice Lane Building 3 35,000 Sandton Abland Webber Wentzel 34,500m² Sandton Redefine Anslow Park Phase 2 9,461m² Bryanston Growthpoint The Crossing 4,750m² Bryanston Barrow Culross on Main Extension 2,300m² Bryanston Barrow Rosebank Towers 22,000m² Rosebank Redefine / Abland Oxford and Glenhove 54 22,000m² Rosebank Barrow Glenhove 6,000m² Rosebank Barrow
Supply Development Approx. Size (m²) Node Developer Hill on Empire Building A 6,680m² Parktown Abland PWC Head Office 40,000m² Waterfall Business Est Atterbury Schneider Electric 14,000m² Waterfall Business Est Atterbury CTM & Haltie 7,000m² Waterfall Business Est Atterbury Stoneridge Office Park, Building E 3,700m² Modderfontein Abland Hertford Office Building E 3,700m² Midrand Abland Hazeldean Office Park Phase 3 Buildings D & E 6,000m² Tshwane Abland Willows Office Park 4,200m² Tshwane East Abland
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 and experience with new models for occupiers. It also sees long term demand increasing in areas serviced by the Gautrain and other means of public transport.
Vacancies National Snapshot As at, the national office vacancy rate as recorded by South African Property Owners Association was 10.6% which is unchanged 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 which was the largest quarter-on-quarter decline since 2008. While the vacancy rate is now 1% 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. In square meter terms, an aggregate of 221 000m² was let during the past quarter while 240 000m² of stock was added to the survey sample - a net take-up of around 19 000m². 10.6% NATIONAL VACANCY RATE
TSHW JHB Vacancies On a regional level, at quarter end, Johannesburg posted an improved vacancy rate of 11.3%, and Tshwane s rate reduced to 10.6%. VACANCY 11.3% 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 deteriorate slightly by 0.3% over the course of. Tshwane has the second highest office vacancy rate after Johannesburg among the four major national metros. VACANCY 10.6% Rental Rates Grade P Grade A Grade B Q2 2014 2014 Q2 2014 2014 Q2 2014 2014 R85 R115/m² Average R170 R220/m² R170-R220/m² R125 R160/m² Average R125-R160/m² Average R185-R240/m² The latest quarter also saw asking rentals continue its above inflation trend by posting a year-on-year growth of 7.1% - up from 5.1% in Q2. The rise however, is more a product of supply side dynamics than it is demand-driven. recorded a 2.2% quarter on quarter increase in the prime office vacancy rate meaning that current asking rentals are based on a better quality sample than the quarter before. The latest uptick in rental growth needs to be put in context though. On an inflation-adjusted basis, office rentals are down 15% since Q1 2011 having grown only half the rate of inflation recorded over this period. Average R120- R160/m² Average R95-R115/m² Average R85-R95/m²
Market Prognosis Global slowdown in commodity prices and the collapse in the Chinese stock market has characterised the last quarter leading to a general lack of business confidence in South Africa, notably the weak currency will open an opportunity for certain global organisations to relook at South Africa as a value driven destination(for selected business operations eg. Call Centers), the office market will remain flat as tenants seek value and Landlords look to retain those tenants. 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 polarized between centralized and decentralized nodes. With centralized nodes attracting tenants to the city at the expense of decentralized nodes eg. Greenstone vacancies 26,3%, Morningside vacancies 19,8% (Aveng exit), and Rivonia vacancies 18,5%. 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
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