Nationally, retail property continues to show growth

Johann Boshoff

There is a strong international focus on Africa as a new growth frontier, which has lent some impetus to the market, as South Africa and Johannesburg in particular is seen as the gateway to the continent. Investment in infrastructural improvements such as those in Midrand, which have allowed the Waterfall development to rise out of the ground and developers taking positions near the Gautrain stations in the decentralised CBDs of Sandton and Rosebank, have driven activity in the market. Tenants are also very sensitive to public transport infrastructure as improved convenience and working environments for staff are prioritised in order to maximise productivity. In addition, industrial property continues to yield steady results with movement in warehousing and distribution contracts sustaining activity.

Some corporate realignment

The office market is experiencing little or no growth, as companies find themselves under pressure as macroeconomic factors take their toll on growth prospects, in spite of some corporate realignment in areas such as Sandton and Midrand in Gauteng. However, pockets of value are to be found as we work closely with tenants to maximise efficiencies and improve working spaces. We are seeing a desire from landlords for more 'value-add' from property managers in terms of vacancy management and tenant retention. As a result, focussed strategies executed by experienced professionals and geared to cater for each individual property have become the industry norm in the current highly competitive environment.

The ongoing increase in the operational expenditure of running a rental enterprise is putting pressure on net rentals for landlords, while stubbornly high vacancy factors in some areas, particularly in the office market, exert downward pressure on rentals as increasingly savvy tenants have more options and negotiate better lease terms.

Challenges present opportunities

The opportunities for growing business lie in the very challenges that face us. Through increasing long-term building efficiencies especially around 'greening' buildings for long-term operating cost savings; increasing international interest in the South African market as we comply with international real estate regulations with the conversion of property loan stock structures to real estate investment trusts; and working closely with tenants to understand their needs and provide intelligent property solutions.

Further opportunities also lie in the growth of the African middle class both within and across our borders.

Shortages in investment market

In the investment property market there is a shortage of quality assets for sale, as investors who hold prime properties find little incentive for disposal as replacement stock is not easy to find. The demand for commercial property may eventually trigger new builds.

In the current low inflation, low interest rate climate, yields remain low in a market characterised by a shortage of A-grade assets and with an expanding base of qualified investors fuelling demand, applying downward pressure to yields. There is a widening of the gap between A-grade assets and B-grade assets, with some strong players capitalising on this trend by acquiring value assets and working with the property managers in order to increase net incomes and achieve good rental growth in the medium term.

Regional trends

Turning to the Western Cape region, office vacancies in the Cape Town area and surrounds have been relatively stable and even decreased in the second quarter of 2013 - currently standing at around 9.6%. Although the scale of developments has decreased considerably, developers are still building for the future and constructing new offices. A notable trend in the market is towards B grade offices, which are reflecting a greater improvement in vacancies in relation to the other classes. This is most likely a key factor influencing the demand for B-grade space, as businesses seeking value accept lower grade offices to meet cost requirements.

Cape Town has a two-tier market, where the limited demand is for quality buildings, which places pressure on secondary buildings where vacancies are already high. This presents significant opportunities for improvement and growth in capital value in this market as secondary stock becomes considered for redevelopments and refurbishments in the near future.

We see lower prices generally remain a theme in the market as landlords become more competitive in regard to rentals, including increased letting incentives, tenant installation allowances, a rent-free period and even relocation costs, in order to reduce vacancies. Despite high rentals, vacancies are very low in prime locations such as Century City and the V&A Waterfront, which is testament to the high appeal of a good location with excellent surrounding infrastructure. While the demand for office accommodation is relatively flat in the Cape Town market, the majority of enquiries are from the likes of IT firms, international call centres and renewable energy companies.

In KwaZulu-Natal, the demand for quality office space to lease north of Durban remains constant, although asking rentals have remained flat. There is a significant over-supply of office accommodation in the Durban CBD, which over the past year has resulted in a lowering of asking rentals in that area. Positively however, vacancies in retail centres remain low. Areas receiving considerable attention in the province include the Hammarsdale/Cato Ridge corridor west of and a development in Cornubia Industrial & Business Estate in the rapidly growing northern development corridor near uMhlanga Ridge and the Gateway precinct.

Acquisitions drive retail section

As a whole, the market is still slower than pre-2008 levels with fewer transactions and increased competition for corporate leasing deals and the key focus will remain on achieving operational efficiencies and in pursuit of pockets of value.

Currently managing approximately R55 billion in assets on behalf of property owners, since the start of 2013, the company has acquired the management of 34 additional properties with a combined market value of approximately R2.7 billion. These comprise 20 retail properties, which are predominantly rural-based and in neighbouring centres, nine office buildings and five industrial properties.