With South African businesses and the real estate sector operating in a low growth economic environment, the commercial office market is decidedly fragile. Over the past several years, there has been a marked slowdown in demand for office space by multinational enterprises and local companies - which appears to be continuing in 2019.
Given that the economic challenges are unlikely to lessen in the short term, it is imperative that local real estate developers, landlords and property managers have a thorough understanding of what is driving occupier space today.
Naturally, the total cost of occupancy will always be top of mind. Yet there are several less well-documented factors – many which are unique to South Africa – which are undoubtedly impacting commercial leases today.
Let’s take a closer look...
1. Demand for ethical landlords
Increasingly, occupiers want to rent office space from landlords who are above reproach. Given the prevailing political climate, occupiers tend to shy away from landlords who are politically exposed and have been accused of poor corporate governance and/or unethical behaviour. Some occupiers are now even unofficially blacklisting landlords who are known for not fulfilling their lease obligations – meaning, these corporations will not consider renting from the landlords whom they have blacklisted. The blacklisting of landlords is often attributed to the following: a) properties that are legally non-compliant and that do not have valid Occupation Certificates, b) exploitation of tenants’ unawareness when it comes to leases, c) incorrect billing, d) unprofessional, unaccountable and unresponsive management teams, and e) disregard for repair, maintenance and replacement obligations.
2. Electricity supply infrastructure under scrutiny
With load shedding fast becoming an established feature of the local business risk environment, companies are looking more carefully at power supply infrastructure. Moreover, Eskom is expected to increase tariffs by a significant amount over the next several years, which is making it critical for businesses to find ways of minimizing their power consumption - while also achieving business continuity during the rolling blackouts.
As a result, when choosing office space, businesses will naturally be scrutinizing the electricity supply infrastructure and will certainly look favourably at office facilities that connect to newer electricity infrastructure. For business continuity purposes, occupiers are demanding that properties offer suitable generators.
To gradually become less reliant on Eskom, occupiers are also looking at properties that offer off-grid electricity solutions such as renewable solar systems.
3. BBBEE credentials shaping choices
Currently, a company’s level of compliance with BBEEE is designated by means of the valid BBBEE Status Level Certificate it holds. Given that organisations’ earning of supplier and enterprise development points is directly dependent on the BBBEE Status Levels of their vendors, businesses frequently require landlords to be in possession of valid BBBEE Status Level Certificates.
Office tenants generally require property owners to hold valid BBBEE Status Level Certificates with a rating of at least four, but preferably closer to one. This requirement is set to become one of the main determinants that businesses will examine when procuring office premises going forward.
4. The continuing high cost of crime
Even though South Africa’s rates for most types of crime align with international levels, its violent crime rates are sadly among the highest in the world. Notably, business losses to crime in the country align with middle-income countries such as Brazil and Russia. South Africa’s losses are, however, attributable directly to crime, while middle-income countries’ losses are as a result of crime prevention costs.
Research has revealed that increased crime rates reduce business entry, and that property crimes in particular have a high impact on the entry of corporations into South Africa. Crime further deters business growth and negatively influences economic growth and job creation. Without doubt, elevated crime levels often keep foreign investors from investing in South Africa.
Today, businesses have no choice but to spend substantial amounts on safety and security. Enterprises, more often than not, lease office premises in locations that have lower crime rates, as this fundamentally results in a reduction in their spending on safety and security - and assist them in attracting the talent and clients they desire.
5. Green building coming more into focus
The South African government has a constitutional mandate to protect the country’s environment. Given that around 60% of the world’s electricity is consumed by residential and commercial buildings, the South African National Standard 10400-XA ‘Energy Usage in Buildings’ Regulation was added to South Africa’s National Building Regulations for Energy Usage in Buildings in 2011. This was done to combat the continuous rise in greenhouse gas emissions by improving the energy efficiency of buildings in South Africa. The new code specifies levels of insulation, glazing, and energy use for a minimum level of energy efficiency. This enforces a level of green building awareness in the public at large.
While the primary motivator for green buildings in the commercial space in South Africa is ethical in nature, it is closely followed by the drive for lower operating costs and consumption charges. Looking at current trends, it is clear that a profit motive often also exists, especially when it comes to longer occupancy periods, and that office tenants frequently look at the overall business case and bottom line prior to renting green buildings. Notably, occupiers do not necessarily only consider properties that offer Green Building certification, but also consider office space that offers green elements.
6. Water scarcity looming large
South Africa is a water-scarce country. According to reports, over 60% of the country’s rivers are being overexploited and only one-third of its main rivers are in good condition. Demand for water supply is set to rise, driven by population growth, urbanization, continuing non-renewable electricity generation and a growing manufacturing sector.
Notably, the reliability of water supply service delivery is a significant challenge in South Africa, which is made worse by massive wastage. Research has revealed that water losses due to infrastructure failure account for around 37% of all piped water – with overall losses estimated at approximately R7.2bn per annum.
With the above in mind, it is natural that more than ever before, businesses frequently require that office buildings offer backup water via pump and tank systems in order to ensure business continuity.
New solutions, new thinking
Although the economic outlook may appear grim for both businesses and the property industry, challenges always represent opportunity for those with vision. Indeed, if property developers, landlords and property managers can offer businesses seamless solutions to the pain points listed above, the next several years can bring renewed growth and widespread innovation to the South African office market.
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