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Sandton weighs heavy on national office vacancies

JOHANNESBURG – The sheer number of speculative developments in Sandton is the main driver for increasing office vacancies, helping to push the national average to 11.3% in the second quarter of 2014, up from 11% in the previous quarter.

According to the South African Property Owners Association (Sapoa) office vacancy survey, the market saw a total of 72 500 square metres vacated, 119 000 square metres let and 192 000 square metres added to stock through developments.

Sandton, dubbed Africa’s richest square mile for the last three quarters added to vacancies and is responsible for the bulk of increases in vacancies, says executive director of Investment Property Databank South Africa Stan Garrun.

“It [the survey] is a barometer of the health of the industry. After the start of the global financial crisis, vacancies shot up and are now ticking up every quarter,” Garrun explains.

Developments remain concentrated in Sandton, attracting 30% of developments compared with developments seen nationally.

“Developments remain high and a risk in the short, medium and long term…. When we went through the last recession, people said ‘don’t develop’. Since then speculative developments have peaked [since 2008].”

Commercial and industrial property consultancy Jones Lang LaSalle South Africa (JLL) pins the current Sandton office supply to 1.5 million square metres. After the completion of all construction developments, JLL anticipates Sandton’s office supply to increase to 1.9 million square metres, which will be over the next three to four years.

Pretoria saw the lowest vacancies among the metropolitan areas, recording 9.5% up from 9.1%. Cape Town recorded vacancies of 9.7%, which were down from the previous quarter of 10.2%.

In Johannesburg the level of new developments – not only in Sandton but also Melrose Arch – saw vacancies rise to 11.9% from 11.4%. Durban saw the highest leap in office vacancies than all metros, reporting vacancies of 14.2%, a trend pinned to the lack of development activity.

Signs of pressure

The performance of office vacancies in South Africa, Sapoa notes are in line with the international property market, characterised by high vacancies in a market of muted growth.

“It is not a great market at the moment. Africa is not showing much improvement, but investors are looking for safe havens”.

A safe haven in Africa could possibly be Botswana, as Garrun says vacancies in the country are low because of the country’s small population of two million.

The survey states that the national average gross rentals for the office space reached R85 a square metres, while asking rent is currently 1.9% lower than a year ago, says Garrun. “It is indicative of the tough letting market. The focus is on keeping your tenants, while rentals are sacrificed to substitute vacancies,” Garrun explains.

Garrun says office vacancies are a cycle underpinned by economic fundamentals such as gross domestic product and employment growth, adding that if the economy is in the doldrums then it will reflect on the office property market. However, the turbulence of the office property market varies on the quality type of buildings.

Office space which is considered C-grade – buildings with older style finishes, services and building systems – shows the highest recorded vacancies of 35%.

Older buildings with finishes close to modern standards as a result of refurbishments and renovations, referred to as B-grade, saw vacancies increasing steadily since 2010. The increase in B-grade buildings could be explained by the move of investors from B to C-grade buildings.

Garrun says a worrying trend is the sharp rise of P-grade buildings, properties considered as top quality and located in prime suburbs. Vacancies as in the corresponding period for P-grade buildings was up to 8.5% from 0.5% in 2012, a rise which is attributed to speculative developments.

B-grade buildings are heading to a recession, the survey points, while C-grade buildings are already in a recession, but optimism beckons as the next phase will be of recovery.

“Troubled times are ahead, but [there are] early signs of recovery. Vacancies will remain high and rentals low until developments are taken up. Also vacancies shift around as there are more developments and existing spaces are gradually taken up”.

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