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Not all gloom in commercial property

Jul 23 2013 15:02 Fin24

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Cape Town - While challenging trading conditions in the commercial property market are resulting in muted overall growth, there are factors which give cause for optimism in activity and future potential.

So says Johann Boshoff, MD of JHI Properties, a member of Excellerate Property Services group.

“The retail sector nationally continues to show positive growth, with good results from retail companies buoying demand for space; however, it appears that small, non-national retailers are finding trading conditions more difficult," said Boshoff.

"The burgeoning black middle class is driving the demand for brands and shopping convenience, with major retailers positioning themselves to capitalise on this pocket of growth."
 
There is a strong international focus on Africa as a new growth frontier, which has lent some impetus to the market as South Africa. 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 Gautrain stations in the decentralised Sandton and Rosebank CBDs have driven activity in the market.

Tenants are also sensitive to public transport infrastructure, with priority given to convenience and an improved working environment to boost productivity.

In addition, industrial property continues to yield steady results with movement in warehousing and distribution contracts sustaining activity.

"It is true that 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 realignments in areas such as Sandton and Midrand in Gauteng," said Boshoff.

“We are seeing a desire from landlords for more ‘value-add’ from property managers in terms of vacancy management and tenant retention.”

He said 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.
 
In the investment property market, there is a shortage of quality assets for sale as investors who hold prime properties find little incentive to sell as replacement stock is not easy to find, according to Boshoff.

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," he said.

"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.”

Turning to the Western Cape region, JHI Properties reports that office vacancies in the Cape Town area and surrounds have been relatively stable, and even fell in the second quarter of 2013 – currently standing at around 9.6%.

Although the scale of developments has dropped 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," he said.

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 low in prime locations such as Century City and the V&A Waterfront - 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 Durban, where JHI manages the new Hammarsdale Junction Shopping Centre as well as development in Cornubia Industrial & Business Estate in the rapidly growing northern development corridor near uMhlanga Ridge and the Gateway precinct.

“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," he said.

- Fin24

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