By Stephen Cranston

The Jo’burg CBD, for example — which with nearly 1,6mm² remains the biggest office node in SA — has experienced a vacancy rate increase from 10,5% to 13,8%, and the rentals for A-grade properties have stuck stubbornly at R70/m²

Last year was a strong year for listed property, which gave investors a 29,6% return. Yet in the direct property business, landlords are complaining that the office rental market is getting tougher. The Jo’burg CBD, for example — which with nearly 1,6mm² remains the biggest office node in SA — has experienced a vacancy rate increase from 10,5% to 13,8%, and the rentals for A-grade properties have stuck stubbornly at R70/m² .

This is according to the Sapoa/IPD office vacancy survey. Johannesburg’s decline is part of the decentralisation trend common to SA’s cities. Durban’s CBD, for example, has an 18,2% vacancy level. Port Elizabeth’s CBD has more than doubled its vacancies to 12,4%.

Paul Duncan, a portfolio manager at Catalyst Fund Managers, says for most property developers, the increase in vacancies in the decentralised nodes has been the biggest disappointment.

“A lot of building projects committed in the bull market in 2006 and 2007 came on stream last year and in 2009. This was particularly true in nodes such as Century City east of Cape Town.”

Vacancies there have fallen from 14,6% to 10,5% over the past two years but only by keeping rentals modest. At R95/m² , Century City prime property is cheaper than A-grade space in Pinelands .

Growthpoint, the largest property fund in SA, fell for the siren calls of Century City when it bought the Estuaries office park there three years ago. But executive director Estienne de Klerk says the Constantia office park on the West Rand, which came on stream in the downturn, was even tougher to fill. Even now, 4000m² of the 14000m² are still vacant.

Duncan says there is an increasing number of inquiries for office space but it could be five or six months before income starts flowing towards landlords. “It is still a tenant’s market and it would be standard for them to be able to negotiate a free month upfront for every year of the lease. Plus changes to fixtures and fittings at the landlord’s expense.”

He says the tipping point at which vacancies become a problem is 5%. “There are always going to be a few small 150m² -300m² spaces vacant. But once vacancies exceed 5% it probably means that space big enough for a large company is going to waste.”

In Cape Town, only the Waterfront has vacancies below 5%. In Pretoria, Brooklyn and Arcadia are in this sweet spot, as are both main suburban nodes in Durban — Westville and Umhlanga — as well as Greenacres in Port Elizabeth.

The Sandton CBD has a 9,8% vacancy level — the empty space would fill Sandton City plus its new extension. Duncan says Illovo, to the south, has proved to be a better investment. It has a vacancy rate of 4,2% and the highest advertised rentals in SA, at R210/m² .

Other almost full nodes in Jo’burg include Houghton/Killarney, Milpark, Morningside and Parktown.

Landlords can count on annuity income escalating at 8%-10%/year from the 80% of their tenants whose leases are not up for renewal in any given year. But if vacancies remain as high as they are in many areas, there could be pressure to bring escalations down as well as rents.

The pipeline of new projects is drying up, but De Klerk is concerned that it will not take long for developers “to fill the holes they have left in the ground”.

Source: Financial Mail