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DELAYS IN IRAQI RESOLUTION LIKELY TO KNOCK PROSPECTS FOR OFFICE MARKET RECOVERY.

Posted On Tuesday, 29 April 2003 02:00 Published by
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Delays in bringing peace to Iraq will be a further dampener on prospects for a recovery in South Africa’s oversupplied office market, says Ian Watt, managing director of Old Mutual Properties.
Delays in bringing peace to Iraq will be a further dampener on prospects for a  recovery in South Africa’s oversupplied office market, says Ian Watt, managing director of Old Mutual Properties.
 
“The South African property market cannot expect to escape fully the international fall-out from the uncertainty arising from protracted efforts to establish a post-war governing authority and the threat of further conflict,” he says. “The international consensus on the extent of that fallout is reduced global demand and economic growth on the back of lower corporate profits and levels of business and consumer confidence.
 
“Those kind of consequences in South Africa will affect the industrial and retail sectors, but will be particularly severe on the office market. They will exacerbate the local office oversupply and high vacancy rate and further impact on returns for investors which have followed the downward spiral of rentals and occupancies. “
 
Watt says the gravity of the problem is reflected in the latest Sapix/IPD property index figures which show a 23,7% vacancy rate for total office floor space and office total returns of 5,1% in 2002 at almost half their long-term average.
 
“This is an extremely serious problem that is going to take several years to resolve. The current state of the market cannot be construed as being part of the property cycle. It is largely the result of a frenzy of decentralization, aided in part by reckless rezoning and an ill disciplined and highly speculative approach to investment. This has been compounded by mergers and downsizing and rationalization of office space by major companies.
 
“Right now the office market is in a much worse condition than what is reflected in figures from the SA Property Owners’ Association. Talk of equilibrium returning to it in the short term is premature in the extreme. The SAPOA figures ignore space that has been vacated but is still under lease. In the UK this has proven to be at least as much again as the existing vacancy. The SAPOA vacancy report also does not indicate any upcoming vacancies, that is, tenants who have signed elsewhere but still occupy existing space.
 
“The malaise is countrywide, but particularly apparent in Sandton and Johannesburg nodes. Over-development, downsizing in financial services and upheaval in the technology arena have all contributed to a vacancy factor of above 17% in Sandton - which compares to the 26% vacancy factor in the Johannesburg  CBD.
 
“The reality is that the Sandton vacancies may be double the 17% level. That is underscored by the sub-lease opportunities that abound in Sandton and nearby offices nodes. Certainly this is the pattern emerging in other international markets; the space may be leased but is it occupied and how efficiently? “
 
Watt says that a further complicating factor is that internationally office use is undergoing fundamental change.
 
“Business structures are changing. So is the way business is done. We live in a mobile era with technology at its heart. In fact technology and restructuring, illustrated by the location of call centres in industrialized building as opposed to office parks, has had a huge impact on office use. “
 
 
Watt does not expect an increase in the actual number of office jobs created over the next five years. Jobs, he says, are being created through vehicles removed from office space, as illustrated by the growth in the informal sector.
 
He says a turnaround in the fortunes of office investments, even with a near-term resolution in Iraq, will at best be cautious.
 
“The downward spiral has to be stopped. Then consolidation can take place which will see an impact on returns, particularly as buildings that are leased become over rented i.e. rents too high relative to the market, a factor that will happen, if it hasn’t already happened, because of lease escalations and the desperate need for cashflow from buildings that are vacant.”
 
Watt says he doesn’t see rental levels at the 1999/2000 levels for at least another 3 to 4 years.
 
“We also need to factor in the impact of inflation over that period which makes the task even more complicated. Where we might see activity is because the existing supply is unsuitable for tenants’ needs, leading back to building obsolescence being of some concern. Who wants to own a building that cannot be let? I think this will also lead to the need for longer lease terms for major office users, that is, 10 years plus as investors look to mitigate the risk.”
 
Ends
 
ISSUED FOR  Old Mutual Properties
BY  Michael Kerkhoff & Associates
INQUIRIES Ian Watt 021-530-4537
                     Mike Kerkhoff 021-424-5280/082-882-8559

Publisher: Old Mutual Properties
Source: Michael Kerkhoff & Associates
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