Gains in the office sector will be driven by economic improvements

Posted On Wednesday, 25 September 2013 23:47 Published by Commercial Property News
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Weak economic growth has seen the office market muddling along, with overall vacancies still high, particularly for older stock and secondary areas, with rental growth stagnating in large cities.

Ndibu MotaungAccording to the Jones Lang Lasalle Johannesburg market review, increasing cost pressures in the current stagnant economic environment continue to burden the South African business community and the already overindebted consumers.
Jones Lang Lasalle head of research Ndibu Motaung says the gap between prime and secondary property is widening.
“Often defined by location, rentals for prime office, industrial and retail property in the country’s major metropolis have held firm. This is particularly true of new facilities where tenants are able to benefit from utilisation efficiencies and subsequently able to absorb premium rentals,” Ms Motaung says.
Asked if the office sector is likely to see an improvement soon, she says the sector’s improvements will be driven by gains in the economy and large take-up of current office space.
But all is not gloom and doom for the office sector.
Despite lacklustre growth, prime nodes such as Sandton, Illovo, Rosebank in Johannesburg, the V&A Waterfront in Cape Town and Umhlanga near Durban are doing well.
“There is good take-up of newly committed office space. Developers are also waiting for economic improvements before committing to more projects. Efficiencies are the key drivers of corporate office markets through office consolidation,” Ms Motaung says.
She says while market conditions could generally be described as being at the “bottom of the cycle, its resilience is remarkable, given the lacklustre state of the economy (both local and international) coupled with alarming increases in the actual costs of property occupation, most notably municipal charges and electricity”. With regard to growth in the office sector, Ms Motaung says improvement in the global economy and SA becoming a production-driven economy could help the market.
“However, the protracted striking season is causing further damage to the country which will result in an uncompetitive market,” she says.
With new office developments around Gautrain stations now the flavour of the month, she says most cranes are concentrated around Sandton and Rosebank.
It is evident that Gautrain infrastructure is still driving location choice. Ms Motaung says the biggest threat facing the commercial property market is the increasing cost of occupancy. Occupiers are focused on affordability, while investors are focused on yield. </p> <p> “It is the balance between these two factors that gives rise to achievable market rentals. </p> <p> “Impose above-inflationary increases in municipal rates and services tariffs, together with the ever increasing range of ‘stealth taxes’, and the result has to be strong downward pressure on net rentals,” Ms Motaung says.
As tenants grapple with affordability, the margin for net rental increases diminishes.
Without net rental growth, development viability is arrested and investment in the sector becomes less appealing.
Increased commitment to development projects is providing occupiers a wider choice of office buildings options at contained rental levels, particularly in the prime areas.
According to the Jones Lang Lasalle Johannesburg market review, the demand in the Johannesburg office market continues to be driven by further consolidation of larger companies into new buildings, particularly in prime areas.
The increased commitment to nonspeculative development in the past year by blue chip corporate occupiers is further confirmation of demand for highquality and efficient office facilities in prime nodes.
Prime buildings in prime nodes continue to appeal to a number of tenants as more highquality buildings are added to the market.
This is further shown by the planned relocation by Webber Wentzel and petrochemical giant, Sasol to new buildings in Sandton due to corporate consolidation.
Last modified on Thursday, 26 September 2013 00:03

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