Sandton rentals for March 2001

Posted On Friday, 06 July 2001 03:01 Published by
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Market reality forces developers to take 37,5% drop in rents

Market reality forces developers to take 37,5% drop in rents
Melrose Arch, the R3bn office and retail project in Johannesburg's northern suburbs, has suffered an unexpected attack of market reality. Asking rents have plunged from R120/m² to R75/m².
This is likely to deepen and extend the downturn in rents and values throughout the area.
Most affected could be the Sandton CBD, where rents are as high as R100/m². Leaseholders whose contracts are up for review in the next 18 months are likely to use the availability of 'bargain' space at Melrose Arch as a cudgel to beat down Sandton rents. If building owners don't listen, they could be left with large, empty spaces in a market that is more than three years oversupplied.
Perhaps even more alarming for the market is the decision by Melrose Arch developer Mines Pension Fund (MPF) to cap annual rent escalations at 10% against the market's current 12%. MPF will also peg increases in operating costs - currently R15/m² - to 11% against an industry standard of 15%. This will put pressure on the income streams of listed and unlisted property owners.
MPF beneficiaries will also feel the effects in their pockets. There is 44 000 m² of space to let in the first phase at Melrose Arch. The 37,5% rent drop will cost R22m against forecast income in the first year, and reduce the office component's value by more than R240m.
MPF and its main consultants, engineers Ove Arup and architects Osmond Lange, have been criticised for trying to position Melrose Arch as a unique, international 'new urbanist' scheme. Critics dismissed the original proposed rents as unrealistic and said the developers would never achieve the returns they were aiming for.
'There are 250 000 m² of A-grade offices to rent in northern Johannesburg and companies are taking up only 75 000 m² a year. Melrose Arch's rent drop is a strong signal that the office market is finally beginning to reflect economic conditions,' says property economist Francois Viruly. Retail and industrial property are generally much more accurate economic indicators, he says.
Viruly doubts that the economy and office market will turn around until 2003. 'We are not sure that the link between economic growth and office space will be as strong in that turnaround as it is now. So when the upswing does come, it might take a year or so before the office market starts reviving,' he says.
Colliers RMS development director Mike Deacon says the previous Melrose Arch pricing strategy effectively kept its 44 000 m² out of the market and its availability will hurt other projects. 'With the quality of space, architecture and position Melrose Arch has suddenly brought into play, the dreary traditionalist manor-house developments that line some side streets off our major roads will be hit hardest. Many of them were poorly conceived and executed and will now empty.
'Tenants are turning back to modernist designs. Tenants are prepared to pay for good quality at R60/m², rather than mediocre space at R30/m².'
What brought the sudden change of heart at MPF? Some believe it is the influence of Investec, which has been helping the fund prepare to list its property portfolio through the Growthpoint variable loan stock company.
MPF property GM Charles Ryan says Investec had some input but that the main influence on the decision was MPF investment GM Mike Cullabine. 'It became clear early this year that the rising oversupply was going to force us to change.' Investec property chief Sam Leon referred all FM queries to MPF.
The reduced rates apply to three-year leases. Deacon and Viruly both expect Melrose Arch to be full and receiving top rents again in about five years.

Publisher: Financial Mail
Source: Ian Fife

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