With the belief that there is presently an oversupply of office space in South Africa’s major cities, the space debate between commercial property developers continues.

Planning Magazine invited several property developers as well as the South African Property Owners Association (SAPOA) to comment on this and related issues. While many of the points discussed brought about a common opinion, there were issues that resulted in some disagreement.  

Oversupply, is it problematic or cyclical?

The property market is undoubtedly a cyclical animal, with rises and falls with the market and economic trends. It is however clear that there is more to the cyclical debate.

According to Jay Junkoon from JHI, one should look at the lag that occurs between the planning and the completion of a project. “Any commercial development at or near completion can find itself at odds with the economic conditions prevailing at the time of the project’s inception”, he says.

Generally across South Africa, such conditions occurred over the better part of 2001 and 2002. As Melville Urdang of Liberty Group Properties reiterated, during the low interest rate environment of 2002, developers were able to finance projects more easily and this led to a large number of developments.

Brian Kirschmann of SAPOA supports this cyclical view but says that what is being experienced now is the outcome of low vacancies. “This means the property industry is at the bottom of the cycle and available space will soon be taken up,” he comments.

Rusty van Niekerk of Gensec disagrees with and feels the property industry has been experiencing a high vacancy rate for a number of years. Says van Niekerk, “We do not believe that this problem will be solved in the near future.”

While some, like Tim Middleton of Kagiso Intaprop, don’t believe the problem to be very serious throughout the entire market, with the problem contained in pockets of disinvestment, other like Hugh Basel of RMB Properties also believes that the problem is far from a natural cyclical process. 

Ian Watt of Old Mutual also believes it is a very serious issue and that 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 decentralisation, aided in part by reckless rezoning and an ill-disciplined and highly speculative approach to investment”, he says.

Watt believes that the office market is in a much worse condition than that reflected by SAPOA’s figures and that a short-term return in equilibrium is premature in the extreme.

David Alcock of Broll Properties agrees that so much vacant space is a problem and town planners and roads authorities have a lot to answer for. “The oversupply is not acceptable and plays havoc with institutions' assets and returns. There is a need for a more controlled use of resources,” he says.

“While the high vacancy rate and oversupply of A and B grade office space is a serious problem, it will correct itself over the next 18-24 months”, says Hein Smit of Marriott.

What causes oversupply?

Having discussed the seriousness of office oversupply, the developers were asked to expand on what is causing this current oversupply.

According to Junkoon, oversupply traditionally stems from lower than expected demand as a result of economic conditions impacting on the rate of company formations and liquidations. Added to this, is ‘rationalisation’ brought about by global forces prompting mergers and acquisitions, as well as a focus on efficient use of space.

In the same vein, Watt adds that as international business structures change, with the ‘virtual’ office and technology so does the way in which business is done. This is illustrated by the location of call centres in industrialised buildings as opposed to office parks and has had a huge impact on office use.

Apart from international trends Watt feels that uncontrolled development of speculative office buildings is a destructive force in the economy. “It usurps space and because it functions typically within an eight hour day, the commercial zone becomes deserted and lifeless outside of that time frame,” he says.

According to Basel, high office vacancies are not simply the result of greedy property developers or lower interest rates. “Part of this oversupply problem is the growing trend in the commercial property market to move from multi-tenanted buildings to single occupant offices, to create a stronger corporate identity,” he says. With economic conditions muted, tenants demanding reduced rentals and occupying less space, the current oversupply problem will persist and possibly worsen.

Effectively dealing with it is going to take a better economic environment, time and accomplished management.

As far as decentralisation goes, there is a belief that the city forefathers were responsible for the start of decentralisation by not allowing and planning for adequate parking. “By permitting the creation of other office nodes, they actually shot themselves in the foot,” adds Alcock.

Middleton says that when the mass exodus from the Johannesburg CBD to the northern suburbs occurred, there was a doubling of demand and take-up of space. However, with decentralisation now practically over, the take-up has halved and the market hasn’t responded quickly enough.

Further, yields and rentals allowed some time buffers to be built in so a general optimism prevailed, leading to greater competition and larger risks being taken. This has resulted in a dramatic drop of rentals, allowing tenants to be more aggressive and in some instances, new tailor-made developments are pitched to the market, which are significantly under prevailing escalated rentals. The end result is that older locations with older stock have to reinvent themselves otherwise they cannot compete.

According to Smit, general decay in CBDs, crime, lack of cleanliness, security and parking as well as the development of office parks outside CBDs, offering solutions to these problems, is what drives tenants out.

While reinvestment in the CBD could have haltered this movement, developers were reluctant due to escalating crime and unhygienic conditions. Therefore says van Niekerk, the only option was to create space for new tenants outside of these areas.

So what should be done about oversupply?

“The answer to this question could make someone very wealthy!” says Basel.

In reality however, he feels issues of the economy will have the biggest impact on resolving the current oversupply.

Added to this, Middleton reiterates the role of economic growth, but feels it must be generated by reducing uncertainty, crime, and infrastructural collapse in specific areas.

Research and information are essential in dealing with this issue. Junkoon believes that since the property market is linked to the broader economy, forecasts of endogenous economic variables such as interest rates, office employment and real construction costs, are essential. These and other issues, surveyed by research bodies on a quarterly basis, must be effectively used.

There are also strong opinions that local authorities and councils need to take a stance and rights should be more tightly controlled. “There should be no more rights for development in decentralised areas and more stringent town planning controls,” comments Alcock.

 “We should wait for local authority support for nodes based on proper planning information and for input, which understands development activity and infrastructural capacity,” says Middleton.

Watt feels strongly that discipline needs to be re-introduced into the process of property development. “City councils have to operate within budget constraints on infrastructure spending and we in the private sector need to support them in this discipline.” We need to observe zoning and planning restrictions in respect of our citizens, our cities and the country as a whole,” he says.

Van Niekerk supports this view and believes that local government must enforce stricter criteria before building rights are granted. Further, a relationship between government departments and the local business community could go a long way in solving problems to benefit all role players.

Looking at the developers themselves, Urdang believes that despite the fact that developers are by nature speculators, there should be less development – “no digging until there is actually a tenant!” However he also admits that the difficulty is that when the upswing comes and there is a shortage of space, tenants don’t want to wait.

Past problems such as poor returns for office buildings are what Smit believes will push developers to be cautious before creating more spec space and struggling for investors.

Added to this, Smit feels the real opportunity lies in the upgrading of existing buildings. “But this is where there is a ‘catch 22’ situation,” he says.

Developers do not own the buildings and are unlikely to acquire them to turn them around, that is the role of the owner. It is easier for developers to acquire land and arrange finance for a development and therefore there will always be competition between the CBD’s and decentralised areas.

What about a CBD revival?

The revival of the Johannesburg CBD is a major talking point in the industry.

“The CBD has hit rock bottom but will start to climb as there is much space to be taken up, says Alcock.

Cheaper rentals are obviously a drawcard for the Johannesburg CBD but there is a need for a residential component,” says Kirschmann.

Smit says that buildings in CBD’s come at a fraction of the rentals of decentralised offices and with existing infrastructure, offers better transport options for staff.

According to Junkoon however, under the present conditions of high supply, the CBD’s rental price competitiveness is perhaps not as strong as it could have been. Having said this, CBD promoters do note a steady demand from newly formed and smaller emerging businesses, the scale of which has served to stabilise the vacancy rate and ensure that it does not worsen.

Despite public/private partnerships, taking the form of City Improvement Districts and various infrastructural projects, Watt believes efforts to enhance a secure environment within the CBDs of Johannesburg and Cape Town call for a more responsible approach to rezoning and decentralisation.

While the crime issue in the CBD is being worked on, Urdang is of the opinion that so many companies have re-established themselves elsewhere that a major catalyst will be needed to reverse movement back to the CBD.

Middleton feels that from a land use point of view, the Jo’burg CBD is being developed on a much more inclusive basis. The spin-offs will be the thing to watch says Middleton. “Government activity and those organisations which cluster around this will revive, support and service retail activity but with a pre-condition that the CBD be crime and grime free!”

Despite the possibilities for a revival of CBD’s both Basel and van Niekerk are doubtful that the Johannesburg CBD will regain its status as a vibrant city, based on  problems of costs and basic infrastructural issues. “Revival will be for different uses,” says Basel. Alcock agrees with the view of new uses, commenting that in his view, tenants will mainly be local and provincial government. Furthermore he feels that public transport plays a major role in the CBD's revival.

Why are strict planning regimes and feasibility studies not used effectively?

“It’s true that developers don’t really talk to each other, with the result that development tends to take place too soon,” says Kirschmann. Alcock however feels that while communication is important, it must be remembered that they are fundamentally each others' competitors. “They need to start looking at cities in a holistic way,” he says.

Kirschmann feels there is definitely a need for more research to be done. However Urdang believes that feasibility studies are done and construction companies are engaged. However if there is an interest rate hike or the economic situation changes, tenants downsize and move to cheaper rental spaces. “Because the situation changes almost daily, it is difficult to predict exactly how the economy will grow,” he says.

Added to this says Middleton, are long lead times, which mean that planning is not an exact science and more problems are being experienced by institutions holding older CBD stock. The latter are much closer to the day to day pulse and are currently only building where demand is strong, identifiable or where risks are manageable.

Akin to this, van Niekerk comments that no reputable developer will invest in a project without a proper feasibility study. However, if restrictions such as building rights are not enforced and if the feasibility projected an acceptable return on investment, developers will obviously go ahead.

Junkoon feels that the ‘planning regime’ poses a dilemma to both public authorities and private developers. At different stages of Johannesburg’s history, different views have prevailed, often based on knee-jerk socio-political reactions. Many strategies and policies are available. For example, one practical step that could be introduced for guiding commercial property is the approval of building plans subject to legitimate and verifiable demand on a pre-let basis, normally a prerequisite of financial backers.

The emergence of listed property funds represents a global trend gaining momentum in South Africa. “One could expect these funds to play a balancing role in the commercial property market, adding improved rationality to market forces and ensuring that a greater degree of equilibrium occurs,” concludes Jankoon.

Both Basel and Watt believes that dialogue between developers and local government councillors needs to be formalised to ensure that they are on the same track. “Strict planning regimes should be their control and they should work more closely with developers, says Basel.”

“The kind of initiative we have seen from local government in Johannesburg, which promotes the concept of a new city boundary, higher value development and constraints on demand for extending services infrastructure beyond it, needs to be supported wholeheartedly. Cape Town city management is instituting similar development control measures” says Watt.

He does feel that developers have lost sight of some of the things that are important in cities.

Where to from here?

It is fair to say that from the wide divergence of opinions expressed there is no one correct point of view, and definitely no quick fix.

It seems that the role of the government and local authorities is key in a number of issues and that perhaps that attitude of “leave it to the developer to sort out” is not going to solve the problems.

Of course, like everything else, the state of the property market is at the mercy of the ever changing global and local economy. Despite this, there does seem to be a need for communication amongst developers and an attempt to work towards what surely is the common goal of stabilising and growing the commercial property market.

In most instances, the comments above are those of individuals and do not necessarily reflect the views of the companies themselves.

Text: Karyn Richards and Cara Reilly