Gauteng Economic Overview 2000

Posted On Friday, 15 February 2002 02:00 Published by
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Gauteng drives the South African economy, contributing some 38% of the national Gross Domestic Product (GDP). The province’s economic activity is mainly centred on the greater Johannesburg area, which includes the eastern, western, northern and southern metropolitan local council regions.

Gauteng drives the South African economy, contributing some 38% of the national Gross Domestic Product (GDP). The province’s economic activity is mainly centred on the greater Johannesburg area, which includes the eastern, western, northern and southern metropolitan local council regions. The second largest contributor to economic activity is the greater East Rand, spanning from Kempton Park in the north to Heidelberg in the South.

Looking at a breakdown of which economic activities account for this activity throughout the province, the Development Bank of Southern Africa reports that manufacturing, followed by services, commerce and finance are the key sectors. The importance of mining’s contribution to economic growth has declined significantly since 1980. Interestingly, while construction represented only 3,3% of the provincial Gross Geographic Product (GGP), it accounted for 39% of the total construction industry country-wide.

Looking at property development activity in Johannesburg and Pretoria in more detail, the following graphs provide an indication of new projects listed, per sector and per node since the third quarter of 1998.

The sectoral breakdown shows the number of projects listed in the greater Johannesburg region (including the East and West Rands) during the time period under review. Offices show a clear predominance and account for over half of new projects, closely followed by retail. Industrial lags at 12,62% of total number of projects. Hotels account for less than 10% of new activity.

The spread of development activity remains very wide, although Sandton, the East Rand and the northern office/retail suburbs of Johannesburg showing comparatively high development levels.

Turning to new projects in greater Pretoria, it seems that offices remain in top position at 56,10% of new developments in the city. Retail accounts for the second-largest slice of projects, followed by industrial at about 17%. More than half of the industrial projects in Pretoria are located in Centurion.

In terms of the geographic spread of property activity, Pretoria is considerably less dispersed than Johannesburg with interest targeted in two main directions: Centurion, which is developing into a mixed use node, and the office/retail nodes of the eastern suburbs.

Over the past two to three years, several trends have emerged which have arguably altered the South African property market’s equilibrium. In Gauteng, these same factors have proved to be an important influence on the market.

Ownership has changed hands to some extent from institutions to smaller or private investors. At the same time, high real interest rates have focused the industry’s attention on the availability of finance and gearing. This new focus precipitated the entry of merchant banks as financiers into the property investment market. Above all, in recent months, the market has experienced high levels of interest rate sensitivity.

The market is highly differentiated and trading conditions are generally tight across all sectors of the market. Property managers are reporting increased difficulties in rental collection, particularly because tenants often feel that landlords would prefer to show lenience than increase vacancies in their properties. This ties in with reports of higher numbers of liquidations and high demand for credit from the business sector.

Due to this market environment, more active lease negotiations have become the norm, with landlords prepared to offer concessions in exchange for longer leases of five years, or more. Tenants, on the other hand, are looking for shorter lease terms of between one and three years. This is because there is a tendency to avoid long-term commitments on the part of business, given the current economic situation. This is particularly true in nodes like city centres, which are seen to have an unclear future.

Lease escalations are running at between 10% and 12%, with only the premier nodes achieving the top end of this range. In some cases, landlords accept lower lease escalations as a trade-off for reducing vacancy levels in their buildings. Similarly to operating cost escalations, the inflation rate does create a market perception of what acceptable lease escalations are, although this is not necessarily a relevant benchmark.

Operating costs are increasingly under scrutiny, although the Sandton rates debate has been resolved and the universalisation of rates in Johannesburg has been factored into the market. Currently, typical operating cost escalations in Gauteng are between 12% and 15%, with 13% being an average. There is a perception that operating cost escalations are linked to the inflation rate, which is running at about 6%, ands this could result in resistance to high operating costs escalations. However, JHI Research has found that the basket of goods used to calculate the inflation rate is not necessarily the most relevant for the property industry - and in fact, the labour cost index my have a more important impact.An increase in labour costs would directly affect operating costs by increasing the price of, for example, security and cleaning services.

The mothballing of buildings - a practice which has occurred in both the Johannesburg and the Pretoria city centres - also has implications for property owners from an operating costs perspective. Effectively, operating costs like rates and taxes are still payable, even if there are no tenants in the building. Thus, even in buildings with high vacancies, the investor carries the burden of additional costs.

To provide a broad-brush overview of lease escalations and operating cost escalations across South Africa’s major cities, consider the following table:

Publisher: JHI
Source: JHI

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