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Vacancies let tenants upgrade

Posted On Tuesday, 09 September 2003 02:00 Published by eProp Commercial Property News
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Despite average GDP growth of 2,7% in the 10 years since 1993, close to 2m m² of new A- and B-grade office space was built in Johannesburg's northern suburbs. Even allowing for the 550 000 m² space that is vacant because of over development - and the 400 000 m² that lies abandoned by companies that fled the Johannesburg CBD for the suburbs - that is about 110 000 m² net take-up/year in the past decade.

Francois VirulyDespite decimation of the IT and financial services industries and a new corporate enthusiasm for reducing staff, demand for A-grade space is still running at 82 447 m², according to research by E-prop for SA Property Owners' Association (Sapoa) Online. But, says property economist Francois Viruly, overdevelopment and vacant space have pushed A-grade rents down so close to B-grade that tenants who usually frequent the latter are finding they can upgrade at little additional cost.

Investment Property Databank (IPD) statistics back him, showing initial yields on offices in peripheral areas, usually B-grade, rising, and therefore values dropping. But E-prop finds an anomaly in this.

"There has been an increase in B- grade office take-up in Johannesburg suburbs," it says.

"This upswing is occurring notably in the worst performers for prime (that is, A-grade) take-up." Tenants occupied 92 000 m² of space in the Randburg CBD and 83 000 m² in the Johannesburg CBD. This could be an indication of a rapid expansion of small and emerging businesses.

Despite the oversupply of space and low rents, Viruly, Pace's David Green and Abro Luntz's Rodney Luntz believe the tenants' market will be over within two years.

"The results of the latest Sapoa analysis, though patchy, show that the decline in A-grade office vacancies will gather momentum as the cyclical upswing in demand takes hold," says Luntz.

Significantly, developers have pulled back sharply from new offices and committed new developments are down from a peak of more than 500 000 m² in January 2001 to about 70 000 m² in June this year.

Viruly says this will mean a quicker return to market equilibrium and rocketing rentals.

But tenants should not be taken in by the rents quoted in the Sapoa survey. These are maximum gross asking rents, not actual rent levels struck when leases are signed. Those rents are somewhere between the asking rents and the rents in table 3. But it would be wise in the next six months or a year to negotiate long leases at what will eventually prove to be bargain rents.

Viruly also believes the Johannesburg CBD has bottomed out, and large profits await investors who move in now.


Last modified on Thursday, 22 May 2014 09:44

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