April 28, 2004

By Roy Cokayne

Pretoria - Office vacancies declined in the central business districts (CBDs) of all four major cities in the country in the first quarter of this year, according to the latest office vacancy survey released by the SA Property Owners' Association.

Office vacancies dropped in Johannesburg's CBD to 25.1 percent from 25.7 percent, in Cape Town to 12.4 percent from 12.6 percent, in Durban to 16.9 percent from 22.1 percent and in Pretoria to 4.8 percent from 9.3 percent between the end of December and the end of March.

However, the survey revealed a mixed performance in office nodes in these four cities.

In Johannesburg, vacancies decreased in 12 of its 20 nodes, increased in seven and remained static in one node.

Vacancies increased in four of Cape Town's six office nodes, dropped in three of Durban's four nodes, rose in four of Pretoria's nodes, and dropped in three others.

Erwin Rode, the chief executive of property services company Rode & Associates, said this week that vacancies in the Johannesburg CBD had "at best stabilised but were still in a trough.

"It's too early to call it a turnaround. Any turnaround in the Johannesburg CBD will take a long time and hard work because the CBD has to be repositioned, which doesn't happen overnight."

Rode said capitalisation rates, which were the property equivalent of the earnings yield of securities, were declining in the Cape Town CBD, which was positive because it meant properties were becoming more valuable.

This was gratifying to see and it seemed the Cape Town CBD had turned the corner.

He added that a wave of upmarket office conversions to upmarket residentials added further impetus to this trend. 

It appeared the commercial property market cycle was "turning for the better", although this was not happening as yet in all office nodes.

"Our analysis is that cyclically it's turned the corner and demand is picking up," Rode said. "The signal is mixed but that is typical of a turnaround, with some nodes deteriorating and others improving. The reason for this is that demand is picking up while the addition of new supply has been decelerating for some time."

Francois Viruly, a property economist and chief executive of Viruly Consulting, said there had been a reduction in vacancy rates in the country's CBDs but he expressed concern about the amount of office space in the pipeline.

Vacancies in the CBDs had remained fairly stable in the past five years compared with office nodes in the suburbs.

"I'm still wary of decentralised nodes, which could still see higher vacancies in the course of the year," he said.

The B-grade office market in areas such as Parktown and Braamfontein in Johannesburg was at risk, particularly when leases expired, as tenants could be lured fairly easily to A-grade accommodation elsewhere.

The office market was "seeing the results of interest rates dropping from 17 percent to 11.5 percent in the course of last year, which has generated new development," Viruly said.

He said the passing of building plans had increased and some of that supply could enter the market this year.

Although the vacancy rate was generally improving, a significant rise in rentals would not occur until vacancies dropped to about the 10 percent level, he said.