By: Joan Muller 
 
TALK OF GROSS asking rentals for A-grade offices soon breaching the significant R100/sq m benchmark in prime business nodes across South Africa, seems premature, as most landlords are still battling with rent reversions when leases come up for renewal (when built-in lease escalations outpace actual market rentals).

That's in contrast to the general perception that office rentals have already started to rise markedly on the back of lower vacancies.

Linda Matthews, head of Marriott's commercial broking division, says that reports of some brokers signing leases at R100/sq m plus are mere hype. She says that in Gauteng in particular there's still resistance to pay anything more than R90/sq m. Landlords who are asking more than that can't fill their space.

For example, Matthews says that in the A-grade Forum building on Sandton Square, north of Johannesburg, landlords were asking R92/sq m a year ago but eventually had to settle for R75/sq m.

Also in Sandton and close to the JSE, two prestige grade (new, top of the range finishes) buildings are still standing empty almost two years after completion, as nobody's prepared to pay asking rentals of between R95 and R100/sq m.

Matthews says that though office take-up has no doubt improved, it remains a tenant-driven market. Therefore most leases coming up for renewal have to revert to lower rental levels.

Gerhard van Zyl, CEO of listed property loan stock company Vukile, says that despite growing demand for offices, some nodes are still sitting with a substantial oversupply, notably older B- and C-grade areas.

Van Zyl says in the Randburg CBD rentals have dropped to an average R35/sq m, down from around R45/sq m two years ago. But tenants are still staying away. About 8 500sq m of offices at Vukile's Randburg Square (the high-rise office block on top of the old Sanlam Centre) in Pretoria Street is standing empty. Van Zyl says they're asking R35/sq m but are prepared to "take anything".

Lynette Finlay, CEO of commercial real estate group NAI Finlay, confirms that lower vacancies have yet to translate into real rental growth. Finlay expects decentralised office rentals to remain under pressure until mid-2006, with growth kicking in after that ? provided the market isn't flooded with new speculative office buildings over the next 12 to 18 months.

Latest figures from Statistics SA show that the value of building plans passed for offices in the seven months to July this year (y-o-y) are already up a massive 105%, raising concerns that developers are returning to the market too soon, dampening hopes of a future rental upside.

However, property economist Erwin Rode says that sharp building cost increases mean that it won't be viable for developers to build new offices unless they can achieve gross rentals of at least R115/sq m. Current gross A-grade rentals in areas such as Bryanston (Sandton, Johannesburg) and Tyger Valley (Cape Town) would have to increase by around 65% before reaching those levels.

So chances are that developers will put their construction plans on hold for the next two to three years or until average A-grade rentals have breached the R100/sq m level, says Rode.