Neno  Haasbroek,  CEO of Sycom Property Fund, explains: “Sustained economic growth at this level will have a definite impact on demand for office space which  will drive rentals upwards.” However, he says that the main question remains how rapidly demand will or can be satisfied by new developments.

Haasbroek believes that new building supply will be insufficient to satisfy
demand,  which  will,  in  turn,  drive  rental levels upwards. “One of the
factors  causing  fewer  developments is the fact that land has become much scarcer,   with   government   less  willing  to  allow  re-zonings  and  a considerably  longer  time  needed  to  bring  new  projects  on stream. In addition, the building industry has limited capacity with longer lead times for the supply of materials and uncompetitive pricing. Again putting upward pressure  on  rentals  as  new  buildings  cannot come on stream at current market levels,” he adds.

“Rentals  in  the  more  sought  after  areas  are firming,” comments Craig Hallowes,  spokesperson  for the Association of Property Unit Trusts (APUT) and  a  Director  of Fortress Asset Managers and PropTrax, a newly launched ETF.  New buildings will probably have to see rentals of R100/m2 or more to be viable.

James Templeton, CEO of Emira Property Funds agrees, saying that: “Building costs  are  rising sharply and therefore we expect to see an upward squeeze on  rentals.  Land costs have been accelerating upwards and there are power issues  in certain areas meaning they have limited development. Rentals are still  growing sharply - we estimate between 15% and 30% in some areas over the past 12-months.

Even  if  the  SA economy fails to achieve the expected growth rate, office space  is  likely  to  remain  at  a  premium.  Haasbroek  notes  that “the oversupply  in  office  space which existed a few years ago has now largely been eliminated and any new demand will have to be met by the supply of new buildings.”

The  Fountainhead Property Trust office vacancies were at 7% in March 2006. By  March  2007, they had slipped to a mere 3%. In certain nodes, vacancies are  down to virtually zero, which relates to the shortages in those areas. One  assumes  there  will  always be vacancies as tenants are moving in and out, although this is not yet the case in all areas. SAPOA office vacancies show  that  national  office vacancies were 6.9% in March 2007 (4.5% if you exclude the Johannesburg and Durban CBD's).

Historically  new  office  developments  were  brought onto the market with considerable  ease, and they therefore did not compete as well as the other classes.  “An  increase in demand for space triggered a massive boom in new developments  thereby  immediately  oversupplying the market and depressing rentals,” remarks Haasbroek.

“Land  was  easily  available  for  development. Consider all the beautiful
residential  suburbs which were destroyed in this way and you will see what I mean:  Illovo,  Sandhurst, Rosebank, Hyde Park, Parktown,” he adds. This trend  has now been reversed by much stricter planning controls, which will cap new developments.

A  further  factor  to  consider  is  the conversion of office buildings to
residential   use,   which   is  happening  in  the  Johannesburg  CBD  and
Braamfontein.  This is taking a large part of secondary office stock out of
the  market  which  will  give  an  additional boost to the existing office
market in Johannesburg.

The  trend  to  higher  rentals is most notable in the B and C grade office
market,  as  they are coming off a lower base.