Many factors driving oversupply of space

Posted On Tuesday, 25 June 2002 10:01 Published by
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Trend can be reversed if there is a marked slowdown in speculative building
THE oversupply in commercial space is the result of a combination of factors, of which overdevelopment has been but one, says Hugh Basel, marketing director of RMB Properties, one of SA's largest commercial property companies.

In the light of interest rate reductions and the movement of companies from the CBD in the past couple of years, there had been a significant increase in aggressive speculative development. This had been fuelled by the relatively free availability of loan facilities from financial institutions.

'It is probably unfair to say that the oversupply is due to overdevelopment by developers alone. This is only one variable in the pot,' says Basel.

Oversupply had been further aggravated by the number of companies closing down because of a tougher trading climate, notably in the information and communications technology sector and microlending industry, that brought a lot of stock to the market virtually overnight.

In the Sandton area, there is stock of between 130000m² to 140000m² available, compared with the bullish years of the corporate exodus from the Johannesburg CBD when the take-up of space was in the order of 40000m² to 50000m² a year.

He says another key factor influencing oversupply is that many organisations are starting to consolidate their various operating companies and divisions to maximise space efficiencies and cut property costs.

Basel says for many companies property is one of the most expensive items on the balance sheet. 'So if they can minimise costs by maximising the efficiency of the space they are utilising, it can have a substantial knockon effect on income statements.'

He says the oversupply trend can be reversed if there is less speculative building.

'Then we should start seeing a catch-up within a period of two years before we reach a situation where the vacancy factor drops to a more acceptable norm.'

He says that from his company's perspective, development strategy is driven to a large degree by addressing the needs of corporations to minimise expenses and to maximise property usage.

'As long as this trend continues there will be a degree of oversupply in the market.

'It's a positive development from the point of view that corporations are looking at their operating costs carefully, of which property expenses are a substantial component.

'It's now a question of the property industry carefully managing the process of what is created and seeing that what is put back into the market is also effectively used.

'It's becoming more and more recognised that effective property management is the engine-room that creates wealth and effective investment returns,' he says.

Jim McLean, MD of Liberty Properties, a wholly owned subsidiary of the Liberty Group, says: 'We've had a reasonable number of vacancies in the more marketable areas, but we have seen an uplift this year in inquiries for our properties in the Sandton area, where we have most of our office accommodation.

'Certainly, the rental rates we are achieving have firmed and are not dropping as they have been for some time previously. Hopefully the upturn in activity bodes well for the rest of the year.'

Within the Johannesburg CBD, where many of the company's properties are let on long leases to government departments, McLean believes rental rates in general are unlikely to improve until the local authority improves the level of service provision.

In conjunction with a group of major landowners, including Wits University, Liberty Properties is working with the local council on an upliftment initiative in Braamfontein.

Business Day

Publisher: Business Day
Source: Business Day

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