Oversupplied office property market seeing first signs of recovery

Demand for office space is increasing, and vacancies are declining with an improvement in property fundamentals as the return to the office continues to gain momentum, with nearly 60% of the buildings fully let.

Real estate investment trusts (Reits) recently published their results pointing towards recovery of the sector with demand for space exceeding limited supply – especially in certain Cape Town nodes –with rental growth reported in some instances, said SA REIT Association CEO Joanne Solomon in a statement.

“Some of our members with exposure to offices are cautiously optimistic about the sector. Vacancies are falling, though negative reversions still persist within certain portfolios,” she said.

“In many global markets – South Africa included – many workers continue to return to the office. Amenity-rich and quality buildings in key locations continue to see improved property fundamentals, demand for space and slight growth in rentals…

“Flight to quality is driving demand for prime offices as tenants see value and opportunities to upgrade from secondary buildings or locations,” said Solomon.

According to the SA Property Owners Association (Sapoa) Office Vacancy Report for the first quarter of 2024, national vacancies fell slightly to 14.7% from 16.7% in 2022, but rentals declined 6.2% year on year after accounting for inflation.

Cape Town offices recorded the lowest office vacancies of 6.8% – the lowest rate recorded since 2009. Nationwide, nearly 60% of prime office buildings were fully let compared to 42% recorded at the beginning of the Covid-19 pandemic.

“The reduction in office vacancies indicates an improvement in demand for offices – assuming the decrease is not attributed to disposals or conversions of office space to residential for example,” said Metope Investment Managers CEO and portfolio manager Liliane Barnard.

Barnard said the decline in rentals reflected ongoing pressure on rental income from the office sector, adding that property valuations remained under pressure.

“The outlook for the office sector is cautiously positive, and recovery in the South African economy would result in declining rentals turning positive. Though reversions have been negative – this rate of decline is slowing, suggesting potential levelling out as demand picks up. In the Western Cape, this is already happening with rental growth experienced in some locations,” said Barnard.

Growthpoint Properties, the biggest listed REIT on the JSE, said across its portfolio vacancies were reducing, and although rentals had been stagnant over the past few years, growth in rentals was now evident in the coastal regions.

“Vacancies seem to have peaked – arrears are back under control, and we are seeing more demand from tenants inland, while our coastal properties are relatively well let,” said Growthpoint Properties head of asset management: office, Paul Kollenberg.

Delta Property Fund, the specialist sovereign-underpinned property fund renewed 55 leases and signed 69 new leases for the financial year ended February 29. Of the 55 renewals, 24 related to sovereign tenants with the balance being to the private sector on average lease terms of 28 months. On new leases, only two related to sovereign tenants with the rest being the private sector.

“Various interventions such as having a dedicated team of leasing specialists, discounted rentals, intensified marketing campaigns, and broker engagements with attractive incentives have resulted in vacancy reductions and tenant retention. This while minimising operating expenses,” said Delta Property Fund senior asset manager Tumelo Applegreen.

Applegreen said due to these interventions, post year-end, Delta concluded 15 new office leases to date for the 2025 financial year.

Growthpoint Properties offers incentives on certain buildings, with deals tailored to suit individual tenant requirements. The group’s strategy is to reduce office exposure to smaller buildings in nodes that were not seeing demand, as well as selling non-core assets for conversion to residential or other uses.

Delta which continues to sell non-core assets, transferred three properties during the 2024 financial year, with a further three transferred post year-end, and another four in the process of being transferred.

“We are still finding buyers with appetite for our assets… Our mandate is to sell at market value or higher implying a prolonged and difficult negotiation process to close a deal,” said Applegreen.

Barnard said taking a long-term view and believing the economic fortunes will improve bodes well for the recovery of the office sector. Location would be key – meaning offices close to transport hubs as well as prime buildings or offices with green features such as back-up power and water, electric vehicle charging stations, and bicycle racks for example will experience high demand.

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