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Thursday Apr 17, 2014

Unlet offices in Sandton raise red flag

A steep increase in vacancies in prime office blocks in Sandton has raised a red flag about the future direction of the economy.

A new office block goes up in Rivonia Road, Sandton.

Prime office market vacancies in Sandton shot up to 13.6 percent in the first quarter of this year from 0.9 percent a year ago, according to the latest office vacancy survey from the SA Property Owners Association (Sapoa).

The amount of unlet prime space in Sandton rocketed to 54 965m from about 2 000m2 a year earlier and was almost entirely responsible for pushing national prime office vacancies up to 7.1 percent.

Erwin Rode, the chief executive of Rode & Associates, said yesterday that there was a correlation between employment in the tertiary sector and the amount of office space occupied. 'So it's actually bad news for South Africa in that the one sector that was growing is now also stalling,' he said.

Ken Reynolds, Nedbank Corporate Property Finance's regional executive for Gauteng, said that the increased office vacancies in Sandton had to be a concern. He said the vacancies were being driven partly by 'musical chairs' in the node but also by new developments coming on stream that were not fully let and speculative developments.

Reynolds added that Nedbank had been 'pretty conservative for a while' in its approvals for office developments in Sandton and only looked at funding developments with a small portion of space that was not pre-let.

Rode said the increased vacancies also raised a red flag about potential future problems in the office market. The almost 55 000m of prime office space vacant in Sandton was equivalent to about double the annual take-up of office space in the Cape Town central business district (CBD), he noted.

He said it could take anything from one to two years for the vacant space to be let.

'It's a marvel to me that rental levels are as high as they are given the oversupply. Maybe it's the status factor of Sandton,' he said.

Rode added that there was not a huge deluge of new office supply in the rest of the market and on the demand side the market was not collapsing, just stagnating.

Vacancies were stagnating at about 10 percent, he said. 'It's not panic-button stage because it could be worse considering where the economy is.'

Apart from Sandton, Sapoa said the Highveld Technopark node in Centurion was also likely to experience excess supply in the medium term and was already seeing downward pressure on asking rentals.

It said there was more than 800 000m of office space under construction in the first quarter in the 52 nodes surveyed countrywide, which was well off the lows of 2009/10.

Calculated as a percentage of completed stock, development levels were at 4.9 percent, which Sapoa said was 'fairly robust given the fragile economic environment'.

The Sandton, Cape Town CBD and Highveld Technopark nodes accounted for half of all development across the 52 nodes and the top 10 nodes accounted for 75 percent of all development. Sapoa said the office market was continuing on its gradual recovery path as vacancy rates stabilised in the low double digits.

The national office vacancy rate was at 11 percent in the first quarter, 20 basis points lower than the previous quarter but 40 basis points higher than a year ago.

Sapoa said the national office vacancy rate had essentially been moving sideways since June 2011 and the current excess supply prevalent in the market was weighing on rental growth.

Business Report


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