2014 Gauteng. Office Market Analysis

Transcription

1 Q Gauteng Office Market Analysis

2 Contents Highlights 1 Summary 2 Statistics 2 Climate 3 Supply 4 Demand 5 Vacancies 6 Prognosis 8 Office Market Analysis Q Gauteng Colliers International South Africa

3 Report Highlights The office market in Gauteng in Q3 was characterised by very slow demand, which was in contrast to the increasing supply levels. Vacancies continued to rise, weighing heavily on asking rental growth, which remained relatively flat and in some instances declined. Overall the economy in Q3 remained under pressure, with the Rand weakening significantly, a further core interest rate hike being implemented, a deterioration in domestic expenditure; and the country s economic growth forecast being downgraded once again. 1 Office Market Analysis Q Gauteng Colliers International South Africa

4 Report Summary Summary Statistics Colliers International South Africa s Q Office Market Analysis provides a brief overview of the key factors impacting the Gauteng office market and future prognosis for the market. The Analysis focuses specifically on the Johannesburg and Tshwane areas within Gauteng. Gauteng Y-O-Y Change 150 bps Y-O-Y Change 982 bps Y-O-Y Change bps Y-O-Y Change 500 bps Y-O-Y Change 40 bps 6 month outlook 6 month outlook 6 month outlook 6 month outlook 6 month outlook Prime Gross Rent (R/m²) Prime Yield (%) Overall Vacancies JHB (%) Overall Vacancies TSHW (%) National Grade P Vacancies (%) 2 Office Market Analysis Q Gauteng Colliers International South Africa

5 Macro-Economic Climate At the end of September 2014, South Africa s core inflation rate had come down from a Q2 rate of 6.6% - the highest rate seen in almost five years to 5.8%. The South African Reserve Bank (SARB) has confirmed that monetary policy remains accommodative, and will continue to be supportive of the domestic economy. Q3 has also seen domestic expenditure further deteriorate, particularly private sector fixed capital formation, and together with continued moderation in household consumption expenditure, is indicative of the lack of demand pressures in the economy. INFLATION 5.8% Q2 Q3 From an economic growth perspective, South Africa s forecast continues to be disappointing, following the strikes that plagued the first half of the year. South Africa has once again been downgraded in Q3 by both the South African Reserve Bank (SARB) and the International Monetary Fund (IMF). SARB s Monetary Policy Committee (MPC) remains mindful however of the anaemic state of the domestic economy, rising unemployment, and the downside risk to its growth forecast. The MPC left the repo rate unchanged at 5.75% as of the end of September, highlighting that the combination of stubborn inflation and a sluggish growth outlook continues to pose a difficult dilemma for monetary policy. The IMF predicted growth to be at 1.4%, while SARB put it at 1.5%. Growth was originally forecast to be approximately 2.3%. Despite this downgrade, there is still a mildly positive long-term outlook among the larger South African banks, who predict future long-term growth to range between 2.5% - 3%. REPO RATE 5.75% Q Q GDP LONG-TERM GROWTH 2.5 % -3 % The Rand weakened significantly in the last quarter, and remains vulnerable to changes in global investor sentiment. The weakening is evidence of continued strain being see in mining and manufacturing on the back of prolonged strikes. The next hurdle for our currency will probably stem from renewed nerves in global equity markets, or from actual increases in interest rates in the US and other developed economies. RAND VALUE Q2 Q3 From a global economic perspective, there is renewed concern across the board, especially for a very weak Europe that looks likely to dip back into recession. Q3 also saw China s economic activity reflect a loss of growth momentum. The United States has very much been the exception, and is on track to grow by more than 3% in 2015, with employment growth as well as wealth levels roaring in the country to pre-2008 levels. US ECONOMY % 3 Office Market Analysis Q Gauteng Colliers International South Africa

6 Supply In the last quarter, Sandton, Rosebank, Waterfall Business Estate, Midrand, Menlyn, Brookfield and Centurion were the main office locations to experience increased levels of activity. The Q3 office market in Gauteng, was characterised by an over-supply of space, particularly in the Sandton area, and very slow take-up overall. This is as a result of the intense pressure that the current economic environment is placing on the office market. The increased levels of construction in the Sandton area and close surrounds is also a significant contributor to the continually increasing vacancy rates in Gauteng. Noteworthy completions in Q3 in Gauteng included, but were not limited to: Honda SA Building (2,710m 2,Waterfall Business Estate) Atrium on 5th (22,000m 2,Sandton) 90 Grayston Drive (19,000m 2,Sandton) Cnr John Voster & Nelmapus (±20,000m 2,Tshwane) Byls Bridge East (11,000m 2,Tshwane) Glades 1 Olievenhoutbouch Road (25,000m 2,Tshwane) Waterfall Business Estate is currently still the biggest ongoing offices construction project in the Gauteng area, with ± 74,000m 2 of gross lettable office space completed or currently under construction. In addition to the office space, there is also a very exciting retail development in the pipeline at Waterfall Business Estate - The Mall of Africa. The Mall is a 127,000m 2 retail asset of more than 300 stores boasting local and international brands, and is due to open in Q Please refer to Fig 1 on the following page for a selection of ongoing construction projects in Gauteng. 4 Office Market Analysis Q Gauteng Colliers International South Africa

7 Supply cont. Sandton EXPECTED COMPLETION - Q Sandton EXPECTED COMPLETION - Q Sandton EXPECTED COMPLETION - Q Sandton EXPECTED COMPLETION - Q Fig. 1 Rosebank EXPECTED COMPLETION - Q Newtown EXPECTED COMPLETION - Q ,000 m 2 SASOL 34,500 m 2 WEBBER WENTZEL 35,000 m 2 ALICE LANE BUILDING 3 86,000 m 2 DISCOVERY HEAD OFFICE 22,000 m 2 ROSEBANK TOWERS 40,000 m 2 NEWTOWN JUNCTION 7,000 m 2 NOVARTIS BUILDING 4,759 m 2 SERVEST BUILDING 2,710 m 2 COLGATE PALMOLIVE 5,500 m 2 BALLYOAKS BUILDING E 5,000 m 2 HILL ON EMPIRE BUILDING 1 5,000 m 2 MONTE CIRCLE BUILDING A 3,500 m 2 HERTFORD OFFICE PARK BUILDING E 2,800 m 2 STONERIDGE BUILDING D 4,500 m 2 WESTEND BUILDING 2 ±22,000 m 2 SUMMIT PLACE 30,000 m 2 THE ANGLE Waterfall Business Estate EXPECTED COMPLETION - Q Waterfall Business Estate EXPECTED COMPLETION - Q Waterfall Business Estate EXPECTED COMPLETION - Q Bryanston EXPECTED COMPLETION - Q Parktown EXPECTED COMPLETION - Q Fourways EXPECTED COMPLETION - Q Midrand EXPECTED COMPLETION -Q Modderfontein EXPECTED COMPLETION -Q Centurion EXPECTED COMPLETION -Q Menlyn EXPECTED COMPLETION -Q PLANNED AND EXPECTED START-ON-SITE AS BELOW Fig. 1 above shows a selection of Gauteng office developments currently under construction. This is a sample list and not fully indicative of the market as a whole. Rosebank ESTIMATED START Q Office Market Analysis Q Gauteng Colliers International South Africa

8 Demand The demand/supply balance in Q shifted, with very slow demand levels experienced across Gauteng. This is in stark contrast to the ever-increasing supply levels. Leasing activity overall has barely changed from Q2 of the same year, as well as the previous year (2013), and the market remains relatively flat, turning negative in most areas across the region. GAUTENG Q Q DEMAND Q Q With national and regional vacancy rates continuing to rise, as well economic pressures persisting, it is unlikely that this trend will change in the near future. Notable new deals and renewals in Gauteng from Q3 include, but are not limited to: Webber Wentzel into 90 Rivonia Road - Johannesburg - 25,000m 2 - New Deal Pearson International - Johannesburg - 9,000m 2 - New Deal Servest - Johannesburg - 4,759m 2 - New Deal AMSCO - Johannesburg - 1,000m 2 - New Deal Cathay Pacific - Johannesburg - 425m 2 - New Deal Boston School of Finance - Johannesburg - 3,400m 2 - New Deal IBM into 90 Grayston Drive - Johannesburg - 10,500m 2 - New Deal De Vere SA into 90 Grayston Drive - Johannesburg - 925m 2 - New Deal Ata Capital into 90 Grayston Drive - Johannesburg - 559m 2 - New Deal Spencer Stuart into 90 Grayston Drive - Johannesburg - 976m 2 - New Deal NUS Consulting into 90 Grayston Drive - Johannesburg - 378m 2 - New Deal ACWA Power into 90 Grayston Drive - Johannesburg - 900m 2 - New Deal Allen & Overy into 90 Grayston Drive - Johannesburg - 1,449m 2 - New Deal Mineralia Building - Johannesburg - 2,561m 2 - New Deal Eco Origin - Tshwane - 42,000m 2 - New Deal Eco Glades 1 - Tshwane - 10,000m 2 - New Deal Oxford Corner - Johannesburg - 3,100m 2 - Renewal 1 Sandton Drive - Johannesburg - 1,343m 2 - Renewal Homestead Place - Johannesburg - 1,300m 2 - Renewal Hatfield Square - Tshwane - 1,343m 2 - Renewal Batho Pele House - Tshwane - 14,891m 2 - Renewal 6 Office Market Analysis Q Gauteng Colliers International South Africa

9 Vacancies National Snapshot In Q3 2014, the overall national office vacancy rate was recorded at 11.6%. This rate is at a multi-year high, with the present level last seen in The current phase of the office property cycle, is however more comparable to the period when the economy faced similar headwinds in the wake of the dot-com crisis. For Landlords, a return to a sub - 5% vacancy rate holds more than a billion rand of potential annual income which could significantly improve office sector income yields and returns. For the broking community, there is around R250m of leasing commission on the table on the way down to a 5% office vacancy rate - assuming an average gross rental of R85/month, 7% annual rental escalation and 5 year leases at 100% of SAPOA commission tariff. In square metre terms, 119,500m 2 was let during the past quarter while 191,400m 2 was added to the market. This resulted in a net area of 71,000m 2 being vacated during Q NATIONAL VACANCY RATE LET SPACE ADDED SPACE TO THE MARKET 11.6% 119,500m 2 191,400m 2 NETT VACATED AREA 71,000m 2 7 Office Market Analysis Q Gauteng Colliers International South Africa

10 Gauteng On a regional level at quarter end, Johannesburg s vacancy rate was recorded at 12.3%, and Tshwane s was recorded at 10.8%. JHB VACANCY Q Q % Johannesburg s Q3 vacancy rate increased by 340 base points when compared to Q Areas that contributed to the bulk of the increase were Sandton, Rosebank and Woodmead. This was partially offset by positive take-up in the Sunninghill and Morningside areas. The Tshwane office market reported an increase in its vacancy rate of 1.3% when compared to Q This increase was mainly as a result of un-let new developments coming onto the market in the Highveld Technopark area. There were also promising decreases in vacant area in the Silver Lakes, Hatfield and Centurion areas. Rental Rates The high and increasing vacancy rate nationally continued to weigh heavily on asking rental growth in Q In Gauteng, rental rates in the last quarter did not see very much change, and remained relatively flat, even declining slightly in some instances when compared to Q Year on year comparisons also demonstrated minimal growth across all three Grades (P, A and B). In Q2 of this year, Grade P rental rates did increase slightly when compared to Q2 2013, however this slight growth flattened out in Q3 2014, and headed downwards. Please refer to the graphic below for the average gross rental bands for each office grade for Q2 and Q3 2014, compared against Q2 and Q Q R160 - R220/m 2 R170 - R220/m 2 GRADE P Q R160 - R200/m 2 Q R150 - R220/m 2 R85 Q R125 - R160/m 2 Q Q R125 - R160/m 2 Q R85 GRADE R85 TSHW VACANCY Q Q % Q Q Gross Rent (R/m2) A Q R110 - R205/m 2 Q R110 - R210/m 2 - R115/m 2 - R115/m 2 GRADE B Q R90 - R150/m 2 - R113/m 2 8 Office Market Analysis Q Gauteng Colliers International South Africa

11 Market Prognosis Q3 results and insights highlighted in this Analysis indicate that the Gauteng office market will continue to slow down in the short to medium term from a development perspective, as was the prognosis in the Q2 Analysis. stock launching, particularly in the Sandton area. The balancing act of how to meet the demand expectations from tenants wanting upgraded, contemporary spaces, whilst keeping rentals affordable, will continue to be a challenge. Larger companies will continue to move into new space, thereby creating increased vacancy levels in older building stock. Small/Medium Enterprises are becoming more sensitive to rentals and utility costs, therefore the total cost of occupation is now becoming even more relevant. A priority for Landlords, investors and developers continues to be how to costeffectively upgrade older building stock that has been vacated as a result of newer Report Sources: Abland Atterbury Property Holdings Colliers International Group Five Growthpoint Properties Investment Property Databank (IPD) Liberty Properties Ltd. M&T Development Nedbank Redefine Properties South African Property Owners Association (SAPOA) South African Reserve Bank (SARB) Statistics South Africa Trading Economics 9 Office Market Analysis Q Gauteng Colliers International South Africa

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