2014 Western Cape. Office Market Analysis

Transcription

1 Q Western Cape 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 Western Cape Colliers International South Africa

3 Report Highlights The office market in the Western Cape in Q3 was characterised by minimal demand and an oversaturation of supply. Vacancies were the lowest nationally, and rental growth showed improvement when compared to Q figures. 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 Western Cape 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 Western Cape office market and future prognosis for the market. The Analysis focuses specifically on the Cape Town area within the Western Cape. Western Cape Y-O-Y Change 30 Y-O-Y Change 500 bps Y-O-Y Change 50 bps Y-O-Y Change 90 bps 6 month outlook 6 month outlook 6 month outlook 6 month outlook Prime Gross Rent (R/m²) Prime Yield (%) Overall Western Cape Vacancies (%) National Grade P Vacancies (%) 2 Office Market Analysis Q Western Cape 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 Western Cape Colliers International South Africa

6 Supply In the last quarter, the Cape Town CBD, V&A Waterfront, Tygervalley, and Century City and its close surrounds (i.e. Sable Square), were the main office locations to experience increased levels of activity. All segments in the Cape Town office market were highly saturated from a supply perspective, especially with regards to Grade A- and Grade B buildings in the CBD. Going forward, Cape Town office supply is likely to lack any speculative development, with new stock only being introduced for pre-let corporate tenants. Noteworthy completions in Q3 in Cape Town included, but were not limited to: Roggebaai Place (12,500m 2,Foreshore ) Worley Parsons (10,800m 2,Tygervalley) Chevron (9,000m 2, Century City) Waterview Park IV (8,800m 2, Century City) Regent Square, The Point (9,000m 2, Sea Point ) 22 Somerset Road (1,200m 2, Green Point ) Please refer to Fig 1 on the following page for a selection of ongoing construction projects in the Western Cape. 4 Office Market Analysis Q Western Cape Colliers International South Africa

7 Supply cont. Fig. 1 Century City Q Cape Town CBD Q Cape Town CBD Q Cape Town CBD Q Salt River ±18,000 m 2 BRIDGE PARK ±11,350 m 2 TOUCHSTONE HOUSE 26,000 m 2 ROELAND PARK 6,500 m 2 TWINELL BUILDING 5,400 m 2 PALS BUILDING 60,000 m 2 STANDARD BANK CENTRE ±20,000 m 2 EAGLE PARK PHASE 2 ±8,200 m 2 PWC ±2,500 m 2 SILO 4 ±5,000 m 2 CITADEL ±3,000 m 2 PARK LANE ±5,000 m 2 GROSVENOR SQUARE ±3,000 m 2 PAM GOLDING ON MAIN Q Cape Town CBD Q Montague Gardens Q V&A Waterfront Q V&A Waterfront Q Claremont Q Century City Q Century City Q Kenilworth Q Fig. 1 above shows a selection of Western Cape office developments currently under construction. This is a sample list and not fully indicative of the market as a whole. 5 Office Market Analysis Q Western Cape Colliers International South Africa

8 Demand A key driver for Cape Town-based companies in the last quarter was price. Tenants wanted a good commercial office product for a reasonable price. They looked to move premises as a last resort, and only if upgrading their existing facility was not a viable option. As a result, only some movement has been seen in Q3. Large companies especially, have been focused on downsizing and consolidating necessary actions given the ongoing economic pressures. While companies desire to be in the location and space that best suits their business image and brand, moving is still considered to be a very expensive solution. This poses a risk to property brokerages. Notable new deals and renewals in the Western Cape from Q included, but were not limited to: Cape Town CBD - 10,000m 2 -New Deal Cape Town CBD - 1,900m 2 -New Deal Knowledge Park 3 (KP3) - 550m 2 -New Deal Knowledge Park 3 (KP3) - 472m 2 -New Deal MIH, The Adderley - 4,500m 2 -Renewal Cape Town CBD - 3,400m 2 -Renewal Rondebosch - 2,000m 2 - Renewal The average deal size for Q3 in the Cape Town area was approximately 300m 2-400m 2. A slight increase on the average deals closed in the quarter before. AVERAGE DEAL SIZE R300/m 2 CAPE TOWN AREA R400/m 2 6 Office Market Analysis Q Western Cape 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 Western Cape Colliers International South Africa

10 Q Q Q Q Q Western Cape On a regional level, the lowest vacancy rate nationally at Q end, was recorded for Cape Town, where an all-office vacancy rate of 9.5% was recorded. This rate was 20bps down from the previous quarter of the same year. Century City and the northern suburbs in particular displayed the lowest vacancy rates seen in years. This is likely to change soon though, as a number of new developments are due to complete in early/mid VACANCY 9.5% Q Q Rental Rates The Cape Town CBD Grade P office situation continues to be heavily impacted by the Q completion of Portside Tower, the new tallest office building in the city, standing at 139m. 25,000m 2 of the total 52,000m 2 is occupied by First National Bank (Old Mutual Property s Joint Venture Partner on the development). Of the remaining 27,000m 2, 56% is still available for lease, and is proving to be a challenge for the Landlord to fill. The Landlord continues to compete to attract the larger tenants whose first choice appears to be to position themselves at the V&A Waterfront when selecting a location comparable to the CBD. 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 A total of 18,400m 2 was let during the quarter, while 15,800m 2 of new space came onto the market - a net absorption of 2,600m 2. On a nodal level, vacancy increases in Century City and the CBD were largely offset by declines in Bellville and Claremont. There was also positive take-up in Pinelands, Rondebosch and at the V&A Waterfront. SPACE TOTAL LET NEW SPACE 15,800m 2 18,400m 2 Gross Rent (R/m2) Q R150-R160/m 2 R180 - R185/m 2 Q R150 - R160/m 2 GRADE P Q R180 - R185/m 2 R110-R150/m 2 R120 - R160/m 2 Q R95 - R150/m 2 GRADE A Q R101 - R165/m 2 R80 - R100/m 2 R90 - R110/m 2 GRADE B Q R75 - R100/m 2 Q R85 - R110/m 2 8 Office Market Analysis Q Western Cape Colliers International South Africa

11 Market Prognosis The Cape Town office market will continue to see a bit of churn with moderate rental growth, but nothing significant. It will remain under pressure for the foreseeable future as a result of the overall bleak economic outlook, and this will continue to affect companies inclination to spend money. Corporate clients, in particular several of the major law firms will require modern and efficient office environments and are ready to invest in them. The legacy office space in Cape Town with older building facilities and inefficient floor plates, continues to drag down the overall office sector. Companies have become even more focused on protecting their Profit & Loss Statements, especially the larger firms with international Head Offices. The office investor is having to be patient and work hard to contain operational costs as best as they can. Major relocation decisions are not being easily reached, with far more hesitance being shown. Report Sources: Colliers International Growthpoint Properties Investment Property Databank (IPD) Old Mutual Property Nedbank Redefine Properties South African Property Owners Association (SAPOA) South African Reserve Bank (SARB) Statistics South Africa Trading Economics 9 Office Market Analysis Q Western Cape Colliers International South Africa

12 485 offices in 63 countries on 6 continents United States: 146 Canada: 44 Latin America: 25 Asia Pacific: 186 EMEA: 84 Natasha Alomia Head of Research & Marketing South Africa Main Mobile Fax natasha.alomia@colliers.com Colliers International Johannesburg 108 Albertyn Avenue Sandton 2146 South Africa Main Fax info.johannesburg@colliers.com Colliers International Cape Town 13th floor, 7 Coen Steyler Avenue Cape Town 8000 South Africa Main Fax info.capetown@colliers.com 1.54 billion in annual revenue 136 million square metres under management 15,800 professionals and staff About Colliers International Colliers International is a global leader in commercial real estate services, with over 15,800 professionals operating out of more than 485 offices in 63 countries. A subsidiary of FirstService Corporation, Colliers International delivers a full range of services to real estate users, owners and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, mortgage banking and insightful research. The latest annual survey by the Lipsey Company ranked Colliers International as the second-most recognized commercial real estate firm in the world. colliers.co.za Disclaimer The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.