Q Cape Town Office Market Report. In association with Baker Street Properties

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1 Cape Town Office Market Report 217 set for rental growth as economy improves, but the city continues to struggle to cater to large occupiers Q4 216 In association with Baker Street Properties 1 Central London Office Market Report Q3 216

2 Overview Cape Town Global confidence in the City of Cape Town has reflected in two global rankings, getting the city off to a positive start in 217. Cape Town featured in the Financial Mail s FDI Intelligence report, ranking 21 in the world for its FDI strategy, Invest Cape Town. Cape Town also featured 37th in the world as a city where property investors should invest, according to a report produced by Wealth X, surveying investment activity by global high net worth individuals. More than a holiday destination, Cape Town s commitment to investing in technology, improved transport and world-class infrastructure has allowed it to attract highly skilled individuals, as well as companies from various sectors from within and outside of the country. All this is evident in the city s office market performance in 216. Over the past year, Cape Town has seen growing interest from global occupiers including DSG and the Norwegian Investment Fund, while KPMG and EY renewed their commitment to the city. Cape Town s office vacancy rate sits at 3.1% below the national office vacancy rate. Rental growth is also higher at 8.% While the economy is not out of the woods yet, any recovery in 217 will only work to boost the Cape Town office market. The city has also seen a diversification in interested occupiers. Traditionally viewed as the financial capital of South Africa, Cape Town is now attracting many ICT businesses and is one of the largest business process outsourcing locations in South Africa. Although investor and occupier confidence is strong, one of the major challenges is the lack of large office developments that are attractive to large occupiers. Although the city saw the completion of almost 9,m² of developments in 216, only two developments were over 1,m² and none reached 2,m². This means that Cape Town is likely to continue to lose large occupiers to Johannesburg. Is this an opportunity that the city will pursue in the long run? 2 Cape Town Office Market Report Q4 216

3 In numbers 7.6% Office vacancies Grade P Grade A Grade B Rental growth slowing Rental growth accelerating Rents falling Rents bottoming out The JLL Property Clock R1,78/m² Grade P rentals Average capitalisation rate Total stock 9.5% 2,511,937m² Cape Town Office Market Report Q

4 Supply Economic conditions did not dampen the outlook for property owners in Cape Town as confidence in the city remained consistent throughout 216. Overall, office stock increased by 2.5% y/y in Q4 216, with the rise in stock dominated by Grade P accommodation, which accounted for the majority of new completions in the year. New developments were dominated by Century City, responsible for 4% of new completions in 216, a notable proportion of these being speculative. Other areas included the prime node of the V&A Waterfront and the, together working towards higher rental rates in Cape Town. New developments have been well received in the office market and are either now fully let or enjoying considerable interest from prospective tenants. Data from SAPOA indicates that 88,868m² of new developments were completed in 216. Although lower quality accommodation (Grade B and C) recorded a decline of 2,4m² in 216, less than a quarter of the addition in accommodation during the year. However, the vacancy rate in the city had not seen much movement. While the market had started off with a development pipeline of just over 6,m² in Q1 216, this has slowed down to just 31,m² in Q The number of developments is also smaller, and the speculative portions have narrowed in comparison to last year. Nevertheless, this should not be read as an indication of a decline in investor confidence. Although vacancies have remained flat, they are low enough for additional developments to be considered. Economic prospects have improved and this should stimulate future demand. Demand Two key factors drove stronger demand in the Cape Town office market in 216, the first being the conversion of traditional office buildings to residential which required some occupiers to relocate. Second is a growing interest in the city, from both local and international occupiers. This allowed all nodes to maintain a relatively low office vacancy rate despite the notable addition of new buildings. Established office nodes have seen a reduction in vacancies in the quality Grade A and P categories. This remained the trend in Q4 216, with occupiers taking up accommodation in the and Century City. Key deals included Vodacom s occupation of 5,5m² and Innovation s 4,m², both in the. Century City welcomed MasterCard and Derivco among others. As there are very few office developments presently under construction we see this trend of declining vacancies continuing in the short term. It is worth noting that, at this time, there is a shortage of large space options in excess of 3,m² in all of the nodes surveyed. This continues to be a hurdle for large occupiers who are keen on moving into the city. Office stock Q , % , % , % , % Grade P Grade A Grade B Grade C 4 Cape Town Office Market Report Q4 216

5 Office stock growth % Percentage 1 2.5% -.2% % -2 Grade P Grade A Grade B Grade C Recently concluded leases TNS 2,5m² Vodacom 5,5m² Amazon 3,6m² Innovation 4,m² Randtrust 1,4m² Derivco Century City 2,5m² Mastercard Century City 1,1m² IT Labs Willis Towers Watson Century City Claremont 1,1m² 1,3m² Source: Baker Street Properties 5 ² m, 23 Cape Town Office Market Report Q4 216

6 Issue to watch : Lack of space options over 3,m² is limiting choice for large occupiers 6 Central London Office Market Report Q3 216

7 Vacancies The office vacancy rate in Cape Town remained at 7.6% in Q4 216 compared to the national vacancy of 1.7% (SAPOA). The vacancy rate for Grade P buildings was at 12.% in Q4 216, well above the city average. While Grade P vacancies have been dominated by Century City and the, this will reduce as tenants take occupation of their premises on the back of leases that were signed at the end of 216. It is worth noting that the Grade P vacancy rate has declined from a peak of 14.9% in Q The downward trend is expected to continue in 217 with demand gravitating towards quality office space. Accounting for the lion s share of accommodation in the Cape, Grade A office space maintained a low 5.% vacancy rate in Q Vacancies in this category have also been on the decline, speaking to the broader office market trend. Vacancy rates in both Grade B and C accommodation remain at double-digit levels. However, stock in these categories is on the decline as a result of conversions to alternative uses or refurbishments to better office grading. While the relocation of occupiers from buildings such as Triangle House, which is currently being converted to residential, has contributed to higher demand in the city, this should not be seen as the major driver of demand. The estimated net absorption or takeup in accommodation in the city over the past year, taking into account new completions and remaining vacancies, is higher than the total loss of stock in Grade B and C offices (45,76m² vs 28,44m²). Vacancy rate % 1 9.4% 8 7% 6 5.3% 5.8% Percentage % 3.1% Belville Cape Town Century City Claremont Pinelands Rondebosch/ Newlands Waterfront 7 Cape Town Office Market Report Q4 216

8 Rental Rates On average, rental rates in the Cape Town office market saw a robust 8.% y/y increase during 216, consistent with traditional escalation rates. The rise was dominated by the 9.% y/y increase in Grade A accommodation, which accounts for over half of the office stock in the city. Encouragingly, the rental growth in 216 falls well above the inflation rate, indicative of stable demand in the market, and a more landlord driven climate than one might have anticipated. The introduction of Grade P buildings over the years is also beginning to play a more important role in the city s average rental growth rate. Grade P buildings closed the year on an average rental rate of R178/m², well above the Grade A average rental rate of R15/m². While prime quality accommodation only accounts for 6.% of total office stock in the city, it is important to note that stock of this kind is on the rise and will likely result in an overall upward shift in the city s average rental rates. Market Outlook There has been a recovery in rental growth following the downward trend which began in 29. This has seen average Grade A rentals in the increase from around R11/m² in 29 to R14/m² today. Grade P asking rentals in the are reaching R185/m² and in the V&A Waterfront they are asking R235/m² for newly completed offices. Both rental and vacancy trends suggest continued rental growth in the Cape Town office market. This will create some optimism for investors as we begin 217. The economic outlook has improved from 216 which is likely to further stimulate demand. Cape Town office rental rates R/m² 4 2 Grade P Grade A Grade B Q1 214 Q2 214 Q3 214 Q4 214 Q1 215 Q2 215 Q3 215 Q4 215 Q1 216 Q2 216 Q3 216 Q Cape Town Office Market Report Q4 216

9 Grade A office Rentals Waterfront Century City Cape Town Pinelands Rondebosch Claremont Bellville Cape Town International Airport 9 Cape Town Office Market Report Q4 216

10 Contact us JLL South Africa Johannesburg 3rd Floor, The Firs Cnr Biermann & Cradock Ave Rosebank, South Africa, 2196 Phone: With other regional offices in Dubai, Abu Dhabi, Riyadh, Jeddah, Al Khobar, Cairo, Casablanca, Lagos and Nairobi Tom Mundy Head: Research, Sub-Saharan Africa Zandile Makhoba Head: Research, South Africa Dave Russell Director: Commercial Leasing and Sales Baker Street Properties Cape Town Jones Lang LaSalle IP, Inc. All rights reserved. The information contained in this document is proprietary to JLL and shall be used solely for the purposes of evaluating this proposal. All such documentation and information remains the property of JLL and shall be kept confidential. Reproduction of any part of this document is authorised only to the extent necessary for its evaluation. It is not to be shown to any third party without the prior written authorisation of JLL. All information contained herein is from sources deemed reliable; however, no representation or warranty is made as to the accuracy thereof. 1 Central London Office Market Report Q3 216