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 Q2 was characterised by flat to reduced demand due to increased vacancies and supply levels. Rental growth was unchanged, with the exception of Grade P stock, which saw a slight increase in comparison to Q Despite a slight strengthening in the Rand in Q2, the economy overall remained under pressure, as a result of hiked interest rates, prolonged strikes, and South Africa s sovereign credit rating downgrade all factors that negatively impacted investor and business confidence. 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 100 bps Y-O-Y Change 80 bps Y-O-Y Change 490 bps Y-O-Y Change 0-40 Prime Gross Rent (R/m²) Prime Yield (%) Overall Vacancies (%) Grade P Vacancies (%) 2 Office Market Analysis Q Gauteng Colliers International South Africa

5 Macro-Economic Climate Q saw inflation in South Africa hit 6.6% - the highest rate seen in almost five years. The South African Reserve Bank (SARB) expects it to continue to rise until 2015 on the back of continued currency weakness, exchange-rate induced petrol and food price hikes, and weak growth in the domestic economy. INFLATION 6.6% Late Q2 saw South Africa s sovereign credit rating downgraded its first credit rating downgrade in nearly two years. The country now sits on BBB status, which puts its foreign debt rating at the lowest investment grade just a notch above junk status shunned by many investors. Analysts warned that if government fails to implement the National Development Plan (NDP) sooner rather than later, South Africa could be at risk of further downgrades over the next 18 months, thus losing investment grade status. RATING BBB Recently the rand has strengthened from Q lows, this however was as a result of increased global risk appetite, rather than a positive reassessment of South Africa s fundamentals. SARB s Monetary Policy Committee (MPC) has cited major domestic risks such as unreliable electricity supply and labour relations (most recently the five month-long platinum mining sector strikes), as leading factors which undermined investor confidence and drove unemployment. The South African economy also still remains vulnerable to changing global expectations of US monetary policy, and investors appetite for risk. China s growth picked up momentum in Q2 of this year, with the country s GDP growing by 7.5%. This could prove to have a positive impact on South Africa in the coming months. South Africa s composite leading economic indicator (LEI), as published by the South African Reserve Bank monthly, remained unchanged at the beginning of Q2 2014, but annually fell by a further 1.5%, after an annual decline of 2% in late Q These trends suggests that the South African economy is losing momentum and will remain under pressure in coming months. LEI 2% Q Q Q Q It is unlikely however, that South Africa will experience an outright recession. In contrast to domestic weakness, the global economic environment continues to improve, which suggests that the local economy could receive a slight lift from global conditions over the course of GLOBAL ECONOMY GDP GROWTH7.5% 3 Office Market Analysis Q Gauteng Colliers International South Africa

6 DEVELOPMENT SIZE (m 2 ) Supply In the last quarter,, Rosebank, Waterfall Business Estate, Midrand, Menlyn and Centurion were the main office locations to experience increased levels of development. Overall, the office market in Q2 was flat, with reduced levels of enquiries coming through for larger office space. Noteworthy completions in Q2 in Gauteng included, but were not limited to: 90 Grayston Drive ,000m 2 Katherine On West ,500m 2 Atholl Towers ,000m 2 15 Alice Lane - - 8,000m 2 6 Sandown Valley Crescent - - 6,500m 2 34 Impala Road - - 4,000m 2 Grayston 66 -, 1,400m 2 3 rd Road - Houghton - 3,000m 2 39 Melrose Boulevard - Melrose - 23,500m 2 Cummins Building - Waterfall Business Estate - 21,000 m 2 Premier Foods Building - Waterfall Business Estate - 4,000 m 2 Regus Building - Menlyn - 3,200m 2 Waterfall Business Estate is currently the biggest ongoing offices construction project in the Gauteng area, with ± 74,000m 2 of gross lettable office space currently completed or under construction. Please refer to Fig 1 for a selection of ongoing construction projects in Gauteng. Fig EXPECTED COMPLETION - Q EXPECTED COMPLETION - Q EXPECTED COMPLETION - Q EXPECTED COMPLETION - Q EXPECTED COMPLETION - Q SASOL WEBER WENTZEL ATRIUM ON 5th ALICE LANE 90 GRAYSTON DRIVE DISCOVERY HEAD OFFICE ROSEBANK TOWERS NEWTOWN JUNCTION HONDA BUILDING NOVARTIS BUILDING SERVEST BUILDING 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. SUMMIT PLACE EXPECTED COMPLETION - Q Rosebank EXPECTED COMPLETION - Q Newtown EXPECTED COMPLETION - Q Waterfall Business Estate EXPECTED COMPLETION - Q Waterfall Business Estate EXPECTED COMPLETION - Q Waterfall Business Estate EXPECTED COMPLETION - Q Menlyn, Tshwane EXPECTED COMPLETION - Q Office Market Analysis Q Gauteng Colliers International South Africa

7 Demand Q2 saw leasing activity in Gauteng flatten and start to turn negative in most areas across Gauteng. This trend was as a result of the high vacancy levels, expected rising interest rates and negative business confidence. Increased levels of demand were seen however in the m 2 size bracket in the northern Gauteng office nodes. NORTHERN GAUTENG DEMAND Q Q Year on year, there hasn t been any significant movement in leasing activity since Q There was however, a slight decrease experienced as a result of the increased economic pressures being experienced in the market. There has also been a substantial increase in renegotiation activity in Q2 this year a lift of greater than 25%. This is as a result of the cost associated with moving in an already weak economy, Landlords renegotiating at lower rental rates, and tenant representations being handled by professional international brokerage houses. Notable new deals and renewals in Gauteng from this last quarter include, but are not limited to: 11 Diagonal Street Johannesburg ±32,900m 2 New Deal 125 Simmonds Street Johannesburg ±5,100m 2 New Deal 209 Smit Street Johannesburg ±3,900m 2 New Deal Kernick House Johannesburg ±5,100m 2 New Deal The Place, 1 Drive Johannesburg - ±600m 2 New Deal Menlyn Corner Menlyn 840m 2 New Deal Brookfield Brooklyn ±650m 2 New Deal Poyntons Building Tshwane ±3,500m 2 Renewal Fedsure Forum Building - Tshwane ±21,300m 2 Renewal Wheat Board Building - Tshwane ±13,100m 2 Renewal 5 Office Market Analysis Q Gauteng Colliers International South Africa

8 Vacancies National Snapshot In Q2 2014, the overall national office vacancy rate was at 11.3%. This rate has doubled since mid At an average gross rental of R85/m 2, this translates into more than R1 billion of lost rental per annum. Asking rentals are 1.9% lower than Q2 2013, this drop is indicative of a tough current letting environment that is focused on tenant retention. Overall vacancy rate nationally remained high in Q2 2014, and is still increasing, which is weighing on asking rental growth. This quarter saw a net area of 72,591m 2 vacated, of which 119,000m 2 was let, and the balance added to stock. Nationally, prime vacancies continued to increase at an alarming rate in the last quarter up to 8.5% from 0.5% in Q There is currently 83,000m 2 of unlet prime space significantly up from 4,000m 2 recorded at the end of Speculative new developments are behind the prime increase, with, Johannesburg responsible for the bulk. The Cape Town CBD also drove prime increases well in Q2 this year. A and B-grade vacancies have remained sticky and have been trending sideways since The A-grade segment ended the quarter at 8.4%, while B-grade vacancies continued to stabilise around the 13% mark. The vacancy rate of C-grade offices remain high, but has started to normalise, albeit off a high base. NATIONAL VACANCY RATE NET VACATED AREA UNLET PRIME SPACE A-GRADE SEGMENT 11.3% 72,591m 2 83,000m 2 8.4% 6 Office Market Analysis Q Gauteng Colliers International South Africa

9 Gauteng On a regional level, the lowest vacancy rate at Q2 end was recorded for Tshwane, where all-office vacancy rates were at 9.5%. This rate is up slightly from Q1 2014, but down on an annual basis. TSHWANE VACANCY 9.5% There were large vacancy increases in Menlyn and Hatfield, offset by declines in Highveld TechnoPark and Tshwane East. Higher vacancies were also reported in Brooklyn, Silver Lakes and the Centurion CBD, with lower vacancies in Tshwane East and Sunnyside. On an annual basis, the largest increase was recorded for the Pretoria CBD, with smaller increases seen in both Brooklyn and Menlyn. Johannesburg s regional vacancy rate continued to be sticky as a whole, and has been trending sideways since 2009/10. At quarter end, Johannesburg vacancies were at 11.9%. JOHANNESBURG 11.9% Q Q Q Q There were large increases in available space in the Constantia Kloof, Illovo and Morningside areas. However, this was largely offset by smaller, positive moves in larger areas like, Bedfordview, Milpark and Greenstone. Rental Rates Overall, rental rates in Q remained flat, with Grade P the exception, seeing rentals increase slightly from Q2 2013, due to the rising construction costs and delivery risk associated with the ongoing strikes. Please refer to the graphics below for the average gross rental rate bands for each office grade for Q2 2014, compared against Q GRADE P GRADE A GRADE B Q Q Q Q Q Q R125 - R160/m 2 R125 - R160/m 2 R85 - R115/m 2 R85 - R115/m 2 R210 - R220/m 2 R170 - R220/m 2 Grade A and B saw no change in rental growth when compared to the same period last year. Both Grades are forecast to experience a decrease in rental due to high expected vacancy levels. Key areas where rental rates increases have been seen in Q included, Bryanston, Rosebank, Waterfall Business Estate, Midrand, Woodmead, Menlyn and Centurion. New developments in the aforementioned areas were the cause of the increases, as were overall operational costs and increased rates and taxes. 7 Office Market Analysis Q Gauteng Colliers International South Africa

10 Market Prognosis Q2 results and insights highlighted in this analysis indicate that the Gauteng office market will continue to slow down from a development perspective going forward. Large companies will continue to move into new space, thereby creating increased vacancy levels in older building stock. The challenge for developers will continue to be how to cost-effectively acquire the older stock for redevelopment, and/or refurbishment, so as to attract prospective new tenants. Abland Alchemy Properties Amdec Group Atterbury Property Holdings Black Pepper Properties Colliers International Currie Group Growthpoint Properties Investment Property Databank (IPD) JHI M&T Development Nedbank Report Sources: Redefine Properties South African Property Owners Association (SAPOA) South African Reserve Bank (SARB) Stanlib Statistics South Africa The Barrow Group The Lord Trust Trading Economics The Wall Street Journal Wikipedia for cover image Zenprop Property Holdings 8 Office Market Analysis Q Gauteng Colliers International South Africa

11 485 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 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.