SOUTH AFRICA COUNTRY REPORT www.broll.co.za February 2011 Key facts Capital cities Pretoria (administrative) Cape Town (legislative) Bloemfontein (judicial) Area 1 219 090 km 2 South Africa, situated at the southern tip of the African continent, forms part of the Southern African Development Community (SADC). The country is surrounded by the Atlantic and Indian Oceans and is bordered by Namibia, Botswana, Zimbabwe, Mozambique and Swaziland. The Independent kingdom of Lesotho is located within South Africa s borders. MAXIMISING PROPERTY POTENTIAL RESEARCH The country has nine provinces Gauteng, Western Cape, KwaZulu-Natal, Eastern Cape, Northern Cape, Limpopo, Mpumalanga, Free State and North West. Major cities include Johannesburg, Pretoria, Cape Town, Durban, Port Elizabeth, Bloemfontein and East London. The country has 11 official languages. English is the main business language. Population 49.9 million (2010 est.) Population structure (2010 est.) 0-14 years: 28.9% 15-64 years: 65.8% 65 years and older: 5.4% GDP PPP (Rank) US$ 505.3 (26) (2009 data) GDP per cap PPP US$ 10 505 (2010 est.) US$ 10 300 (2009 data) GDP growth 2.9% (2010 est.) -1.8% (2009 data) GDP - composition by sector Agriculture: 3% (2009 data) Industry: 31.1% (2009 data) Services: 65.8% (2009 data) Inflation rate (consumer prices) 5.6% (2010 est.) 7.1% (2009 est.) 11.3% (2008 est.) Corruption index (Rank) 4.7 (54) Sources: CIA, IMF, International Transparency 2010 data POPULATION The country has a population of nearly 50 million of which the majority are between 15 and 64 years. Most of the population live in Gauteng. The Population Estimate by Province Eastern Cape 6 743 800 Free State 2 824 500 Gauteng 11 191 700 KwaZulu-Natal 10 645 400 Limpopo 5 439 600 Mpumalanga 3 617 600 Nothern Cape 1 103 900 North West 3 200 900 Western Cape 5 223 900 population growth rate is 8%. The average life expectancy at birth is 52. Source: Statistics South Africa PART OF THE CB RICHARD ELLIS AFFILIATE NETWORK 1
POLITICS AND GOVERNANCE South Africa is governed by a democratically elected parliament. The first multiracial elections took place in 1994, ending the apartheid era and beginning the ANC-led government. The major opposition party is the Democratic Alliance. South Africa s Parliament consists of two houses: the National Assembly and the National Council of Provinces. The National Assembly is more powerful and is ECONOMIC STRUCTURE AND GROWTH According to the World Bank, South Africa ranks 26 in terms of GDP (PPP). Per capita earnings were estimated at US$10 300 in 2009. responsible for the passing of legislation and oversees the executive performance. Members are elected for a term of five years. GDP Valued at PPP (US $ Billion 2009) South Africa 505.2 Nigeria 341.6 Angola 105.9 Kenya 62.1 Tanzania 57.4 Uganda 39.7 Ghana 35.8 Côte d'lvoire 35.8 Botswana 25.4 DRC 21.5 Mozambique 19.8 Zambia 18.5 Mauritius 16.1 Namibia 13.8 Malawi 12.3 Swaziland 5.9 Zimbabwe 4.2 Lesotho 3.0 PPP - Purchasing-power-parity Source: Standard Bank 2
Rand per US$ 6 5 4 3 2 1 0 2003:1 2003:2 2003:3 2003:4 2004:1 2004:2 2004:3 Exchange Rate Purchasing Power Parity 2004:4 2005:1 2005:2 2005:3 2005:4 2006:1 2006:2 2006:3 2006:4 2007:1 2007:2 2007:3 2007:4 2008:1 2008:2 2008:3 2008:4 2009:1 2009:2 2009:3 2009:4 2010:1 2010:2 2010:3 2010:4 Source: Oxford Economics Interest Rate as per 10 Year Government Bonds 12 10 Rand per US$ 8 6 4 2 0 2003:1 2003:2 2003:3 2003:4 2004:1 2004:2 2004:3 2004:4 2005:1 2005:2 2005:3 2005:4 2006:1 2006:2 2006:3 2006:4 2007:1 2007:2 2007:3 2007:4 2008:1 2008:2 2008:3 2008:4 2009:1 2009:2 2009:3 2009:4 2010:1 2010:2 2010:3 2010:4 Source: Oxford Economics Sectors that play a major role in the South African economy are industry and services, they contribute approximately 97% of the national GDP. Gauteng contributes nearly 34% of the national GDP followed by KwaZulu Natal with 16% and the Western Cape with 14%. Research has indicated that the inflation profile has improved. According to Economic Strategy SA: Viewpoint: Macroeconomic published by Standard Bank, the perspectives for CPI year-onyear forecasts have been revised downwards to 4.4% in 2010 (previous forecast 5.8%), 4.7% in 2011 (previously 6.1%), 5.0% in 2012 (previously 5.9%) and 5.2% in 2013. The Treasury has now joined the South African Reserve Bank (SARB) in projecting that inflation is unlikely to breach the upper limit of the inflation target over its forecast period. In addition, the Budget deficit as a percentage of GDP is to narrow faster than originally expected. The new projection for 2010 now is 5.3% (was 6.2%), 4.6% for 2011 (was 5.0%), 3.9% for 2012 (was 4.1%) and 3.2% for 2013. 3
BUSINESS ENVIRONMENT South Africa was ranked 34 out of 183 economies in the 2010 World Bank Doing Business report, and ranks favourably when compared to international standards. It is ranked second on the African continent, with Mauritius the first (17 globally). The South African economy still faces some obstacles, many carried over from the apartheid regime. These factors prevent the optimal functionality of the economy and the competitiveness of exports in global markets. However, significant progress was made in 2009 with new legislation, as well as the creation of a new portfolio, the Ministry for Economic Development and the Planning Cabinet, under the Presidency. Restrictions to doing business in South Africa are very limited and the market is very transparent. Tax legislation for foreign-owned companies and individuals and accurate economic data can easily be obtained from various sources. South Africa business infrastructure is well established, with secure financial systems, good road, rail and airport infrastructure, advanced IT systems and a good communications network. The country is open to foreign direct investment and the country remains popular with both corporate business and private individuals. PROPERTY OWNERSHIP AND TAXATION The legislation that foreign companies may not borrow more than one-third of the purchase price of any property if the company s major shareholders are registered outside of South Africa is no longer applicable. New legislation came into effect on 1 January 2011. There are no restrictions on ownership of commercial properties. However, the legislation for private individuals buying property in South Africa remains the same and non-residents can only qualify for a home loan of up to 50% of the value of the property. REAL ESTATE MARKET MATURITY The South African property market is very mature. The first commercial buildings were developed in the early 1890s. The global recession had an impact on the local property market although it was not as badly affected as most of those in the firstworld countries. The residential market is entering a recovery phase, and the excess stock is being absorbed. The retail market is following a similar trend, with vacancies declining, and capitalisation rates moving sideways and downwards in some areas. Rentals should followed suit and start to increase throughout 2011. The industrial market is still lagging, with a slight oversupply of space. Small manufacturing companies are still trading in difficult conditions. Additional stock that comes online due to the reconsolidation of space by bigger groups also needs to be absorbed. The office market will be the last sector to enter the recovery phase. Vacancies remain fairly high, rentals are still under pressure and capitalisation rates are still increasing. 4
300 250 200 150 100 Gross Office Prime Rentals, Q4 2010 50 0 Century City Umhlanga / La Lucia Menlyn Sandton Cape Town CBD Durban CBD Pretoria CBD Johannesburg CBD US$/sq m/annum /sq m/annum Source: Broll Prime Office Capitalisation Rates DECENTRALISED RANGE Century City 9.00% 9.50% Umhlanga / La Lucia 9.00% 9.50% Menlyn 9.00% 9.50% Sandton 8.25% 8.50% CBD Cape Town CBD 8.50% 9.50% Durban CBD 10.50% 11.50% Pretoria CBD 10.00% 11.00% Johannesburg CBD 10.50% 11.00% Source: Broll REAL ESTATE MARKET TRENDS DEVELOPMENT Development of new stock has been very slow since the start of the recession. The last building plans passed indicate a decrease of 33% year-on-year until September 2010. The development pipeline should remain negative as the effects of the recession continue and the oversupply of stock in some areas still has to be absorbed. Construction related to the 2010 FIFA World Cup have been completed and the reduction in building costs is a reflection that construction companies are struggling to obtain new business in the current economic conditions LEASING TURNOVER The leasing market is struggling to pick up momentum in the current economic conditions. However, the prime office nodes are still in demand, the consolidation of space is likely to continue and rentals in the office market remain flat. The most active markets remain the leading decentralised nodes in each region. 5
Basis of measurement/ Valuation method Market transparency Rent payment Rent escalation and rent review Real Estate Market Practices Areas quoted in square metres. The rentable areas are measured according to the South African Property Owners Association (SAPOA), which use the BOMA methods of measurements. Usable Area is the carpeted area including the internal pillars. The real estate market is very transparent. Market comparables and statistics are available through various publications, online subscription services and quarterly reviews. Rent is typically paid monthly in advance and is quoted on a monthly basis in Rands per square metre. The industry benchmark is to quote prices in gross rentals per m 2. Gross rentals include operating costs and excludes VAT. During the initial lease term, rent escalates annually at 8%-10%, depending on the length of the lease and covenant of the tenant. Rents are reviewed to market levels. Operating costs are also reviewed annually, either according to a fixed scale or based on actual expenses. Tenant covenant Service charge Property taxes and other costs Agent's fees Incentives Lease lengths, options and terms Lease renewal Sub-leasing Repairing liability Generally a rental deposit equivalent to one month s rent is required, assuming that a surety is provided; otherwise, three months rental up front is ordinarily required. However, if the landlord does not know the tenant, or if the tenant is a company registered outside South Africa, then the deposit would be subject to negotiation and as a general guideline is the equivalent of six months rent. The tenant should budget for operating costs, municipal rates and taxes, cleaning services and additional security costs, which are generally not provided by the landlord. Rates and taxes are based on the capital value of the property. The tenant must pay documentation fees, which cover the legal costs of drawing up the lease and average R1 450 per lease agreement excluding VAT. Additional fees include telephone and computer installation, and a rental deposit. Agent's fees are generally calculated as a percentage of the yearly rent and paid by the landlord. Commission is calculated at 5% of the first two years' rental, 2,5% of the next three years' rental, 1,5% of the following three years' rental and 1% of rental for the remainder of the lease. (VAT is due and payable by the tenant.) Landlords occasionally offer a rent-free period, but generally not for longer than three months. Landlords also offer a tenant installation allowance or fit-out allowance, usually three months rental for a three-year lease and five months rental for a five-year lease. New buildings that have not been previously fitted out have allowances of R550 per square metre upwards. Lease terms are generally three to five years but could be as high as 10 years. Leases with foreign companies tend to be for a longer period with break clauses. When the lease comes to an end. Sub-leasing is generally only allowed with the landlord s prior written approval. Generally, the landlord s approval shall not be unreasonably withheld. Landlords do not usually allow tenants to assign their lease. (This depends on the financial credibility of the sub-tenant.) The landlord undertakes to repair and maintain the structure and common parts. The tenant must bear the cost of leaving the premises in its original condition, fair wear and tear excluded. Source: Broll Sources: Statistics South Africa, Standard Bank, CIA, IMF, Transparency International, World Bank. Indicator used as at 4 January 2011 and according to Universal Currency Convertor (http://www.xe.com/ucc/): R1 (ZAR) - $0.150484 (USA) and R1 (ZAR) - 0.112255 (EURO) FOR MORE INFORMATION CONTACT Sanett Uys - GM Group Research and Marketing 14th Floor, The Terraces, 34 Bree Street, Cape Town 8000, South Africa t: +27 21 419 7373 e: suys@broll.co.za For more information on market characteristics and trends, read our reports at www.broll.co.za Disclaimer Broll Property Group has taken every care in the preparation of this report. The sources of information used are believed to be accurate and reliable, but no guarantee of accuracy or completeness can be given. Neither Broll Property Group, nor any CB Richard Ellis company, nor any director, representative or employee of Broll Property Group, accepts liability for any direct or consequential loss arising from the use of this document or its content. The information and opinions contained in this report are subject to change without notice. No part or parts of this report may be stored in a retrieval system or reproduced or transmitted in any form or by any means electronic, mechanical, reprographic, recording or otherwise, now known or to be devised, without prior consent from Broll Property Group. 6