Research

JLL – South Africa’s Real Estate Market Performance (Q1 2020)

Media Business

Office:

A contracting economy coupled with rising unemployment has seen a dampened office sector with national vacancy rates hovering around the 10% to 11% mark.

This somewhat challenging landscape has been offset by strong growth in gross fixed capital formation by businesses over the past three years, driving new occupancy and office expansion.

Rising operational costs, improving networking capabilities and the global outbreak of COVID-19 has seen a strong shift in focus for corporates to scale down on office space and to promote satellite working establishments. More specifically, a call for temporary shared office spaces, or flexi spaces, is now emerging in the market.

These trends will inevitably reduce the demand for office space in the medium to long term, driving vacancies and constraining new traditional office space development. The market may alternatively move towards retrofitting and refurbishment, converting traditional office space into flexi or shared spaces.

In this period, asking rental rates are anticipated to decline in response to an over supply of stock, placing increased pressure on vacancy rates.

Industrial:

Industrial space remains the strongest asset class when compared to its commercial counterparts, with class leading year-on-year capital growth backed by low vacancy rates (3.4% national average). In response to a constrained economic climate and an increasingly competitive market, occupiers have been forced to scale down and to consolidate their operations in order to cut costs and to keep their businesses afloat.

Although manufacturing and heavy industrial spaces reflect the lowest vacancy rates, increased operational costs and a slowdown in Chinese production levels puts growing pressure on the viability of these operations. Consequently, vacancy rates in the segment are expected to rise, whilst rental growth will slow.

In contrast to the heavy industrial outlook, retail driven warehousing, storage and distribution spaces are set on a strong growth path in the short to medium term. This is driven by a relatively new and healthy e-commerce industry in South Africa. This trend is expected to strengthen as consumer preference and behavioral changes, with increased market penetration as a result of more accessible and affordable technologies.

Hospitality:

Amid a 21-day national lock down, businesses and hospitality industries alike have been forced to shut down across South Africa. Global travel bans, as well as the postponement and cancellation of events has left a void throughout the industry. This will have an adverse impact on the hotel industry, with multiple hotel groups announcing temporary closures of venues and facilities.

The hotel snapshot updates must be read in context with the COVID-19 global pandemic, and more importantly, take cognizance of the country-wide 21-day lock down. Subsequently, all indicators will need to be re-evaluated once an updated assessment (post the COVID-19 pandemic) of the hotel industry has been conducted.

Fundamental changes to the dynamics and performance of the hospitality industry abroad, are expected to occur.