As the return to office continues to gain momentum, demand for office space is increasing, and vacancies are declining with an improvement in property fundamentals.
REITs who have recently published their financial results are pointing to the recovery of the sector, with demand for space exceeding limited supply, especially in certain Cape Town nodes, with rental growth reported in some instances.
“Some of our members with exposure to offices are cautiously optimistic about the sector. Vacancies are falling although negative reversions persist within certain portfolios,” comments SA REIT Association CEO, Joanne Solomon. “In many global markets (South Africa included), many workers continue to return to the office. Amenity-rich and quality buildings in key locations continue to see improved property fundamentals, demand for space and slight growth in rentals … Flight to quality is driving demand for prime offices as tenants see value and opportunities to upgrade from secondary buildings or locations.”
According to SAPOA’s Office Vacancy Report for Q1 2024, national vacancies reduced slightly from 16.7% in 2022 to 14.7%, but rentals declined 6.2% year-on-year after accounting for inflation.
Cape Town’s offices recorded office vacancies of 6.8% – the lowest rate recorded since 2009. Nationally, nearly 60% of prime office space was fully let compared to 42% recorded at the beginning of the pandemic.
“The reduction in office vacancies indicates an improvement in demand for offices – assuming the decrease is not attributed to disposals or conversions of office space to residential for example,” says Liliane Barnard, CEO & Portfolio Manager at Metope Investment Managers.
Barnard says the decline in rentals reflects ongoing pressure on rental income from the office sector, adding that property valuations remain under pressure.
“The outlook for the office sector is cautiously positive, and a recovery in the South African economy will result in declining rentals turning positive. Though reversions have been negative – this rate of decline is slowing which suggests a potential levelling out as demand picks up – in the Western Cape, this is already happening with rental growth experienced in some locations.”
Growthpoint Properties says that across its portfolio, vacancies are reducing, and although rentals have been stagnant over the past few years, growth in rentals is now evident in the coastal regions.
“Vacancies seem to have peaked – arrears are back under control, and we are seeing more demand from tenants inland, while our coastal properties are relatively well let,” notes Paul Kollenberg, Growthpoint Properties Head of Asset Management: Office.
Delta Property Fund, the specialist sovereign-underpinned property fund renewed 55 leases and signed 69 new leases for the financial year ended 29 February. Of the 55 renewals, 24 related to sovereign tenants with the balance being to the private sector with average lease terms of 28 months. On new leases, only two related to sovereign tenants with the rest being the private sector.
“Various interventions such as having a dedicated team of leasing specialists, discounted rentals, intensified marketing campaigns and broker engagements with attractive incentives have resulted in vacancy reductions and tenant retention while minimising operating expenses,” says Tumelo Applegreen, Senior Asset Manager at Delta Property Fund, noting that due to these interventions, post yearend, Delta concluded 15 new leases to date for FY2025.
Delta continues to sell non-core assets having transferred three properties during FY2024 with a further three transferred post yearend, and another four in the process of being transferred.
“We are still finding buyers with appetite for our assets – our mandate is to sell at market value or higher which implies a prolonged and difficult negotiation process to close a deal.”
Growthpoint Properties offers incentives on certain buildings, with deals tailored to suit individual tenant requirements. The REIT’s strategy is to reduce office exposure to smaller buildings in nodes that are not seeing demand, as well as sell non-core assets for conversion to residential or other uses.
Barnard says that taking a long-term view and believing the economic fortunes will improve bodes well for the recovery of the office sector. Location will be key – meaning offices close to transport hubs as well as prime buildings or offices with green features such as back-up power and water, electric vehicle charging stations and bicycle racks for example, will experience high demand.
“The sector may be worth investing in for long-term gains if economic conditions improve and rental declines stabilise. However, in the short-term, the sector may continue to face challenges due to economic uncertainties and shifts in work patterns.”
