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Cape Town’s office property sector follows its residential market leader

Cape Town’s commercial property market has not only proven its resilience during a year of economic and political instability, but has emerged as the country’s star performer in this market.

According to the MSCI Direct Property Index for the first six months of 2017, commercial property in the City of Cape Town delivered a total return of 6.2%. This refers to standing investments and excludes developments and transactions.

Although vacancies in the CBD are on the “high side” at 10%, Erwin Rode of Rode & Associates says this is due to the city’s popularity with developers and investors.

“In decentralised areas, vacancies are between 5% and 6 %, or the best in the country. Thus, Cape Town office space follows the lead of its booming residential market. However, in spite of the low vacancies, rentals generally managed to grow at little more than the inflation rate.”On the Rode vacancy scale, industrial vacancies in the Cape Peninsula are at the “top end of low”, enabling rentals to grow at rates slightly higher than inflation. However, in real terms, Rode does not expect growth in market rentals over the next few years.

The city’s industrial sector outperformed others in the first six months of 2017 with a total return of 8.2%, says Phil Barttram, executive director at MSCI. The 8.2% total return was driven by an income return of 4.4% and capital growth of 3.7%. Cape Town’s industrial vacancy rate remains very low, and in June 2017 stood at 1.5% across the 66 properties forming part of the IPD South Africa Property Index sample as at June 2017, he says.

“Cape Town’s office market performed well during the first half of 2017, bucking the trend observed in Joburg and Durban. One reason for the performance is a low vacancy rate of 4.3% in properties forming part of the IPD index sample as at June 2017.

“The Sapoa Office Vacancy Survey pegs the current office vacancy rate for Cape Town at 6.8%. This is significantly lower than the national office vacancies of 11.2%, with several Cape Town office nodes recording single digit vacancies. The only node with a vacancy rate in excess of 10% was the CBD at 10.3% – lower than other major CBD markets.”

The city’s commercial market has proven to be quite resilient so far this year, agrees Broll’s head of broking, Sean Berowsky. Prime office spaces in the V&A Waterfront and Claremont have been “stand out performers” in Cape Town this year, with record rents achieved for long-term leases. The under supply of “real quality” in Claremont and the attractiveness of the V&A are reasons for these achievements.

“The maturing of the Century City Bridgeways Urban Square has been a highlight together with the repurposing of some older A and B-grade office stock into residential developments,” he says.

Looking ahead to 2018, Berowsky says a lack of policy uncertainty, an expected further ratings downgrade, and near to zero economic growth does not augur well for any positive outcome. However, student residential still requires greater supply at the correct price point and high street retail “looks attractive” in the CBD and the south-bound axis along Woodstock, Salt River, Observatory, and Rondebosch.

“(This is) due to additional high rise residential property coming through which will attract more feet and benefit the retail sector along these nodes”

Vacancy rates in larger shopping malls and rental growth will be “under pressure” as consumers are expected to be financially pressed in 2018, Berowsky says.

Property360

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