Private companies, investors meet demand for housing by turning from commercial to residential
Widespread office-to-residential property conversion is taking place in Durban as the demand for housing in the city grows. In particular, student accommodation and entry-level to middle-income homes are needed, says Yianni Pavlou, company principal at Portfolio Property Investments.
Prominent private companies and investors are driving the trend, he says.
- The reasons behind these conversions include:
- Shortage of housing supply.
- Better rental yields in the residential space compared to office.
- Increased migration to Durban.
Furthermore, the regeneration of areas drives up the residential interest in them and the global trend of densification has “finally started to take hold in Durban”. “The volume of such conversions is definitely increasing and expected to continue on this upward trajectory,” Pavlou says.
Although office and other commercial properties are being converted to residential property throughout Durban, major projects of this nature are particularly being seen in the Durban CBD. This is where student accommodation conversions have taken place as well as conversion into ‘“lifestyle living”, or “live, work and play”.
“The same applies to parts of Morningside, Glenwood and Berea. These areas used to be main office hubs but with the growth in office demand in the north and west of Durban, and the regeneration of the CBD economy, the demand for lower- to middle-income accommodation in these areas has grown.”
However, Pavlou says the key to making such conversions viable is the price paid for the building to be converted. “As a rule of thumb anything above R4 500/ m2 makes it difficult to convert.
Other key points such as parking, rezoning and the condition of existing infrastructure must also be taken into account,” he advises. Converting commercial properties into residential offerings is a good way for property investors to beat the low growth in South Africa, says Joel Rosen, managing director at Prime Residential.
With large numbers of office vacancies, especially in some areas of Joburg, and fewer new commercial tenants entering the market, there is often no other option but to look at alternative ways to make these investments work. Furthermore, he says residential property has become a more attractive asset class as it is delivering better returns.
The growing numbers of young professionals looking to live closer to where they work in conjunction with the drop in the supply of affordable units in some of the CBDs around the country have created a healthy market for property conversions, Rosen says.
“The residential rental market in the middle market space has shown good occupancy, healthy collections and solid annual growth. High demand, low supply and good yields all combine to make property conversions an attractive option for many investors,” says Rosen.
However, not all CBDs offer the same opportunity for this, says Gary Palmer, chief executive of Paragon Lending Solutions. “For instance, Cape Town has seen new higher-end office-to-residential conversions come on stream in recent months, resulting in an oversupply.
However, there has been a lack of new affordable rental supply as developers struggle to see solid financial returns in the lower-end rental market. What’s more, the cost of inner-city properties in Cape Town is far higher than in other metropoles like Durban and Joburg which, together with the costs of conversions, makes the returns less attractive,” says Palmer.
Rosen says: “There is definitely strong demand for middle-market rentals in Durban. However, to buy buildings at the right levels is quite challenging.”