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Office sector recovery stays fragile

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Office space in Cape Town’s southern suburbs is already extremely sought after, but this year will see higher demand as more commercial
space is converted into residential accommodation. Over the past three years 33 000m2 of office space in the CBD has been converted
to residential. And according to Dave Russell, director of commercial leasing at Baker Street Properties, more conversions are expected
this year in Cape Town’s main commercial nodes, including the southern suburbs. “This will result in further reduction of office stock in these nodes. The southern suburbs, including Claremont, Rondebosch and Newlands, are enjoying very low vacancy levels along with Central and the V&A Waterfront. Vacancies are low because of demand for these locations together with lack of development.”
The South African Property Owners Assocation’s (Sapoa) Q4 Office Vacancy Survey revealed the vacancy level in Cape Town’s commercial nodes was 7% – a low statistic when compared to historical levels and those of other centres in the county.

However, Russell says: “We believe there will be a slight increase in vacancies during 2018, particularly in the CBD, but nothing too drastic.”

According to the Sapoa report, Cape Town’s vacancy rate was the lowest among the largest municipalities, with its 7% rate a 0.2% decline from the previous quarter. The highest vacancy rate among these municipalities was Joburg, with vacancy levels of 12.6%. Of the smaller municipalities, Nelson Mandela Bay saw the lowest vacancy levels at 6.5%. The national vacancy rate in Q4, as recorded by Sapoa, was 11.2%.

The report revealed that national asking rental growth slowed further over the last quarter of 2017, and that this was indicative of the low growth environment coupled with an excess supply in the market.

“As at Q4 2017, asking rental growth was recorded at 2% year-on-year, down from 2.7% in the quarter before,” it said. This level was also the lowest since Q2 2014.

The amount of active new office development has been “trending down” since 2015, with Sapoa saying the demand for space is also not growing as employment growth and business confidence remain muted.

The report said: “The office sector recovery remains fragile with the latest economic growth and employment data pointing to a stagnant, flat growth environment. The fact that asking rental growth has also been slowing suggests that occupancy gains are mostly coming at the expense of rental growth. That said, some nodes remain resilient and are bucking the trend.”

Rode & Associates’ latest State of the Property Market report noted that the country’s office market was “like a becalmed sailing boat” because there is little growth left in rentals as a result of weak demand-side conditions, and a significant over-supply, with 10% of grade A and B office space vacant.

“In the third quarter of 2017 nominal market rentals in Joburg and Durban decentralised recorded yearly growth of 3%, while Pretoria decentralised grew by 2%. The weakest performance came from Cape Town decentralised, where rental rates remained roughly at previous year levels.

“In comparison, in the reporting quarter, building cost inflation is expected to have shown yearly growth of about 5%. This implies that in major office regions, office rentals declined in real terms. Tepid market-rental growth below building cost inflation means new developments become progressively less viable.”

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