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KEY FACTORS IMPACTING ON THE OFFICE PROPERTY MARKET

In the office sector of the property market there are a number of key factors impacting on the market and on a business’s choice of location, says David Reid, investment broker manager for JHI.

“Firstly, never before has location been more important in terms of accessibility to markets as well as the property’s position within surrounds which have good infrastructure - including easy access to transport along key routes. Currently there is increased attention focused on areas all round the Gautrain stations and the future Bus Rapid Transit system – such as Sandton, for example, where BRT Phase 1 is planned for completion by 2013. These areas are also easily accessible to clients as well as professional services such as financial institutions. There is no doubt that ease of commuting is increasingly important to users of office space.

“Another factor of importance to tenants in this sector is management of the public environment around the offices and typically in Sandton we are seeing a huge improvement in regard to public space, which in turn is impacting positively on the demand for office space. Braamfontein is another area experiencing an improvement as the result of the public environment,” says Reid.

“There is always debate regarding when is the right time to develop new office space and to put it simply the measurement used to determine this is when there is a balance between new space coming onto the market and existing un-let space. When there is an over-supply of un-let space then generally you find little new space coming onto the market. However along with the current more positive sentiment in the market, resulting in increased confidence, we could start to see the big ticket developers gradually begin to return to the market. Currently, according to SAPOA the amount of un-let office space nationally is just under 10 percent, however vacancies naturally differ from one area to another,” he says.

Efficient utilisation of office space:
Reid says when one considers the type of development coming on stream, the view is that today a key focus is on maximising efficiency. In other words tenants are becoming far more critical of how they utilise their space; for example, take the number of square metres allocated per person. “In modern offices the average benchmark to aim for is 12sqm per person, incorporating common areas too, however in reality it is closer to approximately 25sqm per person. As a result, instead of large floor space comprising expansive offices as we knew in the 70s and 80s, many office users today are tending towards more compact, even sectional title space from as little as 150sqm up to around 1500sqm, depending on size of the business. For the entrepreneurial-minded investor this is also a more manageable investment and for the tenant with a focus on return on investment, enables more efficient use of space. In line with this and along with the streamlining of space utilisation, we are also seeing an uptick in the sub-letting of space.”
Reid says for tenants, for whom cost is a key factor, along with careful usage of space it is important to consider how their rentals are made up ie what are the operating costs – as these form a major part of the rental cost. “So for example for a 500sqm tenant the first question they may well ask, after what is the rental, is: what is the cost to them per square metre for electricity used by the central air conditioning plant? By way of illustration, how large, grand and volumetric is the common entrance foyer? How much heat is generated by huge glass facades? How old and prone to maintenance are the lifts? Can space pockets within the building be individually air-conditioned, or do the central air conditioners have to continue at maximum power despite the building being half vacant? These are just some of the questions asked by tenants, but with tenants increasingly cost conscious as well as space conscious, this in turn influences new development, existing re-development and the type and size of projects that will be launched in the future. Currently and on a positive note, we are seeing landlords being more flexible in order to incentivise tenants, and being creative in providing efficient, all-inclusive packages of space to a tenant, or ‘package deals’,” says Reid.

With shortage of parking being a factor in the established areas of the inner city, Reid says despite the projected increased use of public transport, there is always a concern about secure parking, which traditionally has been under-catered. “Much has been done to address the shortage of parking, mainly through re-development, in the granting of new zonings for parking and in the creation of new structured parking facilities. These are mainly very short distances from the workplace and are easily accessed through shuttle services, greater use of taxis and secure walkways.”

From an investment perspective Reid says currently there are investment properties available which offer sound potential for capital growth, and with good rental income. “We are seeing the larger listed funds tending towards the disposing of stock priced under R60-R70 million, which is resulting in attractive stock becoming available on the market. We know of existing CBD buildings ranging between R2 500 and R3 000 per square metre, with very attractive investment yields on rented stock.”
Reid offers a word of advice for investors - to be wary of acquiring properties where rentals are way above market rates due to existing, historic leases still being in place - which have escalated over time and with a short remaining life span. “The result is often an unrealistically high expectation of value on the part of the seller. When these leases come to an end the rentals or tenants will be replaced at lower, more market-related rates which directly translate into lower income. The end result is that the investor ends up overcapitalising on his/her investment.

He adds on a positive note: “It is generally accepted that the South African commercial property market has retained its resilience – even through the global downturn – and continues to do so. According to SAPOA office parks have been the best performing office property type over the past 15 years – with 16.5 percent average annual return during this period.”

Issued by Gaye de Villiers


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