Cape Town boasts SA's top-performing office market

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Welcome to the latest edition of The Property Pod, South Africa's leading property investor podcast. Gain insider insights from key executives, analysts, developers, and entrepreneurs in the country's vast real estate industry.

The latest Rode report on the SA property market for Q4 2023 was released in December. This is a comprehensive quarterly report prepared by renowned real estate economists, Rode & Associates. A particularly noteworthy section of the report concerns Cape Town's office real estate market, with research revealing that Cape Town is South Africa's best-performing office market.

It may not come as a surprise to many, but discussing the report's findings in more detail on this week's podcast is Kobus Lamprecht, Rode's head of research and editor of the Rode Report.

Highlights of his interview are below. You can also listen to the entire podcast above or download it from iono, Spotify, and Apple Podcasts.

Cobus Lamprecht, director of research at Lord & Associates, said:Image: Attached

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Cape Town's reputation as the best-run city is reflected in another economic indicator, the office property market…The latest Road Report, released in December, states: and I am quoting it as follows. , office rent growth in the home city averages about 10%. ” This was the highest amount in the country and also exceeded inflation. Can you share your insights on performance and findings?

“Cape Town has great wine, good rugby, a rebound in tourism and another airport in Cape Town. [the] horizon. So what more do you want?

“The Cape Town office market is experiencing a truly remarkable resurgence…

“Perhaps it’s worth just looking at the trends over the past few years. Very importantly, Rode uses the decentralized rental trend as a proxy for what’s going on in the market, “Type” essentially means that all nodes are together. Next, create an index and examine its trends. This does not include his CBD, as in some areas of the country, such as Johannesburg and Durban, it is really devastated. Therefore, it makes no sense to have just a Cape Town index or a Johannesburg index. We want to break it down into decentralized trends. ”

powerful recovery

“This Cape Town ‘diversification’ index shows market rentals have fallen by around 11% during the pandemic. And we saw a strong recovery in 2022 and 2023. Rentals then ended last year about 6% higher than 2019 levels. So, essentially, rents at the end of last year (2023) were 6% higher compared to 2019. As you mentioned, this is a pretty average feat considering what's happening in other cities. For that matter, the V&A Waterfront, Century City and Claremont also stand out. And starting from the waterfront shows very good performance.

“We all took note of the positive news in the strong tourist numbers and Growth Point financial reports, and found that the V&A Waterfront had a vacancy rate of 7% in the fourth quarter of last year. It was the lowest compared to all other nodes in Town, although its 7% vacancy rate is the average of Grade A and Grade B vacancies combined, excluding Grade C vacancy rates.

“In terms of other nodes, Claremont and Century City have also seen significant improvement over the last year, and as a result, rents have also outpaced inflation. As you may recall, vacancies in Claremont and Century City have increased during the pandemic. The rate used to be close to 20%. Now it's around 10% for both. So more and more companies are coming to Cape Town and expanding their office space. I might touch on that a little bit later. , and why this is happening.”

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Just to clarify, you say it's 6% growth now, what is the 10% number mentioned in the report?

“The 10% is rental growth in 2023 compared to 2022, because it's important to look at where the market is when compared to pre-pandemic levels.” Comparing Q4 levels to 2019, rents have increased by approximately 6%. So you can see what's going on in the office market, sort of the trends over the past few years. ”

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How is this different from decentralized office nodes in other major cities such as Johannesburg, Pretoria and Durban?

“Nominal rent growth was mostly in the low single digits or even declining in other major cities. That said, let's start with Johannesburg, which is of course the largest office market. , decentralized rentals grew by just 1% in 2023, which for us was a slowdown from 2% growth in 2022. Key nodes in Sandton and Rosebank saw similar types of growth. It can be seen that a deceleration trend has occurred in…

“Very importantly, the vacancy rate for distributed space in Q4 2023 averaged around 16% across Johannesburg.”

“That means the Johannesburg office market remains under pressure. The national vacancy rate is around 14%. This is slightly higher than the national figure, but even the Johannesburg market has seen some improvement in the last year. I have to say it has been seen. We have also seen a reduction in the number of job openings in Sandton. And we have added the element of return to work as well as businesses bringing their employees back to the office. Traffic levels have also increased. Masu.”

“And if you look at other nodes like Waterfall and Rosebank, the vacancy rate is much lower at 12%. So there are still some shining nodes in Johannesburg, but Sunninghill, Randburg, If you look at the CBD, Rivonia, we’re still battling an average vacancy rate of about 20%.”

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“The vacancy rate in Pretoria is still around 13% or 14%. In Durban, Umhilanga and La Lucia are a tale of two cities that are doing very well.

“But overall, Durban did not do as well, with decentralized rents in Durban falling by 1% in 2023. But there is one standout node there that has really driven the city. did.”

What are some other factors behind the increase in office rents in Cape Town?

“as [mentioned], with workers returning to offices after the pandemic ended, which boosted the market last year. These employees return to the office two to three days a week, sometimes more. And this trend can be seen internationally as well. Remember, even Zoom last year brought employees back to the office. ”

“Several major foreign companies that have announced this year, including SAP, a global software giant with 108,000 employees, announced last month that they would like their employees to work three days in the office or on-site with customers. And IBM made a similar announcement. This trend of employees returning to the office continues. It's contributing a little bit to the market. The office market was basically wiped out by the pandemic. So keep in mind this is helping the market a little bit.”

“It is also influenced by the fact that companies are expanding or opening office space in Cape Town due to improved electricity supply conditions. I think we all know this by now, and thanks to various investments by the Cape Town government and the private sector, this trend will only increase in the coming years.”

Investec's new Western Cape regional office is located at the V&A Waterfront in Cape Town. Image: Suren Naidu/Moneyweb

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Moneyweb's hot topic is the 'swallow visa' fiasco, so what will be the trend for semi-immigrants?

“Yes, it's definitely happening. And other cities in the Western Cape are also benefiting from that, like George, where we're talking about the office market. So, it's definitely happening. Listen. I have to say that it was really good. [the] Foreign language…”

The report finds Rosebank remains the most expensive office node in the country, while the latest survey includes a section titled 'Pioneer Rentals'. [here] Cape Town claims the top spot, at around R320 per square meter. Can you please explain what “pioneer rental” means and where in the Cape Town office market landlords are asking for such rates?

“This is a very interesting topic and I'm glad you brought it up because I think a lot of listeners don't know what it means. 'Pioneer rent' essentially means means the highest rent actually achieved. So in most cases it will be a brand new office space that is newly built. But it can also be a renovated space, for example. ”

“And if you look at this 'Pioneer rental' level, you have to compare it to the trends in market rental levels. So if the Pioneer rental level is much higher than the average market level, then that node or city We find that there are very good growth prospects in Cape Town and that that high R320 rental rate is actually achievable in Cape Town.”

“It wasn’t just one building. It was in another building. We did this in two buildings, Claremont and Newlands, close to Cavendish Square and public transport, close to these junctions. has benefited office demand.”

“If you look at the average rental level in Claremont, it's well below R300. So essentially, if conditions continue to be optimal and there's plenty of office space, over time. [space]average rental rates could rise to that level…”

Returning to Durban for a moment and talking about La Lucia Ridge and Umhlanga rather than central Durban, the report shows the second highest office rent growth after Cape Town at 3.6%. 3.6% is still below the inflation rate and in negative territory so to speak, so was I reading correctly?

“We all know that Durban has its fair share of challenges as a city, such as riots, flooding and infrastructure failure, but Umhilanga has very low office vacancy rates and relatively good rental growth. , really stands out. It's been mentioned and is still attracting investment. Maybe that will continue.”

“But when we compare it to other Durban nodes such as Berea and Westville for example, we find that those nodes have vacancies.” [rate] In fact, rents are rising, showing the opposite trend to La Lucia and Umhlanga, but what is really happening there…

“Compared to other nodes, there is by far the most office space in La Lucia and Umhlanga. Therefore, most investments are being made there at the moment.”

“In terms of migration, I think the Western Cape will see the biggest influx of people, especially popular spots like Cape Town, Langebaan, Hermanus, George and Plett.”

“If you are going to invest, I think you will choose the Western Cape first and then investors who want to take more risk will invest in other cities.”

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In conclusion, regarding the forecast for Cape Town, do you think this trend will continue? And could Cape Town become the most profitable real estate rental market in the office sector?

“If you look five years into the future, there is no doubt that Cape Town is the most promising city due to the electricity supply situation. [there] If Cape Town can maintain its governance, or a similar type of government that is well-recognized by its people, it will continue to outperform other cities. ”