By Scott Thorburn, Redefine National asset manager, office
7 December 2023 – Although attention has been drawn to the swift post-COVID recovery of Cape Town's commercial real estate sector, Gauteng – the nation's economic engine – is faring better than some may have thought, with occupancies coming down and rentals on the rise in quality buildings in a number of nodes.
Many office buildings in sought-after locations in Gauteng that weren’t fully let prior to the arrival of the pandemic are now fully let or have minimal vacancies and are showing gradual rental growth.
In contrast to many other parts of the world, there has been a noticeable increase in businesses across the country returning to the physical workplace, albeit with a new set of requirements. This is contributing to a high volume of deals, although smaller in nature, in key nodes, such as Bryanston, Sandton, Rosebank, Midrand, Greenstone and Struben’s Valley, where vacancies in the Redefine portfolio are currently lower than at pre-COVID levels.
Demand for quality spaces in key locations
It's reasonable to assume that normal property fundamentals have returned to Gauteng as demand has increased. Tenants are seeking high-end buildings in prime locations with easy and convenient access to services and facilities.
Companies are willing to spend more to create a better work environment for staff. One that’s comfortable, accessible, and has nearby amenities that will help attract workers back to the office. Although companies are occupying smaller spaces, the properties they choose to occupy are of high quality and offer, or are close to, excellent amenities.
As organisations are looking for quality buildings, it is imperative to refurbish lower grade properties in prime areas to turn them into more premium assets. These quality buildings in sought-after nodes have very high occupancy levels. Ongoing refurbishments of lower grade properties will help reduce the province's overall office sector vacancy.
Increased occupancies bode well for rentals and valuations
The decrease in vacancies and rise in occupancies is definitely encouraging for Gauteng's rental growth. When discussing rentals, one might assume that the rand per square metre (rand/sqm) rate in Cape Town is higher. However, aside from the Waterfront node, rental rates are actually modest in the Mother City, even with the low supply and high demand.
While some of the best, fully occupied buildings in Sandton are fetching around R230/sqm, an iconic P Grade building in one of Cape Town's sought-after nodes might struggle to reach a rate of R190/sqm. However, commercial rentals in Cape Town have seen sharp increases in the last six months and will continue to firm, resulting in this rental gap narrowing.
Property values measured at rand/sqm are strongly influenced by rental rates, which reflects the strong performance of the key nodes in Gauteng, while Cape Town generally has lower rand/sqm valuations. The highest-value areas in the Redefine portfolio are Sandton and Rosebank. These nodes continue to perform well for Redefine.
Upsides exist in Gauteng's office sector
The post-COVID performance of Cape Town's office property sector has been nothing short of extraordinary. The city experienced a perfect storm on the back of new organisations opening for business, a recovering local Cape Town economy, businesses’ calls to return to the office, increased loadshedding leading to more people needing to work in the office, and an influx of international call centre operations. Not to mention, the relatively superior service delivery provided by the City of Cape Town.
Nonetheless, Gauteng can still be considered the financial hub in commercial property. Of course, Gauteng has its own set of problems that impede the sector's expansion in the province, which is experiencing not only a lack of municipal effectiveness and ever-increasing rates but also low economic growth.
The lack of service delivery can be managed and tempered with a proactive approach by property owners. For instance, Redefine, alongside other property companies operating in the sector, has invested and been involved in city improvement districts (CIDs) in nodes such as Sandton, Rosebank, Illovo, Parktown, Braamfontein and Bryanston for a number of years.
Where these CIDs are in place, the improved cleanliness, security, and quality of facilities in the area are noticeable, especially when one compares the state of the environment when leaving the CID areas. Water and electricity supply remain a risk across the country – not only in Gauteng. Property owners have mitigated this risk by ensuring standby supplies to properties; however, this solution is only effective for short-term supply issues.
Sticking to age-old fundamentals
The approach that real estate firms in Gauteng should take is to never compromise on quality. If your building is empty, invest money in renovations. If you plan to buy, be aware of where to buy and make your purchase in the right node with the right amenities in close proximity. Being ahead of the curve in an area is the opportunity.
Although the office market in Cape Town will undoubtedly continue to grow and present opportunities as new developments materialise, buildings are renovated, and rental rates rise, Gauteng should not be disregarded. If the province can realise economic growth and sort out service delivery issues, it is not unfathomable that the improvement in the commercial property fundamentals and the increase in returns in Gauteng can be as dramatic as that of Cape Town in the past 12 months.
