In an ironic twist, the work-from-home phenomenon is helping drive renewed demand for premium commercial space in SA’s economic heartland, Sandton.
Flexible working arrangements have dramatically reduced traffic congestion, making the area attractive again to tenants, Redefine Properties, SA’s second-largest property stock, noted at its investor day in Sandton this week.
The trend, particularly noticeable in the Golden Mile section around Sandton City, is seen mainly in the premium-grade (P-grade) segment, which includes brand-new flagship premises.
Vacancies remain high in A-grade properties, which are relatively new buildings with quality finishes, and in older B- and C-grade office premises.
Flexible working had “taken out about 20% of traffic flow and that has opened up Sandton”, said Pieter Strydom, Redefine’s national office asset manager.
“The average travel times into Sandton have reduced by 30%-40% and we’ve seen a material increase in demand in letting in our Sandton [P-grade] portfolio.”
According to the latest MSCI/South African Property Owners Association (Sapoa) vacancy figures, premium office space in Sandton had vacancies of 11.6% on average, while Redefine was now “sitting at 5.5% vacancies on P-grade”.
In Redefine’s overall portfolio, P-grade and A-grade premises account for about 74% of its R21.6bn office portfolio.
What made Sandton’s premium space attractive was access to amenities, as well as a trend among top companies to want premises offering “healthy, quality” space for employees returning to the office.
Much of the vacant space caused by existing tenants subletting premises as they downscaled during the pandemic had largely been absorbed in the Redefine portfolio, said Strydom. This helped ease the pressure on vacancies.
But vacancies in other Sandton office grades were still high, with MSCI/Sapoa’s vacancies for A-grade space at 25.1%. Secondary-grade properties had been hit particularly hard, with vacancies of 38.3%.
Redefine’s A-grade vacancies in Sandton were at 27.1%, while its secondary properties had a vacancy factor of 23.9%.
Brendon Hubbard, portfolio manager at ClucasGray, said the office market in general remained under pressure,“still remains under some pressure” with no “evidence yet of rentals starting to turn higher”.
But, Hubbard said, premium-grade energy-efficient office parks were attractive to big companies. This was particularly true in an environment where the highest-quality P-grade building probably fetched rentals similar to older A-grade offices because of oversupply.
Ann-Maree Tippoo, portfolio manager at Ninety One, said it was encouraging to see “Redefine’s thesis play out” in terms of quality space, particularly with premises close to the Gautrain gaining traction, as Sandton had “typically been the bugbear of the sector”.
“The news that shadow vacancies [caused by subletting] have largely been mopped up, at least in the Redefine portfolio, is good news for the company and the sector. “Though it is too early to extrapolate that into an underpin for office rental levels, at the very least it is a key input into slowing the rate of deterioration in the office market significantly.”
Redefine’s national office portfolio has a vacancy factor of 15.4%, but Strydom said this was a 1% improvement on the group’s half-year results to end-February, showing “the tenant sentiment to come back to the office”.
Strydom said while A-grade vacancies were still high, improvements were seen in the “upper ends” of that portfolio.
Vacancies should decrease further as Redefine already had offers for 40% of the secondary portfolio.
Redefine was repurposing a portion of secondary portfolio assets. Some, for example, were being turned into schools.
The average travel times into Sandton have reduced by 30%-40% and we’ve seen a material increase in demand
— Pieter Strydom of Redefine
CEO Andrew Konig said a challenge facing property owners was the disconnect between national government policies and those of local authorities over the distribution of electricity and the addition of alternative power sources such as solar onto the grid.
Reselling electricity was a big revenue spinner for councils and many dragged their feet over approving additional electricity sources, despite the government’s plan to enlarge the electricity supply market by scrapping the threshold for private power-generation projects feeding into the grid.
Local councils were “protecting a revenue source, which runs counter to what the president is trying to do, which is to stimulate the generation of electricity”.
Sapoa CEO Neil Gopal said he had asked the president’s office for clarity and guidance on the issue but “nothing concrete has been forthcoming”.
He said that “to some extent” local authorities were acting contrary to President Cyril Ramaphosa’s energy announcement.
“The reality is that if we are not able to produce electricity up to and above the cap of 100MW, which has now been lifted, it will place further barriers to future property developments and economic growth, leading to increasing unemployment.”
However, the South African Local Government Association (Salga) said it had “been in the lead” to allow the private sector to “play in the generation space, and also for municipalities to be able to buy not only from Eskom, but also from independent power producers”.
Nhlanhla Ngidi, who leads energy and electricity distribution at Salga, said municipalities were “not viewing the private sector as their competition” and the government’s new electricity supply dispensation “opens up another business opportunity for municipalities, which is to charge the private sector wheeling electricity through their networks”. This would help them earn additional revenue.
“Since this transition is coming very quickly, it calls for municipalities to adapt their policies and bylaws quickly as well, so maybe the challenge might be on that part, where the developments from the private sector are faster than the changes in local authority policies.”
He said it was a “matter of working together” as it was a “win-win situation” for the private sector and local governments.
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