The office sector is some distance away from improving, with vacancies on the rise and no recovery expected soon.
At the top end large companies are still taking up premium commercial space, but this demand stems mostly from businesses that are consolidating and from international groups seeking a base in SA while they service the continent in general.
There has been consolidation within large groups such as chemicals company Sasol and health-care group Discovery in the past few years.
Both have moved their operations from four or five offices across Gauteng to single, high-end trophy offices in Sandton. Both now operate out of offices that are valued at billions of rand.
More than 5,000 Discovery employees moved into a new, 112,000m² office building at the end of last year. SA’s largest property company, Growthpoint Properties, which owns 55% of the building, says the total development cost of phases one and two of the building was about R3.4bn.
That is more than Sasol’s mega-office, which was completed in 2016 and was valued at about R2bn.
Besides these large moves, a number of international law firms, including Allen & Overy and DLA Piper, have moved to glass towers in Sandton, and some smaller, more specialised firms are looking to take up space in Rosebank. Legal firm Webber Wentzel has moved from Illovo to a much larger office in Sandton.
Redefine Properties’ new multiuse development, Rosebank Link, has been designed to attract smaller professional companies rather than the big corporations that have been based in Sandton over the past two decades.
A recent report by the SA Property Owners Association shows that the national vacancy rate for offices was 11.5% at the end of the first quarter of 2018, up 30 basis points from the quarter before and just off the 12-year high of 11.8% recorded in mid-2017.
Offices are a musical-chairs business at the moment. It is a depreciating asset class. The world of work is changing, and what people want from offices is also changing
— Marc Wainer
The organisation says asking rental has grown 3.1% year on year.
It’s "expected to remain well below inflation, which is indicative of the current low-growth environment coupled with an excess supply in the market".
The report says the office sector’s recovery over the past few years has been subdued. "The aggregate vacancy rate has moved sideways since 2011, while the level of development activity has been trending steadily lower since reaching a peak in the fourth quarter of 2015."
At last week’s Jones Lang LaSalle Outbound Capital conference, Redefine Properties executive chair Marc Wainer said that though his company will continue to supply offices, retail property offers the best long-term prospects.
"Offices are a musical-chairs business at the moment," said Wainer. "It is a depreciating asset class.
"The world of work is changing, and what people want from offices is also changing, as more people work from home or in shared [premises].
"So offices aren’t our focus in SA or in Poland, through our investment in Echo Polska Properties."
On the other hand, Wainer said the prospects for shopping centres are more promising. Even though shopping is moving online, people still visit malls to try on clothes and look at products before they buy them online.
SA’s office vacancy rate is just off 2017’s 12-year high; rental price increases are well below inflation
— What it means
And while retailers around the world face the challenge of how not to lose money from merchandise that customers return, returns are more likely from online shopping than bricks-and-mortar purchases.
"The cost of returns runs into billions of pounds a year in the UK," said Wainer. "I think shopping centres still have a lot to offer across much of the world."
Evan Robins of Old Mutual Investment Group says specialised real estate may also offer good growth potential in SA over the next few years.
Accommodation is a further option: mid-cap real estate groups Emira Property Fund and Vukile Property Fund are converting their B-and C-grade offices to residential property, having waited too long for suitable tenants to fill the commercial space.
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