If you’re doubting the extent to which Cape Town continues to challenge Joburg’s dominance as the country’s economic hub, look no further than the outperformance of the Mother City’s commercial property market.
In the two years to June, Cape Town’s office vacancy rate has more than halved — from close to 14% to 6.3%. That’s the lowest level since 2009, according to the most recent office vacancy survey by the South African Property Owners Association (Sapoa).
In some nodes, most notably the V&A Waterfront, the city centre and Century City, there’s little, if any, top-end office space available to rent.
That’s in stark contrast to Joburg, where a hefty 16.9% of office stock is still standing empty. Granted, the city’s vacancy rate has improved from the 19.5% peak reached in mid-2022, but it’s still significantly ahead of the 12.5% recorded pre-pandemic.
South Africa’s office market, like that of many others across the globe, has battled record high vacancies and falling rentals following the adoption of pandemic-induced work-from-home and hybrid working policies.
Sandton, South Africa’s largest office node, with 1.9-million square metres of gross lettable area (GLA), still labours under a 16.5% vacancy rate. In fact, Sandton is one of the country’s business hubs with the most “troubled assets”, which is how Sapoa classifies buildings with vacancies exceeding 30%.
The Joburg CBD, Rivonia (north of Sandton) and the Durban CBD also have a high tally of empty office buildings. That said, the Sapoa report reveals a large disparity between older and newer areas within individual nodes.
For instance, the vacancy rate in Sandton’s older, historic core sits at a hefty 34.3% while in its newer, more attractive areas only 9.3% of stock is to let.
Joburg has the biggest glut of vacant space in the country, but Durban and Pretoria also continue to battle an oversupply, with vacancy rates of 15.3% and 12.1% respectively, only marginally down from 2022 pandemic-induced peaks.
Office vacancy rates are widely used to analyse the performance of the commercial property sector — and tend to be closely linked to economic and employment growth.
The general view is that the country needs to achieve GDP growth of at least 3.5% a year for office vacancy rates to return to a healthy supply-demand equilibrium of vacancy rates of about 5%-7%. These levels were last seen in 2006 — just before the global financial crisis hit — to 2009.
However, annual GDP growth for the country clocked in at below 2% in the past two years, which suggests that the rebound in Cape Town’s office market has been driven by other factors.
Paul Kollenberg, head of asset management for the office division of Growthpoint Properties, South Africa’s largest commercial landlord, says Cape Town has been a major beneficiary of the rapid growth in the business process outsourcing (BPO) and offshoring market.
BPO demand comes on the back of the global trend to outsource IT-enabled services and functions related to marketing, payroll, human resources, customer relations, supply chain management and the like.
Kollenberg says there’s strong demand among European and US companies to diversify BPO exposure beyond traditionally preferred locations such as the Philippines.
BPO tenants require large floor plates — typically exceeding 1,000m² — which has resulted in a scarcity of sizeable office spaces to let.
Kollenberg says other reasons for Cape Town having become increasingly desirable as a corporate home include the absence of load-shedding in the CBD, better municipal service delivery (and perceptions thereof) and infrastructure upkeep, and lower municipal rate increases than most other cities.
The newly released State of Cape Town Central City Report 2023 provides further evidence of how the city’s commercial property market has almost decoupled itself from that of the rest of the country.
According to the report, which is published annually by the Cape Town Central City Improvement District (CCID), the vacancy rate for premium offices — newly built or refurbished with all the bells and whistles — shrank from 16.6% to 3% in the 12 months to December. The A-grade vacancy dropped from 7.9% to 4.9% over the same period.
The CBD is Cape Town’s largest office node, with just more than 1-million square metres of GLA. Take-up in older buildings has also increased, though less so, with the city centre’s B- and C-grade vacancy rate still exceeding 10%.
We will soon run out of space to let for top-end tenants
— Rob Kane
The upmarket mixed-use V&A Waterfront, which consists primarily of premium and A-grade space, has no more space to let, down from 4.9% in December 2019.
CCID chair Rob Kane says that unlike those of other metros, where most office landlords must still drop prices to keep tenants or find new ones when leases expire, Cape Town’s improving vacancy rate has not come at the cost of rental growth.
Rentals for premium space increased by 5.4% last year. In fact, the city centre has now overtaken Sandton in terms of median asking rentals for prime offices, at a substantial R265/m² vs R208/m², according to Sapoa figures.
A- and B-grade space in Cape Town’s CBD also recorded inflation-beating rental growth of 6.5% and 8.3% respectively in 2023. Even older C-grade buildings in need of refurbishment have breached R100/m², a level unheard of five years ago.
Kane, who is also the founder of private commercial property fund Boxwood, says the vacancy rate in the fund’s seven city centre buildings spanning more than 84,000m² is fast approaching 3%, down from close to 30% in 2018/2019.
That comes on the back of a R200m redevelopment initiative, which turned the portfolio of mostly older, rundown office buildings into modern, mixed-use premium and A-grade space.
Rentals increased from about R120/m² to more than R200/m² over the same period, he says. “We will soon run out of space to let for top-end tenants,” he adds.
Kane ascribes the growing shortage of upscale office space in the city centre partly to the successful office-to-residential conversion trend, which created about 3,000 new apartments and aparthotel units in the past three years.
At least another 1,000 residential units are under construction or in the pipeline. While that has reduced the CBD’s office footprint, office take-up has simultaneously surged due to ongoing business and household semigration.
Kane adds: “It’s not only existing corporates that are relocating offices from Gauteng. Many people are also moving to Cape Town to start their own businesses.”
It also appears that Cape Town office workers may have returned to their desks at a faster pace than their Gauteng counterparts. Kane argues that people want to work in the city centre because it’s a clean, safe and vibrant place to be, with world class infrastructure.
“It’s a big thing that the local government has a proactive stance towards the business sector. So it gets stuff done,” he says.
The question arises whether the divergence in Cape Town’s commercial property market vs that of the rest of the country is likely to be short lived or a longer-term trend.
When foreign firms select South Africa as the base from which to establish an African presence, Cape Town is usually top of the list
— Quintin Rossi
Quintin Rossi, CEO of Spear Reit, the JSE’s only Western Cape-focused property stock, believes it’s highly probable that Cape Town’s office sector will continue to outperform.
Cape Town has never attracted much speculative office development, which has been a “blessing in disguise”, he says. “That’s protected the city from the office overhang seen in Gauteng and parts of KwaZulu-Natal.”
Sapoa figures show that in December 2019, more than 124,000m² of new office space was under construction in Sandton, Waterfall City and Rosebank alone.
Combined, these three Joburg nodes accounted for more than 55% of the country’s total office development pipeline of 247,000m². In stark contrast, fewer than 46,000m² of new offices were under construction at the time in Cape Town.
Rossi believes new office supply in the Mother City will remain constrained given the shortage of suitable development land and high construction costs.
“Returns on new projects are under pressure, which makes developers a little gun shy,” he says. That’s a major advantage for existing office landlords, as vacancy levels should continue to contract, placing further upward pressure on rentals.
“I don’t believe we will see major new levels of office supply come on stream in Cape Town over the short to medium term, which will further underpin top line revenue growth for owners of existing office assets,” says Rossi.
Meanwhile, he expects ongoing demand for commercial premises from the BPO market and a burgeoning tech sector. He says more than 500 tech firms, employing more than 40,000 people, are already operating out of Cape Town, and more are likely to come.
“When foreign firms select South Africa as the base from which to establish an African presence, Cape Town is usually top of the list given its value proposition in terms of lifestyle, cost of living and ease of doing business,” he says.
Rossi refers to the Western Cape government’s Growth for Jobs Strategy, which aims to grow the provincial economy to R1-trillion by 2035. If this target is met, which is based on lifting GDP growth to 4%-6% a year, an estimated 150,000 people are expected to move to the province annually.
Rossi points out that “these people [will] need homes, offices, places to shop and buy goods, which creates a strong holistic underpin for the full real estate value chain”.
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