The past few years have not been the most encouraging for the SA economy, with anaemic economic growth putting a damper on business and investor confidence while political instability serves only to make matters worse. Nevertheless, the long-term nature of real estate investment allows investors to look ahead and make decisions based on future returns. While activity in the market has continued, recent trends show an increase in caution in the market, which will set the tone for the next couple of years.
It is interesting to note the increase in levels of real estate investment in SA despite notable concerns about economic and political issues. We witnessed the second consecutive quarter of negative GDP growth in the first quarter of 2017 leaving us in a recession, employment grew a mere 0.3% y/y in 2016 while business confidence plummeted to 2009 levels.
That being said, a total of R8.3bn was invested in existing office stock in 2016, growth of 8.9% on a y/y basis. Gauteng continued to dominate activity, with sales in the province accounting for 64% of the invested value, up from 58% in 2015. Property funds seeking to dispose of some of their older office stock to acquire other assets such as industrial and retail property, will support continued transactional activities this year. The industrial and retail property sectors have proven to perform better than office stock, with prime yields averaging 8.5% and 7% respectively compared to 9% for offices.
However, prime office buildings are more likely to outperform the overall office market given that premium grade accommodation sits in short supply, accounting for less than 10% of overall office stock and maintaining vacancies below 5% at a national level. Consequently, new office developments in Johannesburg, Durban and Cape Town continue to break ground in order to take advantage of mounting demand for prime office accommodation. The migration to new developments by blue chip companies is however, leaving significant vacancies in older office buildings. Landlords are having to be creative in attracting tenants with initiatives such as Growthpoint Properties’ Smart Move, which offers 100% first-year rental back as a tenant allowance.
Improved building efficiency is becoming more and more important to cost-sensitive tenants, justifying relocation expenditure in the current economic climate. In fact, the growth in office demand is no longer directly proportional to the growth in employment as the amount of accommodation required per head has declined with the increasing popularity of open-plan offices and hot-desks. Growing interest in building efficiency is likely to lead to greater momentum in developments that have “green’’ features, particularly given anecdotal evidence of improved productivity and decreased long-term operational costs of these buildings. Other trends in the office market include co-working spaces, sectional title office accommodation as well as the conversion of office buildings into student accommodation, residential developments and possibly educational premises.
The industrial sector recorded total investments of R13.4bn in 2016, a significant increase from R5.2bn in 2015. Even if excluding the substantial transaction between JSE-listed Tradehold and private developer Collins, total investments would have recorded a substantial 65% y/y increase from 2015. The past year has certainly shown enhanced confidence in the performance of the industrial sector, which has contributed to a notable increase in new builds as well. It is worth noting that the industrial sector is the only asset class that recorded double digit growth in new buildings completed in 2016, at 14.0% y/y.
The significant rise in demand for logistics and warehousing investments is interesting as it seems counter-intuitive in the wake of declining consumer confidence, with the subsector largely servicing the retail sector. It is surprising that concerns of an oversupply have not hit this market yet as it has the office market. Driven by household consumption expenditure, low consumer confidence and weak household consumption growth suggests that one should not anticipate a notable increase in trade activity, hence warning of low demand in the logistics and warehousing market over the short term. On the upside, this can be read as the market being confident of a long-term recovery in the economy despite the current downturn.
The spread of properties transacted in 2016 continued to be concentrated in Gauteng and KwaZulu Natal. In contrast, the Western Cape showed a marginal 1.7% increase in investment activity and the rest of SA a marginal increase of 0.2%. Location and quality of accommodation continue to play a key role in demand for industrial property, with Durban seeing the most interest in areas within close proximity to the international airport and Durban Port. Johannesburg has seeing a lot more demand in the north and eastern regions. These areas offer newer, high-quality accommodation that is globally competitive, which has exerted upward pressure on rentals in these nodes. For example, rentals for an A-grade warehouse in Durban’s Riverhorse Valley are above R65/m² while rentals in New Germany (Cape Town) are well below that. The same goes for Johannesburg, average rentals in the east and north are higher (R67/m²) compared to the West and South Rand. Rentals are expected to improve in the longterm, driven by asking rentals of new developments coming in at around R70/m² to R75/m².
There have been factors that have worked against an economic recovery in SA, keeping GDP growth below 1% in 2016 and a similar figure expected for 2017. Looking at economic forecasts and our local business sentiment measures, it seems the economy is far from a recovery and the market is anticipating a period of stagnation. The significant impact of recent political decisions on business sentiment and the current sovereign credit rating suggests that the future confidence depends on a political solution. This will cause decision-makers to be more cautious and some may adopt a "wait and see" approach to business and investment decisions. However, the growing development pipeline reflects a positive long-term outlook in the sector.
• Makhoba: associate director: research & strategy, JLL, SSA
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