More "To Let" signs are starting to appear in South Africa's office nodes, a trend that is likely to prompt many landlords to lower their asking rentals. David Green, MD of Johannesburg-based Pace Property Group, says secondary B and C-grade office nodes are particularly vulnerable to the slowdown in the broader economy. He notes that the vacancy rate in a number of South Africa's older office nodes have already more than doubled since the beginning of 2009.
Green says B- and C-grade vacancies are likely to rise further over the coming months, as the recession continues to force cash-strapped companies to downsize. That means office landlords in secondary offices who want to retain tenants or lure new ones will have to start offering improved incentives.
Green says in Europe, landlords have had no choice but to lower asking rentals and increase tenant installation allowances in a bid to retain tenants. He expects that SA landlords will soon follow suit.
Despite rising vacancies in B and C-grade offices, Green says the SA office market has proved far more resilient to the global recession than those of Central, East and Western Europe.
He notes that vacancy rates for prime A-grade offices in dominant business nodes such as Sandton and the CBD of Cape Town remain below 4% and 6,5% respectively. In Durban's Umhlanga and La Lucia, overall vacancies are at a modest 1,9%. While the amount of office space to let in the CBD of Pretoria has increased markedly this year, Green says overall vacancies are still at only 4,3%.
In stark contrast, office vacancies in many cities across Europe now exceed 12%, with some even touching on 30%. Pace Property's overview of the European office market for third quarter 2009 shows that cities like Frankfurt, Glasgow, Amsterdam, Stockholm, Brussels, Edinburgh, Madrid, Milan, Dublin and Rome currently all have more than four years supply of available office space.
Latest performance figures from the IPD SA Property Bi-Annual Indicator confirm that SA's office market is under pressure. Offices were the worst performing sector of the commercial property market for first half 2009 with total returns slipping to 1,6%, down from 8,1% year-on-year (y/y).
Retail and industrial property both delivered total returns of 4,1% over the same time, bringing the average for the three sectors of the commercial property market to 3,4%, down from 7,3% in 2008. The IPD tracks the performance of physical commercial property worth some R94bn