SA Commercial Property - Kwazulu Natal, Cape Town and Gauteng
Opportunistic and doom-laden commercial property investors, who were waiting for the market to collapse like the beleaguered residential development sector, have been disappointed,” says Auction Alliance CEO Rael Levitt. Commercial property has held up well but investors are tending to focus on ‘safer assets in good positions’, which includes nodes such as Sandton, Tyger Valley or Umhlanga Ridge. There has simply been no one cashing in on prime, distressed commercial real estate.
“The properties that have come under the hammer have tended to be problematic assets that investors would have steered clear off, even in the best of times,” says Levitt. The best distressed assets that have come to the market have arisen from failed investor schemes, where the underlying asset was strong but the investment vehicle was either fraudulent or over-geared. “In reality we have seen lots of failed developments under the liquidation hammer, but there has not been one property fund that has put its best properties to the market. “Commercial property, which was not at the heart of the property crisis, has in fact held up surprisingly well in South Africa, probably off the back of a strong listed property sector,” explains Levitt.
South African investors, operating with interest rate at 37-year lows, have a growing interest in commercial property, but they are only looking for deals in the best locations with the strongest tenants. We have seen that low interest rates make the yields on offer from commercial property look more attractive than ever, and there is strong demand for reliable rentals,” Levitt adds. The cash flow from tenants is more stable than that from equities and offshore currency. For those investors who are concerned that inflation may rear its head again, commercial property has always been a useful hedge against inflation because lease agreements can be renegotiated with tenants to reflect rising prices. Levitt says investing in commercial property has paid off handsomely for many investors after the 2008 crisis, particularly with stellar results from the listed sector up to the end of 2010. We have been saying for some time that good commercial property is really good and poor property is really poor, and this two tier market is growing wider in 2011. Prime locations are where prices have remained annoyingly strong for those in search of a bargain. In SA, where the bubble in commercial property was less dangerous than residential property, there may have been too much development and some over-supply in certain sectors.
When banks were giving 80% commercial property loans it drove up demand and reduced yields. Certain banks fuelled this boom by getting involved in equity participation models and giving 100% funding to developers. Rapid rental growth also fuelled developments, particularly in nodes out of traditional urban zones. Now demand for developments has slowed down as banks are shying away from new funding and there is less development in the pipeline. The chance of a surge in new development activity is slight and debt financing, which lenders class as risky, remains tight. That may cause a further surge of demand for strong cashyielding properties and result in negligible demand for marginal commercial assets in poor locations.
It is believed that the growth in commercial property will be confined to trophy assets in prime locations, which are either well let or can easily be tenanted with long leases. For offices, that means buildings in prime nodes such as Sandton, Tyger Valley or Umhlanga Ridge. For retail centres, it means properties in upmarket suburbs or busy traffic nodes. For the industrial sector, it means single-tenanted buildings, with long leases near busy transportation nodes. In the 2004-08 commercial property-boom, bidders at auctions would not differentiate between top-quality trophy assets and secondary ones. Bidders chased commercial property of all sorts, closing the yield gap between the best and the rest. This however, is no longer the case. Investors are now generally a lot more prudent, largely because funding isn’t that freely available and they have a lot more of their own cash in the deal. That points to prime properties in prime locations, where demand for high-quality tenants prevails. Those investors who were planning to buy distressed assets are focusing on safer assets in good positions. The concern however, is that the gap between good and bad is widening. This makes the job even more challenging, to dispose of the properties that are distressed and coming to auction from banks and liquidators.”
The V & A Waterfront, Cape Town will get a R500m revamp
The Government Employees Pension Fund (GEPF), represented by the Public Investment Corporation Limited (PIC), together with Growthpoint Properties Limited have announced that their purchase, in equal proportions, of South Africa’s landmark V&A Waterfront is now complete and all conditions have been fulfilled. The new owners have wasted no time confirming their commitment to the ongoing development of V& A Waterfront. They announced the R500-million redevelopment of the landmark Clock Tower precinct over the next four years, one of the biggest business developments since the inception of the V&A Waterfront almost 22 years ago. Development has already commenced.
The V&A Waterfront transaction represents South Africa’s biggest single property transaction to date with the new owners paying a combined investment of some R9,7 billion for South Africa’s most popular tourist destination, which is widely recognised as one of the finest waterfront developments in the world. Located around the historic Victoria and Alfred Basins which formed Cape Town’s original harbour, the V&A Waterfront is a mixed-use property development and a South African showpiece. The V&A Waterfront acquisition has ensured that the ownership of one of the most prestigious properties in South Africa is again vested in the hands of South Africans and specifically the South African worker base, in the form of 1.2 million public servants, who are members of the GEPF. The purchase of the V&A Waterfront meets objectives of a sound investment, while effectively contributing to the sustainable economic development of South Africa.
The V&A Waterfront is a historic landmark and desirable location on a vibrant working harbour, which is an important international trading route for South Africa. While the future development of the V&A Waterfront remains flexible, it will be sensitive to the needs of Cape Town and integrate with the city. This has already started with the IRT bus route which runs through the V&A Waterfront, providing easy public access. The developed property boasts a well-established and mature portfolio of properties across the retail, office, hotel and industrial sectors, with attractive rentals, rental escalations and lease expiry profiles.
Key KZN commercial market on the up
While trading conditions remain challenging, albeit gradual, the various sectors of the commercial property market in key business nodes in KwaZulu-Natal are experiencing improving market sentiment.
From a retail perspective and in regard to centres, it appears stable or up on last year, with traditionally strong shopping centres trading well and with tenancies having proven resilient in tough trading conditions. Managed retail centres remain well tenanted and have very few vacancies, with rental levels and growth remaining intact. It’s positive to note that there is a high demand for retail space in the Durban CBD, with very few vacancies. The Berea/Morningside area is also experiencing a good demand, with little space available, while in the precinct around Gateway (ie not including Gateway shopping centre) tenanting is generally good but with pockets of vacancies. Rentals vary significantly, depending on size and location.
In the office sector it is noted to have a slightly more positive sentiment in the market with lease renewals and new lets continuing. While interest remains focused mainly in the areas north of Durban, the centrally and conveniently located area of Morningside sees an ongoing, steady demand due to its position and thriving business component. Westville, with its easy access to the city centre and all major routes, is starting to see an increase in demand. There is no doubt that the development of thousands of square metres of commercial space in Umhlanga Ridge and La Lucia Ridge, as well as in Westville over the past five to 10 years has had a significant impact on leasing in the Durban CBD. These new developments are attractive, well designed, easily
accessible, situated in secure, landscaped and well managed precincts and accordingly, are extremely appealing to corporate tenants. The opening of the new King Shaka International Airport at La Mercy has undoubtedly also had a positive impact on development to the north of Durban. In the Umhlanga Ridge precinct the current demand is mainly for smaller units in the region of 80-200sqm, with asking rentals ranging from R90 to R120 per square metre per month.
The stronger demand is for space in La Lucia Ridge, where developments are tenant driven, with most enquiries for smaller units which, attract rentals to a maximum of R135 per square metre. In prestigious Umhlanga Ridgeside, presently under development, there is a strong demand for office rentals at R150 per square metre. Closer to Durban in the Durban North area, where asking rentals tend to be close to the levels sought in nearby Umhlanga and La Lucia, there is an ongoing trend towards rental space comprising mostly houses which have been converted into office accommodation. In busy Morningside pockets of office space are available with asking rentals mainly in the region of R85-R100 per square metre and parking bays at R350 for covered parking and R250 for open bays. In Westville, where there has been an oversupply of stock, demand is starting to increase, with available space comprising units between 100 and 800 square metres at asking rentals of R85-R100 per square metre. Slightly further inland in Hill rest, it is reported that enquiries are also picking up with asking rentals from R95-R120 per square metre and parking bays at R450 for covered and R300 for open bays.
Melrose Arch, Johannesburg
Melrose Arch needs no introduction as a hot spot for Johannesburg’s fashionistas and foodies. Perhaps a lesser-known fact is that the precinct is fast becoming the poster child for SA’s sustainable development movement. With only 60% of the property developed to date, another 160000m² of retail, office, hotel and residential space will be added to Melrose Arch over the next five years.
The plan is to position Melrose Arch as South Africa’s foremost example of new urbanism, the idea that neighbourhoods should have a mix of easily accessible places to work, play and live in. Sustainable development and new urbanism design principles have real, practical implications and address many of the critical issues of our time, rapidly rising electricity and fuel costs, urban decay, traffic congestion and crime. Energy consumption will become increasingly important in the South African property development context. What one can expect to pay for electricity and water will in future play a fundamental role in the buying and renting of residential and commercial property in South Africa. So how do South African developers introduce new urbanism and sustainable development principles to built environments? In essence, it’s about connection and integration, creating an environment where people can live, work and play within safe walking distance, yet still have easy access to transport nodes. It does away with over-reliance on motor vehicles. At the same time, it creates a sense of community, allowing people more time to engage with one another face to face.
Johannesburg inner city improvements facilitate further new development
Johannesburg CBD continues to undergo a metamorphosis in order to meet the needs of a rapidly evolving, major economic and metropolitan hub. Since the city’s turnaround strategy was adopted in the early 2000s, Rea Vaya BRT (Bus Rapid Transit), properly tarred roads, new taxi ranks and more affordable residential accommodation are some of the positive infrastructural changes being implemented, providing a catalyst for further improvements and increased confidence in the inner city.
Good news for the city is that planning is currently in progress for an impressive new mixed-used development to be known as Stimela Square, situated at the corner of Sauer and Hall Streets on the southern fringe of Johannesburg CBD, with good access to major transport routes. This landmark project creates a ‘city’ in one block, comprising offices, retail and a hotel in one consolidated development. Located on part of the historic Ferreira’s Camp (originally a mining camp), the development is arranged around an attractive inner city garden square, created as the focal space of Stimela Square and a hive of retail and public activity. Centred around the square and with direct access will be 90 000sqm of high grade office space configured in six blocks. Designed to cater for tenant requirements these offices will range in size from 185-15 000sqm at a gross rental of R119.50 per square metre.
Source: SA Commercial PropNews and Auction Alliance Group – Property 24