While the underlying fundamentals of the South African office rental sector had shown signs of improvement, the industry lingered in the late stages of an industry slowdown, characterised by high vacancy levels and relatively low rental yields.

Drawing on data collected from rental property owners across the country, property performance analyst firm IPD South Africa executive director Stan Garrun said on Friday that national office vacancy rates had hit 11.3% in the second quarter of this year, creeping higher than the year-ago level but remaining below that of the 2003 vacancy peak.

Scrutinising average gross rentals for the quarter of R85/m², he noted at a business breakfast organised by the South African Property Owners Association, that this translated into lost rental income of over R1-billion a year.

Asking rentals for the three months were 1.9% lower than those of the year before, which Garrun believed was indicative of a “tough” letting environment in which property owners were increasingly focused on retaining existing tenants rather than maintaining rental thresholds.

“In the second quarter, 72 591 m² of office space was vacated, 119 000 m² was let and 192 000 m² was added owing to new developments,” he added.

PRIME VACANCY
Meanwhile, the vacancy levels of prime office property had increased “alarmingly” over the three months to 8.5% of total prime rental space – up from 0.5% in the fourth quarter of 2013.

A-grade and B-grade vacancies had remained largely flat, while C-grade vacancy levels had decreased after coming off a high base.

“Even prime office rental levels are showing strain, which is largely driven by speculation around the new developments coming to market. There is currently 8 300 m₂ of unlet prime office space – up from 4 000 m² at the end of 2013,” he commented.

Sandton, in Johannesburg, saw the bulk of these vacancy increases in prime rental space, followed closely by Cape Town’s central business district (CBD) and the Waverley and Melrose suburbs, in Johannesburg.

METROPOLITAN PERFORMANCE
Looking more closely at regional rental trends, Garrun reported that overall office vacancies in Johannesburg were currently at 11.9%, which was up on the prior year’s comparable quarter.

This was characterised by a large increase in available rental space in Constantia Kloof, Illovo and Morningside.

In contrast, lower vacancy rates were recorded in Bedfordview, Milpark, Greenstone and Sandton.

Durban, meanwhile, had the highest vacancy rate among all metros surveyed, at 14.2%.

Cape Town’s vacancy rate was at 9.7%, which was slightly down from the first quarter, but up from 2013 levels.

Looking at the performances of CBDs in comparison with decentralised business hubs, such as Rosebank, Rivonia and Sandton, Garrun noted that inner city office vacancies, at 15%, remained high, and were driven by lacklustre rental performances in the Johannesburg, Pretoria and Durban CBDs.

OFFICE SPACE DEVELOPMENT
The pace of development of office rental space remained high, with 700 000 m^₂ added to existing rental stock in the second quarter.

Garrun said this remained concentrated, with 30% of the country’s total office development occurring in Sandton.

The pre-letting of this developing office space was trending upwards, which Garrun said could be a sign of financiers reducing their exposure to speculative development and of developers being more cautious.

Some 65.4% of developing office space had been pre-let in the second quarter.

“If you take this pre-let figure into account, the total office vacancy rate for the second quarter rises to 12.2%,” he commented, adding that this could put pressure on asking rental prices.

Iterating that the sector was currently in a late-stage slowdown, Garrun noted that it now remained to be seen whether the next quarter would see a further entrenchment of lacklustre levels or a slight recovery.

“This relies heavily on the economy – if it continues to put pressure on jobs and salaries, the rental rates could well shift further downwards,” he said.