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How commercial properties look ahead

Apr 3, 2017 | Property News, Uncategorized

Property developers and various funds may diversify to cater for student housing demand, while institutional investors will be forced to scale back their exposure to shopping centres

The economy underperformed again in 2016; however, there is a slight increase in the level of optimism. The International Monetary Fund expects SA’s gross domestic product (GDP) growth to remain flat at 0.1% this year, noting that the economy will only experience a modest recovery. The government is slightly more optimistic and expects moderate GDP growth recovery. Finance Minister Pravin Gordhan recently said expectation at this stage was that GDP growth would increase from 0.5% in 2016 to 1.3% in 2017.

Rosebank is starting to attain rentals that supersede those of Sandton, and there is still activity in Waterfall Estate, Steyn City, Umhlanga and Cape Town CBD, with a continued drive to green buildings. Regardless of this, consumers are still finding it difficult to meet increasing costs. Consumer price inflation averaged 6.5% in 2016, increasing to 6.6% for January this year. This is higher than the averages we have seen in the past five years and the cost increased at an even faster pace for food and non-alcoholic beverages, and housing and utilities. Property funds have turned their attention offshore for additional growth.

 Strong competition in Gauteng shopping mall

There are signs of pressure in the retail property space, mainly as a result of cannibalisation and strong market competition. New regional and superregional malls are opening or undergoing massive expansion in Gauteng in particular. This has put pressure on trading densities in neighbouring centres, exacerbated by the slowdown in the economy that has strained retail spending in the past year. The same centres are competing for the same struggling and debt-ridden customers.

In 2016 alone, two new centres were added to the market: the 90,000m² Mall of the South and the 131,000m² Mall of Africa. Menlyn Park Shopping Centre and Fourways Mall are also undergoing major expansion.

Customers are spoilt for choice; the bigger the centre the more choices available. This means the smaller centres will be forced to specialise

Menlyn Park is the largest shopping centre in Africa with 170,000m² of retail space.

Competition is prevalent in the retail space; however, from 2017 onwards, with the economy unlikely to improve, real estate institutional investors will be forced to scale back and diversify into other segments of property.

Office market movement

The office market will remain under pressure, with slow growth in rental rates. Grade A Johannesburg office rentals have had the highest year-on-year growth rate, with an overall average growth rate of 5%, while Grade B rentals had a 2.9% growth rate. Vacancy rates had a marginal increase from 11.3% in Q3 2015 to 11.8% in Q3 2016. This can be attributed to demand being focused in the prime areas. In Cape Town, numerous office completions have been no threat to the office vacancy rate. This indicates stable demand and strong rental growth well above inflation. The low vacancy rate does imply limited options for larger office requirements.

“The office market will remain under pressure with slow growth in rental rates”

Buoyant demand for student accommodation

One of the many results of the #Feesmustfall movement, which became more violent in 2016, is students fearing being on campuses because of the unrest. This is encouraging more students to find accommodation off campus. Further to this, the student population has been increasing, with a number of students looking for safe, secure and affordable accommodation. There has been an increasing demand in students looking for accommodation that current campus housing stock cannot meet. Property developers will consider increasing investment in this sector of the economy as the demand continues to rise.

We are likely to see various funds diversifying to cater for student housing demand this year. Developers have ignored this real estate sector for a long time as much of their investment has been allocated to industrial, office and retail development, which is evidently becoming saturated. According to Higher Education and Training Minister Dr Blade Nzimande, student accommodation supply caters for only 100,000 out of the 530,000 students. The ministry estimates that by 2030, an additional 400,000 beds will be required as various old universities are housing students in derelict buildings, old hotels and office conversions in inner cities. For property developers, the opportunity is ripe for penetration and will alleviate the social challenges faced by the future employees and employers of this economy.

 

Infrastructure investment to drive real estate investment

Through the expansion of Gautrain lines expected to begin in five years’ time, space for commercial activity will be created particularly in areas such as Soweto, Mamelodi and the western suburbs of Johannesburg. The expansion is also expected to create more real estate demand, particularly around the stations, be it for commercial property, rental stock or more residential sectional schemes. The Bus Rapid Transport (BRT) system is also likely to influence acquisition decisions. All major municipalities have or are implementing a BRT system, which is aimed at improving access to safe public transport. With this investment in mind, it could revive some of the nodes that are under strain, particularly where infrastructure is developed along busy commercial secondary nodes.

 

Transaction activity dominated by private funds

Commercial transaction activity reached about R127bn in 2016, from R118.9bn in 2015. Although this is an improvement, it is only a 7.3% increase and a slight drop from the 13.1% increase seen in 2015. The listed sector dominated transaction purchases in 2016, increasing by 42% from 2015. Funds are looking for valuable assets and land for development to cater for future demand. In 2017, we are likely to see even more purchases as various funds diversify from traditional sectors to residential and student accommodation.

 

 Top suburbs

Below are the top 10 commercial areas in SA ranked according to total transaction value. The majority of commercial transactions are in Gauteng and the Western Cape. Gauteng, however, is leading the field in terms of the total value of transaction, which exceeds R9.6bn.

Lightstone Property is a data and analytics company

Credits: Photos:iStock, Text: Hayley Ivins Downes, Lightstone Property Head of Real Estate

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