the johannesburg office market shows resilience persistent ... 2017 johannesburg... · 1 central...
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1 CentralLondonOfficeMarketReport | Q3 2016
Johannesburg Office Market ReportTheJohannesburgofficemarketshowsresilienceinthemidstofweightypoliticaluncertaintyandthepersistentpooreconomicenvironment.
Q1 2017
2 JohannesburgOfficeMarketReport | Q1 2017
Overview
JohannesburgThecurrentpoliticalclimatemaywelldamperfuturegrowthintheJohannesburgofficemarketwithrentalgrowthslowingdown.Abulkofnewprimenodestockisexpectedin2017whichcouldexertpressureonrentalsandmaycreateshort-termvacancies.However,evidencehasproventhatprimenodescanbeexpectedtoperformsatisfactorily,evenduringthemostfeverishmacroeconomicconditionsandprevailingpoliticalinstability.Thisismainlyduetotheconsistenthealthydemandforhighqualityaccommodationwitnessedinprimenodes.Investorsandoccupierswillbepragmaticwhenmakingdecisions,especiallyoccupiersseekingmoreflexibilityinleaseterms.
Gross prime rental range
R207/m²-R243/m²Gross Lettable Area
9,876,547m²Overall Johannesburg
vacancy rate
12.3%Prime office yield
8.5%-9%Asking rentals for
new developments
R223/m²– R257/m²
Innumbers
Indicativedevelopmentprojects
Development
33BakerStreetBidvestBankTheLinkTheGalleriaTheMainStraightPhase2KnightsbridgeManorGatewayWestAtria
Node
RosebankSandtonRosebankRosebankBryanstonBryanstonWaterfallWaterfall
Approximate size (m²)
12,00015,00018,00018,1004,00012,52213,80020,000
Table source: JLL Development Pipeline
3 CentralLondonOfficeMarketReport | Q3 2016
Issue to watch :Theclimateisripeformoreflexibleleaseterms
andshowcasesthebenefitsoftheco-working
environment.
4 JohannesburgOfficeMarketReport | Q1 2017
DemandGeneral overview of SA’s current economic state
Thefirstquarterof2017wasthemosteventfulthreemonthsforSouthAfricasincethe“Nenegate”sagain2015,withpoliticsyetagaintakingcentrestage.Whilesomemayhavebeenshockedbythepresident’sdecisiontoreshuffletheexecutivecabinet,inrealitythiswasanexpectedalthoughunwelcome,decisionbythemarket.
Negativefeedbackheraldedthestartof2017withStatsSAreportinganeconomicgrowthof0.3%for2016,whichwaslowerthantheforecasted0.5%.ThismayhavebeendrivenbytheconsecutivenegativegrowthinGDPoverthelasttwoquartersof2016.
Zooming in on the Johannesburg Office MarketDespitethenegativity,marketactivityhasnotsloweddowninthefirstquarterof2017,withsignsofahealthydemandforhighqualityaccommodationmainlyinprimenodes.Recentlyconcludedtransactionsandotherdealsinthepipeline,suchasBidvestBank’smovetoSandton,illustratethis.
Thesetransactionscementthefactthattherewillstillbedemandforofficeaccommodation(mainlyforhighqualitygradeAandPstock).Howeveroccupiers,particularlysmallandmediumbusinesses,willbelookingformoreflexibleleaseterms.Landlordsshouldexpecttonegotiateforshorterterms,forinstanceathree-yearleaseinsteadoffive.Thedrivingfactorforthesechangeswillbea“fearoftheunknown”approach.Itwillnotbeeasyforbusinessestoforeseehowseverelythecreditdowngradewillaffectthemsocautiousmaybethewayforward.
Recently concluded deals
Table source: SARB, Stats SA
Source: JLL
Economic growth (2016)
0.3%
Repo rate
7%
CPI (March 2017)
6.1% Unemployment rate
26.6%
Prime lending rate
10.50%
Cricket South AfricaGlenhove - 4,000m²
Standard BankRosebank - 12,000m²
SABBryanston - 8,000m²
Anewtrendthathasbeenadisruptorfortheconventionalofficemarketisco-workingofficeaccommodation.Whileitsimpactontheestablishedofficemarkethasbeenminimalsofar,itwillserveasaworthyalternativeforsmallcompaniesavoidingexpansionsorenteringnewleasesinthesetryingtimes.Co-workingisstillinitsinfancystageinSouthAfrica,howeverthereareclearsignsofbusinessesbecomingmorereceptivetothistypeofoperationalenvironment.Consultancies,technologyrelatedcompaniesandsmallbusinessesareseentoberespondingwelltothisnewtrend
Needlesstosay,dealswillbehardtocomebyasbusinessesmayfreezeorpostponeanydecisionstomoveorexpandoffices.Andthisiswhereco-workingspaceswillcapitalise.Thesenewaccommodationoptionsofferseveralbenefits:
•flexibility-in“leasetermsandtoemployees•mobility-animportantfactorforglobalisation•noofficeset-upcostsallowingmorecapitalforinvestmentingrowthopportunities.
Perhapsthebiggestadvantageofthesharedworkspaceisitofferstenantstheopportunitytorentonaneed-bebasisunlikeconventionaloffices.Despiteallthepositives,theimpactofco-workingofficesisforecasttoremainminimalintheofficemarketduetosomeofitslimitationslikeavailabilityofparkingspace.
5 JohannesburgOfficeMarketReport | Q1 2017
Supply
Despitecountry-widenegativesentiment,thereareafewprospectstolookforwardtointheJohannesburgofficemarketwithseveraldevelopmentsexpectedtobecompletedin2017(seetablebelow).Withthisinmind,supplycanbeexpectedtogrowbyatleast2.0%in2017andwillcontinuetogrowintheshorttomediumterm(12–36months).
Althoughthereisstillpotentialformoredevelopmentsinprimenodes,itislikelythatdeveloperswilltakeawait-and-seeapproach,refrainingfromspeculativedevelopmentsandwaitingonsufficientdemandfromoccupiersbeforeembarkingonanynewdevelopments.Investorconfidencehasalreadyshowndeclinesincetherecentcabinetreshuffle.Itwillcontinuetoadjustastheimpactofthenewleadershipandrecentlyacquiredjunkstatusunfoldsinthefollowingmonths.
Mostofthenewstockandstockcurrentlyunderconstructionisinprimenodes(i.e.Sandton,Rosebank,andWaterfall).Whilethegrowthiswell-received,aseriousconcernisthetrafficcongestioninSandtonandRosebankwiththesituationworseningasnewtenantsmoveintothenodes.Thenewstockwillfurtherheightentheconcernofover-supply,especiallyintheSandtonarea.
Development projects expected to be completed in 2017:
Distributionof2017expectedcompletionsbynode:
Name of development Node Approximate size (m²)
TheMainStraightPhase2 Bryanston 4,000
KnightsbridgeManor Bryanston 12,522
OldMutualEmergingMarkets Sandton 30,000
WerksmansAttorneys Sandton 20,000
TheCentralPhase1 Sandton 20,000
AliceLanePhase3 Sandton 33,000
Discovery Sandton 85,000
144Oxford Rosebank 35,000
108Oxford Houghton 4,500GatewayWest Waterfall 13,800
14,0%
74,0%
7,0%
5,0%
BryanstonRosebankSandtonWaterfall
Table source: JLL Development Pipeline
Data source: JLL
6 JohannesburgOfficeMarketReport | Q1 2017
Newsupplycomingintothemarket,particularlyinprimenodes(i.e.SandtonandRosebank),meansincreasedcompetitionforexistingaccommodation.Thiswillexertadownwardpressureonrentalswithlandlordsattemptingtoavoidhighvacanciesintheirbuildings.This,however,doesnotmeanthatthesenodes(prime)willnotperformwellunderthecurrenteconomicconditionsastheyhavealreadybeenperformingatmarketlevelwithsomeevenoutperformingthemarket.Thissuggeststhateventhoughrentalsmaydeclineinthenextfewmonths,theywillstillremainclosetotheaveragemarketrentofR210/m².
Data source: JLL
Data source: JLL
Data source: JLL
Rental performanceOverall,rentalperformanceintheCityofJohannesburgwassatisfactorywitheachgradeofaccommodationwitnessinggrowth.Thegrowthwitnessedwaswithinthe8.0%-10.0%escalationband.Belowisabreakdownoftheyear-on-yearandquarterlygrowthratesofeachgradeforQ12017:
Grade P
Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017-2%
0%
2%
4%Grow
th (%
)
6%
8%
10%
12%
14%
Grade A Grade B
250
240
230
220
210
Aver
age
Grad
e P
rent
als (
R/m
²)
200
190
180Sandton Rosebank Illovo
207
213
243
213
Prime rentbenchmark/Market average
Waterfall
Average rental growth by grade:
Top performing Prime Nodes compared to the market:
Grade P
Outlook
Grade A Grade B
OutlookOutlook
0.4%
7.4%3.1%
5.8%2.2%
7.4%
Q/Q % change Y/Y % change
ItisinterestingtonotethatrentalsintheCBDhaveremainedrelativelyconstant,notexceedingtheR72/m2markinovertwoyears.Yettheareaischaracterisedbyhighvacancyrates,whichcontradictsthelawofeconomics(aspricesdecreasedemandincreases).Ontheotherhand,rentalsinBraamfontein-aneighbouringnodetotheCBD-haveseenincreaseseveryyearwhichareattributabletoannualescalations.Thisisaclassiccaseofbadneighbours;onepreferredovertheother.
Q1 20120
20
Rent
al ra
tes (
R/m
²)
JHB CBD
Linear (JHB CBD)
Braamfontein
Linear (Braamfontein)
40
60
80
100
120
Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017
JohannesburgCBDvsBraamfonteinrentals:
Data source: JLL
Rosebank
Houghton
Fourways
Byanston
Rivonia
Sunninghill
Sandton
Waterfall
Illovo
M1
N3
N1
N1
M2
Randburg
Lanseria Airport
R213/m²
R207/m²R176/m²
R187/m²R128/m²
R110/m²
R110/m²
R160/m²
R149/m²
R101/m²
R160/m²R181/m²R157/m²
R127/m²
R213/m²R165/m²
R228/m²R184/m²
R243/m²R193/m²
Johannesburg CBD
Woodmead
Midrand
Melrose
Parktown
OR TamboInternational Airport
Average gross rentals/m²
Table source: JLL Averagegrossrental/m²-GradePbuildings
Averagegrossrental/m²-GradeAbuildings
8 JohannesburgOfficeMarketReport | Q1 2017
Q1 2013
10.6%
11.4%
12.7%
12.3% 12.3%
9.5%
10.0%
Vaca
ncy
rate
(%)
10.5%
11.0%
11.5%
12.0%
12.5%
13.0%
Q1 2014 Q1 2015 Q1 2016 Q1 2017
Q1 20130.0%
Vaca
ncy
rate
(%)
2.0%4.0%6.0%8.0%
10.0%12.0%14.0%16.0%18.0%20.0%
Q1 2014 Q1 2015 Q1 2016 Q1 2017
Prime nodes - Johannesburg
Decentralised Johannesburg
Johannesburg CBD + Braamfontein + Newtown
Vacancies
OverallJohannesburgvacancyrate:
Data: SAPOA
Data: SAPOA
Onayear-on-yearbasis,thevacancyrateremainedunchanged,whileonaquarterlybasisitincreasedfrom11.9%(Q42016)to12.3%inQ12017.TheCityofJohannesburgrecordedoneofthehighestvacancyratesamongthelargermetrosinSouthAfrica.AccordingtoSAPOA,thehighvacancyrateismainlydrivenbythehighvacancyratesintheinnercity.Whileprimenodescontinuetorecordthelowestvacancies,therehasbeenanincreaseinvacancyratesonaquarterlybasisgoingfrom7.2%to9.1%.Thisislikelyasaresultofnewstockinthemarketthathasnotbeenoccupiedyet.
Wecanexpecttoseeanincreaseinvacancyratesoverthenexttwotothreequartersasdevelopmentswithspeculativeportionswillbecomingtocompletion.Anotherdrivingfactorforvacancyincreaseswillbeupcomingofficeconsolidations(example:PWC,Discovery).Thegoodnewsisthattheseeffectswillnotbepermanentastherecontinuestobeverydynamicdemandforhighqualityofficeaccommodation.
9 JohannesburgOfficeMarketReport | Q1 2017
AfewmonthsagoitwouldhavebeensafetosaythattheJohannesburgofficemarketwillcontinuetoperformwellinthemediumtermdespiteweakeconomicconditions.Howeverrecenteventshavecreatedfurtherrestraintamongstdecisionmakersandwilldamageinvestorconfidenceinthecity.
A couple of things to expect in the short to medium term:
• Developmentactivitytoslowdownafterthecompletionofongoingdevelopments-fewernewprojectswillbeannounced.• Developerstoholdbackonspeculativedevelopmentsduetohigherriskofalackoftenants.• Potentialoccupiersnegotiatingfornewleaseswillseekflexibleandshorterleaseterms.• Vacancyratesexpectedtoincreasebeforeimprovinginfuture.
WhilemostdevelopmentsintheSandtonnodearetenant-drivenwithspeculativeportions,theremaybeanover-supplyofofficeaccommodationintheshortterm,thisislikelytocausedownwardpressureonrentalsinthearea.Needlesstosay,theramificationsofthecabinetreshuffleandthecreditdowngradearestilltobefeltinthefollowingmonths,possiblyyears,andmaybeworsethanexpected.TheSARBforecastGDPgrowthat1.2%for2017,butconsideringrecenteventsandfurtherpossiblecreditdowngradesbyotherratingagencies,SouthAfrica’sgrowthwilllikelyremainstagnantandbelow1%.Aseconomicgrowthandemploymentdatafeedstheperformanceoftheofficemarket,suppressedgrowthandhighunemploymentratesindicatestagnancyintheofficemarket.
Rental growthaccelerating
Rental growthslowing
Rentsbottomingout
Rents falling
Grade B
Grade A
The JLL Property Clock™
Grade P
Market outlook
10 CentralLondonOfficeMarketReport | Q3 2016
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Tom MundyHead: Research, Sub-Saharan [email protected]
Omphile Ramokhoase Head: Research, South [email protected]
www.jll.co.zawww.jllpropertysearch.co.za
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