South Africa’s largest commercial landlord, Growthpoint, believes that prime office space could deliver better returns than retail or industrial properties in the medium term.
This is largely due to the sector’s low starting point and significant write-downs that property owners had to take following the Covid-19 pandemic,
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Growth in this sector is already evident in Cape Town and Umhlanga Ridge, with the majority of the company’s future developments focused on Cape Town.
“My projection is that offices will outperform the other two sectors in the medium term because of what has happened to offices,” said Estienne De Klerk, Growthpoint’s CEO for South Africa.
“Rentals were massively under pressure previously, and we had very large vacancies, and we wrote down the valuations. So, looking forward, just by letting the property, you get a total return pick-up.”
The office market has struggled with oversupply in recent years, resulting in little new stock entering the sector. However, as demand picks up, this will quickly absorb the available space.
Growthpoint’s portfolio, valued at about R45 billion on the JSE, includes a mix of retail, office, and industrial assets.
The group’s directly held South African assets, worth R66 billion, represent 48% of its portfolio. Notably, its 50% stake in the V&A Waterfront, valued at approximately R11.5 billion, remains a key investment.
The recovery in office space is particularly noticeable in Cape Town, where vacancies are under 5%, and in Umhlanga Ridge, where they are under 1%.
As demand grows, rental prices in these areas are also rising, with rates at the V&A Waterfront increasing from R220 per square meter last year to R320 per square meter today.
“The rent at newly developed offices at the V&A [Waterfront] has escalated from R220 per square meter mid-year last year to approximately R320 per square meter gross today,” said De Klerk.
“And that means that existing offices that are of good quality get dragged up in terms of those rentals, especially if there’s a shortage. That is what we are starting to see.”
While Cape Town and other regions in the Western Cape are showing significant growth, Johannesburg, South Africa’s economic hub, is recovering more slowly.
The city had the largest oversupply of offices even before the pandemic, and a meaningful reduction in vacancies will require a substantial improvement in GDP growth.
However, vacancies in Growthpoint’s Johannesburg office portfolio have fallen from over 30% during the pandemic to just under 20%.
To truly kickstart the economy, De Klerk believes that a reduction in interest rates by at least 100 basis points is necessary. Even if rates are cut early next year, it will take several months for this to have a noticeable effect on the market.
The office space most likely to benefit from improved economic conditions will be new or premium-grade offices, particularly those less than 10 years old.
Growthpoint is optimistic about Cape Town’s property market, with the majority of its development activity over the next few years planned for the city. Business activity in Cape Town has been boosted by semigration and increased tourism, while Gauteng’s economic growth has been slower.
The V&A Waterfront, jointly owned with the Government Employees Pension Fund, is investing R4.5 billion in new developments. This includes redevelopments such as the Table Bay Hotel, Quay 7 hotel, and 100 new residential units.
Other major developments include a new luxury mall upgrade and a state-of-the-art heliport. Growthpoint has also invested nearly R2 billion in office, retail, and logistics developments throughout Cape Town.
The Western Cape portfolio represents 27% of Growthpoint’s total South African assets by value and 11% by gross lettable area.