Q2 2014 Western Cape Office Market Analysis
Contents Highlights 1 Summary 2 Statistics 2 Climate 3 Supply 4 Demand 5 Vacancies 6 Prognosis 8 Office Market Analysis Q2 2014 Western Cape Colliers International South Africa
Report Highlights The office market in Q2 was characterised by slight to minimal growth in demand due to the overall stagnant nature of the market. Vacancy rates have improved, and rental rates overall saw a slight increase only, with Grade P stock however, showing a more significant upward move, when compared to Q2 2013. Despite a slight strengthening in the Rand in Q2, the economy overall remained under pressure, as a result of hiked interest rates, prolonged strikes, and South Africa s sovereign credit rating downgrade all factors that negatively impacted investor and business confidence. 1 Office Market Analysis Q2 2014 Western Cape Colliers International South Africa
Report Summary Summary Statistics Colliers International South Africa's Q2 2014 Office Market Analysis provides a brief overview of the key factors impacting the Western Cape office market and future prognosis for the market. The analysis focuses specifically on the Cape Town area within the Western Cape. Western Cape 2014 180-185 2013 160-165 2014 8-10 2013 8-10 2014 9.7 2013 9.8 2014 24.7 2013 0 Y-O-Y Change 20 Y-O-Y Change 0 Y-O-Y Change 2 470 bps Y-O-Y Change 100 bps Prime Gross Rent (R/m²) Prime Yield (%) Overall Vacancies (%) Grade P Vacancies (%) 2 Office Market Analysis Q2 2014 Western Cape Colliers International South Africa
Macro-Economic Climate Q2 2014 saw inflation in South Africa hit 6.6% - the highest rate seen in almost five years. The South African Reserve Bank (SARB) expects it to continue to rise until 2015 on the back of continued currency weakness, exchange-rate induced petrol and food price hikes, and weak growth in the domestic economy. INFLATION 6.6% 2009 2014 Late Q2 saw South Africa s sovereign credit rating downgraded its first credit rating downgrade in nearly two years. The country now sits on BBB status, which puts its foreign debt rating at the lowest investment grade just a notch above junk status shunned by many investors. Analysts warned that if government fails to implement the National Development Plan (NDP) sooner rather than later, South Africa could be at risk of further downgrades over the next 18 months, thus losing investment grade status. RATING BBB 2012 2014 Recently the rand has strengthened from Q1 2014 lows, this however was as a result of increased global risk appetite, rather than a positive reassessment of South Africa s fundamentals. SARB s Monetary Policy Committee (MPC) has cited major domestic risks such as unreliable electricity supply and labour relations (most recently the five month-long platinum mining sector strikes), as leading factors which undermined investor confidence and drove unemployment. The South African economy also still remains vulnerable to changing global expectations of US monetary policy, and investors appetite for risk. China s growth picked up momentum in Q2 of this year, with the country s GDP growing by 7.5%. This could prove to have a positive impact on South Africa in the coming months. South Africa s composite leading economic indicator (LEI), as published by the South African Reserve Bank monthly, remained unchanged at the beginning of Q2 2014, but annually fell by a further 1.5%, after an annual decline of 2% in late Q1 2014. These trends suggests that the South African economy is losing momentum and will remain under pressure in coming months. LEI 2% Q3 2013 Q4 2013 Q1 2014 Q2 2014 It is unlikely however, that South Africa will experience an outright recession. In contrast to domestic weakness, the global economic environment continues to improve, which suggests that the local economy could receive a slight lift from global conditions over the course of 2014. GLOBAL ECONOMY GDP GROWTH7.5% 3 Office Market Analysis Q2 2014 Western Cape Colliers International South Africa
DEVELOPMENT SIZE (m 2 ) Supply At the end of the second quarter of 2014, the total office stock in Cape Town stood at approximately 2,300,000m 2. The main office locations included the CBD which comprised 38% of existing supply, and Bellville and Century City which represented approximately 24% and 12% of the total stock respectively. There is currently ±150,000m 2 of office space under construction in Cape Town, with the biggest ongoing investment being Bridge Park (±18,000m² of leasable area) in Century City. Please refer to Fig 1 below for a selection of ongoing construction projects in Cape Town. Fig. 1 60 000 20 000 Century City EXPECTED COMPLETION - Q3 2014 Century City EXPECTED COMPLETION - Q2 2015 Sea Point EXPECTED COMPLETION - Q3 2014 15 000 Cape Town CBD EXPECTED COMPLETION - Q2 2015 Cape Town CBD 10 000 5 000 0 CHEVRON BRIDGE PARK REGENT SQUARE TOUCHSTONE HOUSE ROELAND PARK WORLEY PARSONS WATERVIEW TWINELL BUILDING PALS BUILDING 22 SOMERSET STANDARD BANK CENTRE Fig. 1 above shows a selection of Western Cape office developments currently under construction. This is a sample list and not fully indicative of the market as a whole. EAGLE PARK PHASE 2 Tyger Valley Century City Cape Town CBD EXPECTED COMPLETION - Q2 2015 Salt River Green Point Cape Town CBD EXPECTED COMPLETION - Q4 2015 Montague Gardens 4 Office Market Analysis Q2 2014 Western Cape Colliers International South Africa
Demand Leasing activity in Cape Town in Q2 this year demonstrated slight movement but minimal growth as a result of a stagnant market overall. When compared to Q2 2013, the last quarter saw an increase in activity in Century City and the V&A Waterfront, and Claremont was seen to rebound strongly. Q2 2014 has also seen the emergence of a more educated, prudent tenant when compared to the previous year. Tenants are comparing costs more aggressively and appointing brokerage firms more regularly, in a market where they are spoilt for choice when it comes to available office space. Lead times to conclude deals in Cape Town in the last quarter has also proven to be very drawn out, as a result of a lack of urgency in the office market in general. Notable new deals and renewals in Cape Town from this last quarter included, but are not limited to: MTN Head Office, Heron Place Century City 6,000m 2 Renewal MontClare Place, Claremont 6,500m 2 Renewal Belmont Office Park, Rondebosch 6,000m 2 Renewal Ex CityVarsity Building, Gardens 2,200m 2 New Deal The average deal size for Q2 in the Cape Town area was approximately between 200m 2 250m 2. AVERAGE DEAL SIZE R200/m 2 CAPE TOWN AREA R250/m 2 5 Office Market Analysis Q2 2014 Western Cape Colliers International South Africa
Vacancies National Snapshot In Q2 2014, the overall national office vacancy rate was at 11.3%. This rate has doubled since mid-2008. At an average gross rental of R85/m 2, this translates into more than R1 billion of lost rental per annum. Asking rentals are 1.9% lower than Q2 2013, this drop is indicative of a tough current letting environment that is focused on tenant retention. Overall vacancy rate nationally remained high in Q2 2014, and is still increasing, which is weighing on asking rental growth. This quarter saw a net area of 72,591m 2 vacated, of which 119,000m 2 was let, and the balance added to stock. Nationally, prime vacancies continued to increase at an alarming rate in the last quarter up to 8.5% from 0.5% in Q4 2012. There is currently 83,000m 2 of unlet prime space significantly up from 4,000m 2 recorded at the end of 2012. Speculative new developments are behind the prime increase, with Sandton, Johannesburg responsible for the bulk. The Cape Town CBD also drove prime increases well in Q2 this year. A and B-grade vacancies have remained sticky and have been trending sideways since 2001. The A-grade segment ended the quarter at 8.4%, while B-grade vacancies continued to stabilise around the 13% mark. The vacancy rate of C-grade officers remain high, but has started to normalise, albeit off a high base. NATIONAL VACANCY RATE NET VACATED AREA UNLET PRIME SPACE A-GRADE SEGMENT 11.3% 72,591m 2 83,000m 2 8.4% 6 Office Market Analysis Q2 2014 Western Cape Colliers International South Africa
Cape Town Cape Town s office vacancy rate was recorded at 9.7% at the end of Q2 2014. This was slightly down on Q1, but up on the previous 12 months. During Q2 2014 there were improvements across most areas, which resulted in Cape Town s regional vacancy rate declining by 50bps. Century City recorded the largest decline in vacancy rate, with a 140bp decline to bring vacancies in that area to 5% at quarter end. VACANCY 9.7% Q1 2014 CENTURY CITY 5% Q1 2014 Q2 2014 Rental Rates In Q2 this year, office rental rates for Grade P space in Cape Town was R180/m². Grade A space was trading at R120/m² and Grade B at approximately R 90/m². Please refer to the graphics below for the average gross rental rate bands for each office grade for Q2 2014, compared against Q2 2013. GRADE P GRADE A GRADE B Q2 2013 Q2 2014 Q2 2013 Q2 2014 Q2 2013 Q2 2014 R80/m 2 R90/m 2 R110/m 2 R120/m 2 R150/m 2 R180/m 2 The CBD Grade P office situation has been impacted heavily by the completion of Portside, the new tallest office building in the city. Nearly 30% of its 50,000 m² is still available, and will take some time to tenant. The Landlord will need to compete hard to attract the larger tenants whose first choice appears to be to position themselves at the V&A Waterfront when selecting a location comparable to the CBD. 7 Office Market Analysis Q2 2014 Western Cape Colliers International South Africa
Market Prognosis The Cape Town office market remains under pressure for the foreseeable future. The demand for top level office accommodation has been steady, and this should continue throughout 2014. Corporate clients as well as several of the major law firms require modern and efficient office environments, and are ready to invest in the right spaces. The legacy office space in Cape Town with older building facilities and inefficient floor plates, drag down the overall picture for the office sector. The overall economic environment in South Africa does not look positive enough to affect a rapid change in the office sector performance in the Cape Town metropolitan area. Report Sources: Colliers International Growthpoint Properties Investment Property Databank (IPD) JICA Research Institute Nedbank Redefine Properties South African Property Owners Association (SAPOA) South African Reserve Bank (SARB) Stanlib Statistics South Africa Trading Economics The Wall Street Journal 8 Office Market Analysis Q2 2014 Western Cape Colliers International South Africa
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