Real Estate Investor Magazine South Africa August/September 2019 | Page 39

making up as much as 56% of total office development.
In Sandton, the jewel of Johannesburg’s prime nodes,
there is a steady increase in vacancies which in 2019 reached
an all-time high of 337,000 sqm. This follows a period of
rampant development of capital projects, often for single
tenant occupation, where large companies have chosen to
consolidate their businesses by bringing all operating facets
into one location. The knock-on effect is that older buildings
previously occupied by such single tenants are now at risk of
standing vacant for long periods of time.
THE CASE FOR REFURBISHMENT
Property owners are being pushed into refurbishment in order
to attract or retain occupiers who are otherwise enticed by
property developers to new developments. In addition to
taking account of the changing trends in the workplace there
is a demand for greener, sustainable design when refurbishing;
owners need to prolong the life of aged buildings that look
dated or are reaching the “end of life” with the breakdown or
inefficiency of their services infrastructure.
As significant earthworks are unnecessary for refurbishment,
this provides a cost-effective solution to revitalising the asset.
However, refurbishment requires foresight, skill and experience
from initial planning stages through to construction as
retrofitting often demands ingenuity. Particular client
requirements could inadvertently create structural risks, from
additional loading due to security rooms with concrete walls
that will necessitate floor reinforcements, to raised floors -
allowing for flexibility of services such as power and data.
This could further necessitate changes in the structure of the
building.
For occupiers, in addition to operating in a challenging
economic environment, they are also faced with fast-changing
work requirements and their operations must accommodate
this. Many companies are contracting in terms of usable space
required.
South Africans are following the global trend where the
work environment is important and employee’s wellbeing
is a central consideration. Replacing the cubicle layout is an
‘open work and agile’ notion where combining open work
areas with flexible spaces enables a positive response to the
company’s changing needs. Whereas fixed technology was
built into space considerations in previous years, now wireless
technology allows for portability of equipment and mutable
workspaces. Employees are utilising hot desks along with
contained and collaborative spaces as it provides healthy light
exposure and air flow.
NEW DEVELOPMENTS
According to SAPOA’s office vacancy report, the overall office
development pipeline has begun to slow down as developers
begin favouring a phased or tenant-driven approach. As
evidenced in Sandton, developments specifically for a
single tenant have grown in prevalence as large companies
consolidate their activities into one building.
A critical aspect when developing office space to meet the
unique requirements of a single tenant is to ‘future proof’ the
project so that flexibility is allowed if the tenant vacates. A
failure to do so will stifle the sale value and rentability of the
building due to cost or technical constraints.
For new developments, unlet space is a sizeable risk for
developers which has a knock-on effect in the greater market.
For example, in Johannesburg’s Rosebank area, a vacancy rate
for completed property is recorded at 6.9%. With the inclusion
of unlet developments the figure spikes to a vacancy rate of
16%. This not only effects the developer but has a direct
impact on achievable rentals for other new developments and
existing buildings in that node.
Due to the significant expense of Greenfields developments,
most developers look to densify spaces to get more bang for
their buck. As office development activity has soared over the
past few years, city councils began to waive or reduce some
requirements, such as parking bay numbers. This was good
news for developers. Developers are advised to be aware of
the practicalities required by South Africa’s workforce. For
example, at one of the iconic single-tenant developments in
Sandton, the client’s understanding of staff needs pushed for
less densification, requiring as many as 6 parking bays per
100m² which is on a par with the standard retail parking ratio
due.
THE WILD CARD – OFFICE TO RESIDENTIAL
CONVERSIONS
Johannesburg’s CBD has been labelled as an Urban
Development Zone in a bid to revitalise the city centre. With
tax incentives for investors, this is an attractive consideration.
Property data and research group, Lightstone, point to an
example of a commercial property in Fox Street that following
refurbishments including a coffee shop, restaurants and
apartments, has increased the value of the property from R2.8
million in 2017 to R6.2 million today.
Converting old office buildings to residential is, for
developers, an exercise driven by profit and the consideration
of how to maximise the investment optimally and quickly.
While it may be a potential solution for both South Africa’s
housing shortage and neglected Johannesburg CBD buildings,
it is not clear whether office to residential conversions would
solve vacancies in other nodes. There are complicating factors,
from potentially incomplete building records or poor data
available at planning stages, through to making deep spaces
compliant with access to light and fresh air for domestic use.
All these requirements demand innovative refurbishment
solutions.
CONCLUSION
While the sluggish office market begins to make a slow
recovery, the challenge of supply and demand will continue
to create market pressures. Developers will continue to drive
the supply side due to the imperative need for continued
investment in capital projects, while demand is linked to the
economy and job market.
As property owners scramble to retain and attract tenants,
the refurbishment market could be about to come into its
own wherever it is able to provide innovative, tailored tenant
solutions. While these developments present good potential,
the cautionary note for both new builds and refurbishments is
to allow for flexibility and future proofing to ensure longer term
reasonably low vacancy rates that enable the office segment to
produce a solid performance in the property sector.
BEUKES VAN HEERDEN, Head of Capital
Projects for SADC at award-winning property
and construction solutions company,
Profica, considers refurbishments and new
developments in South Africa’s challenging
office market.
SA Real Estate Investor Magazine AUGUST/SEPTEMBER 2019
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