Real Estate Investor Magazine South Africa October 2018 | Page 39

DEVELOPMENTS
These two driving factors have created a healthy market
for property conversions.
“The residential rental market in the middle market
space has shown good occupancy, healthy collections
and solid annual growth. High demand, low supply and
good yields all combine to make property conversions an
attractive option for many investors,” says Rosen.
Caveat emptor still applies
BY ELZAAN RHODE
C
onverting office space into residential rentals is gain-
ing popularity. This is especially true in CBD areas
where there are a dearth of mid-market residential
property for young professionals looking to live closer to
work.
Property investors looking to beat the low growth in
South Africa may want to consider the conversion of
commercial properties into residential offerings. According
to Joel Rosen, MD at Prime Residential, who has himself
been involved in a number of these conversions, there has
been a strong interest from commercial property owners as
the traditional deal flow has slowed due to tough economic
conditions.
“There are currently a large  number of office  vacancies,
especially in some areas of Johannesburg.  With fewer new
commercial tenants entering the market, there is often no
other option but to look at alternative ways to make these
investments work for you,” Rosen explains.
According to Rosen, residential  property has become a
more attractive asset class as it is delivering better returns.
There is a growing number of young professionals who
are looking to live closer to where they work. However, at
the same time there has also been a drop in the supply of
affordable units in some of the CBDs around the country.
While the opportunities to convert existing office space
into residential units is attractive, there are some factors
which should be considered before rushing in.
“Not all CBDs offer the same opportunity. For
instance, Cape Town has seen a number of new higher-
end office to residential conversions come on stream
in recent months, resulting in an oversupply. However,
there has been a lack of new affordable rental supply
as developers struggle to see solid financial returns in
the lower-end rental market. What’s more, the cost of
inner-city properties in Cape Town is far higher than in
other metropoles like Durban and Johannesburg which,
together with the costs of the conversions, makes the
returns less attractive,” explains Gary Palmer, CEO of
Paragon Lending Solutions.
When it comes to location, Rosen agrees that
investors and developers should choose carefully. “There
are certainly fewer opportunities in Cape Town in the
current circumstances. We believe that good urban nodes
in Gauteng is where the focus should be. Randburg is
a good example. There is a high vacancy in B-grade
office space, a very high demand for residential rentals
and it is ideally situated for those working in Randburg
and Sandton, with excellent access to public transport.
These sorts of areas are where the real opportunity lies,”
explains Rosen.
Both Palmer and Rosen also caution that finding the
right building is key to making the deal attractive.
“Developers need to look closely at the floorplans of
the buildings. Not all office space is easily converted.
Many offices have very deep spaces with little natural
light. Or, they may have a structural floorplan which
would require extensive renovations and building work
to make it a suitable living space. This impacts the costs
and ultimately the profitability of the exercise,” says
Palmer.
Overenthusiasm can be a real danger. Rushing into an
ill thought through conversion can leave a developer on
the hook for the debt and a building that is not attractive
to tenants - frustrating sales opportunities and making
rentals unlikely.
Despite the cautions, both agree that office conversions
offer a means to capitalise on current trends. The trick,
however, is to partner with companies who have the
necessary experience.
“There are any number of creative ways to make
money in the current climate. Working with people
who have real experience in conversions, who know
the markets, and who understand how to maximise
investment returns with the right finance is the key to
keep your money working for you,” Palmer concludes.
SA Real Estate Investor Magazine OCTOBER/NOVEMBER 2018
37