Speculative property developments make a return

Posted On Wednesday, 31 July 2013 13:16 Published by Commercial Property News
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Taking advantage of low vacancies in premier office space and banking on a slowly improving global economy, speculative office developments are starting to rear their heads again after five years of a lull in activity.


6 Benmore Capital HillSA has not seen any major speculative developments after developers learnt the hard way in 2008-09, leading to an oversupply of space in the industrial and office sectors from speculative activity.

Despite an improving economy, few listed property companies do speculative developments unless the proposed projects are substantially pre-let. Commercial banks are still reluctant to finance speculative developments.

Funding for speculative developments continues to be scarce as some nodes are oversupplied with stock that has not yet been absorbed in the existing economic climate, even with the lowest interest rates in SA in more than 30 years.

However, some developers are biting the bullet and see opportunities in speculative developments. Sandton is to have a new office building on its skyline.

Developer Uvongo Falls has recently commenced a R208m construction of a 12-storey tower, named Capital Hill, opposite the Benmore Gardens Shopping Centre.

"We have been closely monitoring the demand and supply of A-grade office accommodation in Sandton and it is clear that the market has turned. Strong demand has followed the recent announcement of landmark office complexes in Sandton, such as that announced by Sasol," Uvongo Falls director Debbie Mosley said.

Ms Mosley said that excavation had recently commenced and completion is scheduled for the middle of 2015.

Grahame Lindop, CEO of Amtrad Properties, which is co-ordinating the marketing and leasing of Capital Hill, said his company has already leased the top floor of 1,100m² out of a total of 8,300m².

"Being adjacent to a Gautrain feeder station and having registered with the Green Building Council with the intention of achieving a four-star rating are factors that have influenced a number of major tenants to respond to the building’s marketing launch," Mr Lindop said.

He said the trigger for commencing construction, which started three weeks ago, was a perceptible turn in the Sandton office market. The announcement of corporate head offices for Sasol, Webber Wentzel, Santam and Bowman Gilfillan came on the back of the completion of the Alexander Forbes head office and the commencement of the EY building, Mr Lindop said.

"For many of them, the Gautrain has been a factor in their decisions. However, these new tenants are attracting smaller firms to Sandton who need to be close to them. They represent the second wave of demand, for two years from now," he said.

"Rentals are already firming, going forward. The global economy is lifting. Good news is coming out of the US, and China has recently rebuffed suggestions that its economy is experiencing difficulties. China, with a floor growth of 7% per annum, they still offer a large market for SA’s mining sector," Mr Lindop said.

In Africa, oil and gas finds in Angola, Nigeria, Ghana, Uganda, Tanzania, Kenya and Mozambique were providing massive opportunities for South African companies, he said, particularly for the Sandton-based service industries such as banking, financial services and legal.

According to the South African Property Owners Association (Sapoa) office vacancy report, vacancies in SA’s premier-grade office space remain exceptionally low, despite high levels of speculative development activity.

Premier space continues to enjoy the lowest vacancies — underscoring high demand from tenants — with just a 2.2% vacancy rate overall.

Given high levels of speculative office development, this performance is particularly noteworthy. A-grade space maintains an 8.7% vacancy rate overall.

Both the premier and A-grade sectors are still well in line with the natural, or frictional, vacancy rate of between 5% and 10%.

As at the second quarter of this year, the national office vacancy rate across all grades of property stood at 11% — a small increase over last year.

However, the report warned that the high level of speculative development was pushing up vacancy rates across all grades in the South African market.

Estimates suggest speculative space remains about 50% unlet.

"Expectations are that speculative development levels are beginning to soften, which should ease the impact on vacancies for the office sector," the Sapoa report notes.

Source: BD

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