Nick Wilson

Property Editor

WITH 782866m² of new decentralised office space committed to construction over the next few years in major metropolitan areas, there are concerns that developers might have taken on too much risk.

Property economist Erwin Rode of Rode & Associates says the risks involved in new office development changed virtually overnight because of global market woes and Eskom’s electricity supply problems.

He says this is a two-layered risk facing “all players in the economy”.

“Compared with December, the risk of doing speculative developments has increased many-fold. At the end of last year, you could still make a strong case for speculative non residential developments. That is not the case any more.”

According to commercial property association Sapoa’s December office vacancy survey, 62% of the 782866m² of space is not yet let, implying that 38% is pre-let to tenants.

Rode says 40% “represents an uncomfortable risk”.

In the Johannesburg area, 391353m² of new decentralised office developments has been committed to, which amounts to about 8% of the existing prime-quality stock in the area.

“To give this figure some perspective, one can compare it with the Carlton Centre office tower, which is about 75000m² New office stock amounted to slightly more than five Carlton Centres,” says Rode.

About half of this space is not yet let. In Pretoria, 283620m²² of new space is committed to coming to market and 86% is not yet let.

Commercial and industrial property brokers Pace Property Group MD David Green says that further speculative development “over and above” what is under construction would “not be a good idea unless it is pre-let”.

“But with regard to commercial property under construction, these properties tend to be let closer to completion and we do not expect an oversupply at that point.”

He says that in certain areas the space under construction is “insufficient to meet the tenant take-up needs over the next two to three years”.

“The electricity supply crisis has caused certain proposed office developments to be shelved and therefore developments that are continuing to be built and can provide tenants’ energy requirements will remain in strong demand.”

Green says that in Sandton, for example, there are about 1,2 million square metres of office space. “In Sandton the demand for additional space amounts to about 10%-20% growth in space, which implies we would need 120000m²-240000m²² of new space per year,” Green says.

There is huge demand for space due to growth requirements of occupants and, to a lesser extent, new tenants, he says. As far as the global market is concerned, Green says the effect of the slowdown in the US economy has not yet “filtered through” and that the full extent of this effect on the property cycle would only be “apparent in about 12-18 months”.

Listed property loan stock company Redefine Income Fund CEO Brian Azizollahoff says “there is not a huge amount of speculative development under way across SA”.

“There is not an oversupply looming, unless there are factors that will affect the economy to such an extent that growth will be zero or near zero.

“If there is continued growth, even if growth doesn’t achieve 6%-plus per year, there will be continued demand for offices,” Azizollahoff says.

Constraints against speculative development are that the cost of land has increased and there is a shortage of zoned land. “Building costs have risen substantially and of course there is uncertainty around the movements of interests rates and now power.”

There will be further development, but it will be on a “somewhat muted basis”.

Azizollahoff says if there is concern, it is “not nervousness that will bring development to a complete standstill”.

Source: Business Day