This is a guest piece by Raul Flores, CEO of TITAN Property Group.
The South Africa (SA) commercial property market is estimated to be worth R1.3-trillion in 2024 according to research by proptech data services group, GMaven.
Before the COVID-19 pandemic, the real estate commercial market faced difficulties because of changes in work practices brought on by the pandemic, leading to an increase in the number of vacant properties. Many businesses wanted to downscale their physical workplaces in favour of smaller office spaces required for hybrid workforces.
Repurposing Commercial Property
Since many of these pre-existing commercial buildings have services, repurposing them is generally simple and affordable. This tendency is already well established in many cities and as more offices become empty as a result of global economic instability, it will pick up speed.
Aside from saving money, repurposing a building also eases the burden on provincial governments, already under strain to provide services and utilities. The fact that these converted buildings are already situated within cities, further reduces the need for inhabitants to commute, decreasing
traffic and the strain on public transportation infrastructure.
Arguably nowhere is this better demonstrated than in the retail and office sectors, previous stalwarts of any real estate commercial market portfolio, have in recent years undergone a paradigm shift both in attractiveness to investors and how the spaces are occupied.
The office market has also been affected by two recent phenomena: working from home and hybrid working (both during and after the pandemic), as well as environmental and sustainability requirements,
driven by environmentally conscious occupiers, institutional landlords and the government.
This has led to a contraction in office space requirements from occupiers, resulting in the loss of tenants from many lower grade office buildings. There is, and will continue to be, increasing pressure on investors to repurpose and reposition underperforming assets.
In past years, property owners would simply redevelop by demolishing their existing building and putting a shiny new one in its place. Nowadays, it is not so simple. Demolitions leave a big carbon footprint. In the drive towards sustainable property investment and development, planning permission, which includes demolition, is becoming increasingly challenging to obtain.
This means will continue to be, increasing pressure on investors to repurpose and reposition underperforming assets as far as possible within the existing physical envelope; refurbishment and redevelopment. Not only in SA, but globally, there are already numerous examples of this
happening in the commercial real estate market and specific trends of real estate repurposing are emerging.
One is the conversion of office buildings to life sciences and laboratory spaces, especially where there is access to leading research and development talent. Given the convertibility of offices to laboratory spaces, many property investors with redundant office stock are repurposing these spaces into laboratories in a bid to take advantage of potential returns.
The increase in construction costs and rising development finance costs have affected many real estate developers, but hotel operators and investors in particular, are more than ever, seeking opportunities to convert former retail and office sites into hotels, especially given the desirable city centre locations.
Similarly, shopping centres with substantial voids are being repurposed and repositioned to align with economic reality. A move towards mixed-use schemes, incorporating residential, hotel, entertainment, leisure, food and beverage, retail and other complementary aspects, will become increasingly popular as investors seek to provide commercial spaces to improve footfall while simultaneously diversifying their portfolios with different real estate asset classes. Repurposing and repositioning are here to stay. Wise investors should continue to adapt their assets to reflect the ever-evolving economic, political and social landscape.
Student Accommodation Gaining Track
While the current state of the global economy is putting pressure on investors in most segments of the domestic real estate market, Makhosini Ndlovu, product head at FNB Commercial Property Finance, said that those who have invested in student housing continue to see strong returns.
It is estimated that 2.55-million students enrolled across all tertiary institutions (universities and Technical and Vocational Education and Training colleges (TVET)) in SA in 2020. Public universities make up the
largest portion (44.9% of all students), followed by TVET colleges (30.9%). Enrolments at public universities are estimated to grow to 1.2-million, and TVET college enrolments are set to reach 1.03-million by 2023.
Accommodation is available for only 20% of university-enrolled students, excluding other higher education institutions. This does not compare well with the global average of 50%.
Yields remain very good for certain universities, such as the University of Cape Town (UCT). Regardless of how many approvals are given for the construction of student housing near UCT, domestic and international demand for study opportunities will likely maintain demand for housing in the upcoming years.
The conversion of former grain silos in Newtown, Johannesburg into trendy student accommodation is completed. Known as Mill Junction, it will be home to 400 students from the Universities of Johannesburg and the Witwatersrand, as well as other colleges in Johannesburg.
Increasing office space demand
SA has seen its former robust office fundamentals erode significantly over the past year. Vacancy rates rose steadily as corporate consolidations and the rise in work-from-home resulted in more space vacated. At the end of the second quarter of 2022, Johannesburg had the highest office vacancy rate across all major metropolitans. The vacancy rate of commercial (office real estate) increased across all major markets in SA between the first quarter of 2021 and the first quarter of 2022. Pretoria and Surrounds had the lowest vacancy rate of 12.1 % in 2022.
Johannesburg, on the other hand, has the highest share of vacant office space of more 19% as office dynamics shifted as many corporates continue to scale down on space requirements, in line with the new work- from-home and the office rotational hybrid model. While office fundamentals are expected to continue softening over the foreseeable future, qualifying tenants may find great opportunities to secure
favourable long-term lease arrangements.
Increased Industrial Growth Creating Market Opportunities
According to JLL data, Pretoria and Surrounds and Cape Town were SA markets with the lowest average vacancy rate for industrial real estate in the first quarter of 2022. During that quarter, approximately 4.9% of industrial real estate was vacant with this share slightly higher at 4.95% in Johannesburg.
According to Knight Frank, the industrial property sector was the only one experiencing an increase in prime rents in Cape Town between 2020 and 2022. Rental rates for retail space, on the other hand, halved during the period.
H2.Commercial Property Industry Overview
The SA commercial market is fragmented with the presence of local and global players. Developers are more inclined to spend money on repurposing property rather than building on new land. SA’s REIT sector is outperforming in terms of returns to investors. There is a need for investment in all sectors to foster further development in the commercial market sector of real estate in SA.
I’ve seen first-hand how the commercial real estate landscape in South Africa has evolved. What we’re experiencing isn’t just a response to the pandemic’s challenges but a broader shift in how landlords and developers are approaching their properties.
247@propertyflash.co.za
