‘SA has too much office space’
Companies merging satellite branches and moving to more upmarket workplaces, says property group
● South Africa has an oversupply of offices, as some companies have merged their satellite branches and others are moving to more upmarket workplaces, according to property group Redefine.
CEO Andrew König said the oversupply was a result of new office developments that preceded the pandemic having been built and firms having merged some of their offices.
König said that with sluggish economic growth and high levels of unemployment, “we are not seeing new demand coming into the market”.
He added: “There is a churn of office tenants at the moment. Tenants are generally shopping upwards from a quality of space point of view ... so lower-grade offices are taking strain, as there is a migration to upper grades. That is why we have positioned ourselves to be focused predominantly on high-grade properties, with 95% of our portfolio in that category.”
Redefine COO Leon Kok said: “We can refer to it as a tenant market because they have options and the ability to shop upwards and occupy well-located, quality office space at relatively affordable rentals.”
Redefine’s office portfolio extends across the country, with the majority of its properties in Gauteng, in areas such as Rosebank and Sandton, followed by the Western Cape. Its overall office occupancy level is 87.7%.
“The Western Cape is doing very well from an office point of view. There has been a lot of demand from call centres. Rosebank, where we have predominantly premium and hybrid properties, is doing OK. Centurion and Bryanston are under pressure,” said König.
Redefine reported a slight deterioration in occupancy, and Kok noted that pressure would remain. However, Redefine continued to hold its own.
“The office portfolio at a net operating income level grew by 4.1%, outperforming our industrial portfolio, which speaks to [the former’s] quality,” he said.
König said that for the high number of office spaces to be reduced, GDP growth of “at least 3%-3.5% on a sustained basis” was required.
He added: “We are struggling to get to 1%. As long as we have sluggish economic growth, we are not going to work off this oversupply, and that is a challenge.”
He said that “higher-for-longer interest rates remain a persistent theme, and relief is critical to moving the dial on most outcomes”.
Redefine also owns shopping malls such as Benmore Centre, East Rand Mall and Maponya Mall. It recently bought Mall of the South for R1.8bn and a stake in Pan Africa Shopping Centre in Alexandra to grow its township mall footprint. The group also owns industrial properties, which make up 20% of its total business.
“When there is instability and unfavourable economic conditions, this diversity becomes most beneficial, because it allows us to mitigate some of the challenges that sectors or geographies may encounter,” said Kok.
At its retail centres, there was 94.5% occupancy, driven by major retailers aggressively opening new stores to expand their footprints.
König said that, despite pressures on disposable income and interest rates, Redefine’s retail sector continued to perform relatively well, driven by demand for essentials, value and apparel.
Commenting on trends, König said most retailers were not downsizing their store space, while companies were seeking bigger premises.
“There was a time when people were looking to really optimise space and to almost go for that shared space of open areas and hot-desking and so forth. However, I think as a consequence of the pandemic people are wanting more space,” said König.
“We see it in meeting rooms, where there is a trend for people to occupy an eightseater [boardroom] when there’s only four people attending the meeting. They want space — they don’t want to be squeezed into small spaces. People also want a better work-life balance with services that can make life a little bit easier, like having gyms and medical facilities in one building.”
Redefine grew its year-on-year trading densities by 4.8% to R34,460/m2, which contributed to an average rent-to-turnover ratio of 7.4% across the retail portfolio.
According to Kok, this means there is the opportunity for rental growth that will enable the company to pursue renewal rates in the retail sector more aggressively.
Redefine also operates in Poland, where it has raised its ownership stake in Polish retail platform EPP from 95.5% to 99.2%.
EPP consists of 29 retail properties and six office complexes located in the most attractive Polish cities with the highest consumer demand and growth potential.
Occupancy levels in the core EPP portfolio sit consistently at 98.4%, and it is essentially considered fully let.
König said Poland’s energy-price crisis, which had been the biggest driver of high levels of inflation in that country, had ended, bringing inflation down to near pre-crisis levels.
This had led to an increase in disposable income, aided by policies implemented by the new government such as easing the ban on Sunday trading and raising the child social grant.
These factors, König said, bode well for the retail sector in Poland.
He said part of Redefine’s goal was “to create a high-quality, diversified portfolio” that could “generate long-term, risk-adjusted returns in a hard currency”.
For the high number of office spaces to be reduced, GDP growth of at least 3%-3.5% on a sustained basis is required
Andrew König