Weekend Argus (Saturday Edition)
Office sector must dig deep to rise again
OWNERS of office properties will have to get creative if they want to dig themselves out of their Covid-pandemic hole enough to make their property investments work for them.
Right now, says John Jack, chief executive of Galetti Corporate Real Estate, the office market remains the “poor cousin” of the commercial property industry as retail returns to pre-Covid levels and the industrial property sector has remained resilient throughout.
“You can see evidence of this in your day-to-day movements – people are back in the shops and restaurants – but you may have noted that although there is more traffic, there is not as much as there was pre-Covid.
“People are still hybrid working and that means a significant number of offices remain vacant,” Jack says.
Although commercial property owners are usually less affected by small interest rate hikes because of lower gearing rates – a financial ratio that compares some form of owner equity (or capital) to funds borrowed by the company – they are affected by GDP growth or decline because this “directly impacts vacancy and rental levels”.
“It’s the underlying tenants who are more affected in their own businesses that ultimately determine where the pressure will release.”
Generally, Jack says, commercial property owners are under increasing pressure through rising rates and operating costs as these “continue to surge way higher than underlying escalations”. This effectively means a larger portion of the total rent is being attributed toward costs instead of the base rent, “which is what the landlord ultimately wants”.
He advises property owners to optimise costs and income, looking for non-gross lettable area revenue where possible.
“Cellphone masts and advertising boards are good examples of this.
“Deploy tech where possible to reduce the people on site managing a building.”
Because lockdown forced companies to accept that a remote workforce was not only viable, but could also deliver improved cost and productivity efficiencies, says Malusi Mthuli, KZN provincial head at FNB Commercial Property Finance, the conversion of commercial spaces into residential units, although not a new trend, is also one for office property owners to consider.
One of the driving forces behind this trend, he says, is the fact property funds continue to offload large portions of their office stock, “which most now consider less viable from a returns perspective than properties in most other sectors”.
“Fortunately, this offloading of office space is somewhat serendipitous given the significant upswing in demand for well-located residential properties that align with the changing lifestyles of an evolving working population.”
Mthuli says prices of empty office blocks are lower than ever, and the costs involved in converting them are “far lower” than building them from scratch, especially from a utilities infrastructure viewpoint.
“And local governments are actively seeking opportunities to partner with developers to leverage inner-city residential projects as a way of addressing growing social housing backlogs.”
However, he points out investing in conversion projects is not an automatic ticket to riches.
“As with any property development, in any sector, caution is required.”
Property entrepreneur and chief executive of Frankie Bells Real Estate Grant Smee believes while many landlords want to meet residential demand, there are factors that should be considered before proceeding.
“While one might have a structure or physical building, it’s still important to weigh up whether the property lends itself to conversion.”
He suggests that the following factors are considered prior to investing:
• Location: Most of the properties converted from office to residential are in areas where there is demand for residential and easy access to amenities.
• It needs to feel like home: While many potential home buyers will be attracted to the prospect of living in a business district, the property would still have to feel like home.
“It needs to be comfortable, quiet, spacious and inviting, with easy access to shops, restaurants and walking routes.
• If the structure is right: You need to weigh up the costs of building off-plan vs renovating an existing property. You also need to consider parking, the property’s size and what’s available in the area in the same price bracket.
Smee notes that while many landlords still want to reinvent vacant properties, there are hoteliers who are also looking to get in on the action.
“Such partnerships are designed to fulfil the needs of all parties involved.
“The tourism sector is still not up to speed and accommodation for travel remains seasonal.”
The current pressure on office property owners is also being revealed in the number of new building plans being passed for such properties.
John Loos, property sector strategist at FNB Commercial Property Finance, says while non-residential building statistics showed “positive growth” for January, in square metres of building plans passed, office space planning and completions were the “key drag” on overall non-residential building levels, remaining low compared to pre-lockdown levels.
“Office plans passed declined by 17.9% year-on-year in January 2022 off a very low base a year prior.”
He says the low level of planned new office space developments, despite some recent growth, is not surprising, with office vacancies nationally at record levels.
“Employment numbers in the office-bound economic sectors have declined since lockdowns started in 2020, greater levels of remote work are the future, and more efficient use of office space through the ‘hoteling’ of desk space is a key factor too.”