The recession: where does the future of corporate real estate lie?

The announcement of South Africa’s third recession since 1994 has sent shock waves across the country. While we all saw it coming, the market shrinkage reported by Stats SA yesterday confirms one thing: we have now reached our lowest point since 2009. 

Industries such as agriculture, the country’s catalyst for job creation and future economic growth, is down by -7.6% and more than 10 000 jobs have been cut in the past three months alone. Interestingly, finance and personal services saw some positive growth which usually reflects in the office market.

Demand is erratic

John Jack, CEO for Galetti Commercial Real Estate notes that although this news is not good, this has been reflected in office and industrial property demand for quite some time now.

Large vacancies exist specifically within the office sector. That said, we are seeing increased demand for offices which saw a nett take up in the Bryanston and Sandton nodes of just under 30000sqm in January and February of this year”.

There are clear trends taking place in the industry. Tenants are hard pressed to move from their existing space given the costs of relocating. They remain at their current premises but continue to negotiate reduced rates and this puts major pressure on the market,” he explains.

At the same time, companies have reduced their head count to reduce their salary bill and in doing so they now require less office space which contributes to the vacancies we are seeing”.

Jack also notes that interestingly, the tenants who are looking to sublet space are often the landlords biggest competition being able to offer far better terms for their space. “We have recently concluded a lease where the exiting tenant was able to offer two years rent free to the incoming sub-tenant,” he explains.

Investor confidence

Jack notes that businesses require better market transparency and accurate benchmarks to make decisions and that this is largely lacking in South Africa.

There is a lot of pressure on businesses to make big decisions. We are seeing over inflated values, inaccurate information or a lack of market activity information when trying to make key purchase and capital investment decisions,” says Jack. “There is a move in the commercial property sector to try and centralise this information to allow for better transparency in the market. This is largely on the back of large indexing businesses like Moody’s moving into this space globally in a big way”.

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