Mon, 17 May 2021

  • A person working in Sandton can now own an apartment at the heart of Africa's richest square mile.
  • This as some landlords have started converting office blocks in Sandton into apartments.
  • Will more landlords follow suit as office vacancies are projected to reach a record high of 20%?

For less than R5 500 per month, a person working in Sandton can now own an apartment at the heart of Africa's richest square mile. Real estate companies are converting office blocks into residential units in Sandton and other parts of the country, making what was once a pipe dream of living in Sandton a reality for some people.

The office sector that was already facing rising vacancies before Covid-19 has been hit the hardest by the pandemic. Vacancy rates shot up to 13.3%, the highest since 2004, the South Africa Property Owners' Association's (SAPOA) office vacancy report for the fourth quarter of 2020 showed. With three out of every 100 office buildings being completely empty by the end of 2020, landlords are scrambling to find other ways to put them into good use.

From swanky offices to apartments

A former Redefine Properties office block on Fredman Drive that used to house an international law firm, Hogan Lovells, is now an apartment block, with units selling like hotcakes.

Redefine said it had sold that building to someone else who saw an opportunity to convert what Sandton had a surplus supply of to something that remains in demand, residential property.

The head of listed property funds at Stanlib, Keillen Ndlovu, has been keeping an eye on this development. He's seen office buildings in Melrose and Rivonia turned into apartments too.

Ndlovu said he expected these office-turned-into-apartment homes to be a hit with buyers and tenants, provided that they are affordable and have well-run infrastructure and amenities.

Emira Property Fund was one of the first listed property companies to do these office block conversions with The Bolton in Rosebank. Emira said during its results presentation that The Bolton's vacancy rate stood at 2.5% at the end of December 2020, the lowest among all sectors in the group's portfolio.

Ndlovu said The Bolton is enjoying a first-mover advantage as well as a great location. The trendy apartment block that gives residents access to communal meeting rooms is a few minutes walking distances to the bars, the Gautrain Station, malls, and major offices in Rosebank.

Ndlovu said the success of each office conversion to apartments would depend on certain factors.

"Not all buildings can be converted to residential and at a viable level to be easy to sell or rent. Some buildings may need to have their values marked down a lot to make them viable as residential. Some are simply not configured for residential," said Ndlovu.

He also warned that if turning offices into residential apartments was the only preferred option, there is a risk of oversupply of residential space.

But some landlords may still not be under the kind of pressure that has forced them to start thinking about converting their office buildings to something else. In his new report on office market trends, Ndlovu pointed out that office exposure only made up 21% of the All Property Index, including offshore properties of listed South African property funds.

So, as long as it's not a significant part of their portfolio, some landlords may choose to sit out the current office vacancy crisis for a little longer to see if the tide changes before making long-term decisions.

It will get worse before it gets better

But Ndlovu expects that the situation will first get worst for office landlords before they get better. He said there is a general expectation that office sector vacancies will rise to beyond 20% in the next two years or so.

This will be the highest vacancy rate on record. Ndlovu said he has not seen the office sector vacancy rates reach this level since the official data collection started in 1994. The closest that office vacancies in the country ever came close to this was in 2003 when they reached 15% as the global economy was coming out of the emerging market crisis.

Some of SA's biggest landlords were facing much higher vacancy rates than the 13.3% average reported by SAPOA at the end of 2020. Growthpoint Properties saw its office vacancies climb to 18% in the last six months to December 2020.

Emira Property Fund's vacancy rate rose to 14.9% over the same period. Redefine experienced the highest vacancy rate in its office space since its formation in the early 2000s, as it climbed to 14.7%.

"Some REITs [real estate investment trust] have vacancies approaching that 20% level within the next year. As leases expire, corporates are likely to take less space subletting already happening in some instances," said Ndlovu.

Ndlovu said some office tenants are already subletting a portion of their space to others as their leases have. Because they are already using less space than when they signed the leases, these tenants are highly likely to reduce this when their leases come up for renewal if they don't cancel altogether.

Redefine Properties said the vacancy levels for its premium-grade offices started reducing in the first quarter of 2021. But as tenants are consolidating their offices to the premium segment, vacancies are growing elsewhere.

Still, Redefine's commercial asset manager, Pieter Strydom, said the company has no plans at present to convert any of its offices or other commercial property assets into housing.

Instead, Strydom said he believed that big REITs like Redefine need office assets to be well-diversified. Also, Strydom believed that remote working would soon create that "home alone" feeling and diminishing work culture as people aren't able to collaborate as before. Even if people continue to work remotely, Strydom foresees a rise in demand for co-working spaces.

Source: News24

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