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Cape Town Office Market Outlook In association with Baker Street Properties Q3 2015 Highlights Investor confidence showed improvement in Q3 2015 from the first half of the year. The overall vacancy rate increased slightly to 9.0% in Q3 2015. However, recent activity will see a reduction in the next quarter’s vacancy figures once tenants, who have just finalised leases, have physically moved. Grade A accommodation recorded an average 6.4% y/y increase in gross rental rates, with Century City outperforming other nodes. The growing interest of corporates may see a continuation of increasing rental rates in the coming year. Cape Town Office Market Outlook 2 Prime gross rent 167 ZAR/m2 per month1 Prime Yield Vacancies 8.0% 9.0% Total gross leasable area (GLA)(‘000 m2) 2,445m2 12 month outlook Source: Baker Street, JLL, SAPOA existing stock even with the higher proportion of speculative developments. Although a notable improvement in development activity, new office developments will only account for a 3.0% addition to existing accommodation, allowing for demand to catch up over time. Supply Investor confidence showed improvement in Q3 2015 from the first half of the year in the City of Cape Town, with several projects breaking ground that will reach completion in 2016. Over 75,700m2 of developments will be completed in the coming year. Of this total, 68.0% will be speculative developments, further highlighting the optimism among investors. Nevertheless, investors remain cautious in the current economic climate, gradually adding to The sturdy growth in demand for office accommodation, including take-up in speculative developments, is improving the long term outlook of the Cape Town market. Developments will be added to three major nodes, Other 13% Cape Town CBD 34% Century City 27% Waterfront 26% Source: JLL, Baker Street Cape Town Office Clock Rental growth accelerating Grade P Grade A The CBD in particular has been a major attraction to large corporates in 2015. Recent developments include the start of the KPMG building measuring 16,000m2 along with the 10,000m2 Touchstone House which is nearing completion. These follow the 8,000m2 development recently completed for e.tv. Table 1: Indicative development projects Figure 1: Pipeline developments by node m2 Rental growth slowing including the Cape Town CBD, Waterfront and Century City, all of which can be considered prime nodes. Rents falling Rents bottoming out Development Approximate Size (m2) Node Opening Date KPMG building 16,000 Cape Town CBD Q3 2016 Touchstone 10,000 Cape Town CBD Q3 2015 Silos 10,000 Waterfront Q3 2016 The Apex 8,000 Century City Q1 2016 Citadel 6,500 Claremont Q3 2016 Gateway 6,000 Waterfront Q4 2016 The Matrix 5,000 Century City Q1 2016 The Pavilion 4,000 Waterfront Q3 2015 The Annex 4,000 Century City Q1 2016 Aurecon 2 3,200 Century City Q2 2016 Grove Exchange 3,000 Claremont Q1 2016 Recent Completions – Total 21,000m2 12 month outlook Bridge Park, Century City 18,000m2 Waterview Park Four, Century City 3,000m2 Grade B The JLL Property ClockTM 1 Prime rent represents the top open market rent that could be expected for an office unit of the highest quality and specification in the best location in a market, as at a survey date. COPYRIGHT © JONES LANG LASALLE IP, INC. 2015. Cape Town Office Market Outlook Demand 3 Figure 3: Rental performance by grade Vacancies As predicted, Portside, Cape Town’s 5 Star Green Star SA rated building, has experienced more take up with the latest tenant, EXL, taking an entire 2,800m² floor. Activity in the northern suburbs has seen Pepcor taking additional offices in Tyger Valley. This will reduce vacancies even further in this node and will be reflected in the next quarter’s survey. 180 The overall Cape Town Office vacancy rate increased slightly to 9.0% in the quarter from 8.2% in Q2 2015. The increase is largely attributable to the completion of speculative developments in Century City, resulting in a 12.2% vacancy in the node from 6.6% in Q2 2015. As already mentioned, recent completions in Century City have been well received with ABSA Barclays recently finalising lease terms. In the CBD, the vacancy rate remained unchanged at 11.7% . There was an increase in Grade P and A vacancies from a combined 11.1% in Q2 2015 to 12.3% in Q3 2015 while vacancies in Grade B and C accommodation declined. Nevertheless, this marginal increase is likely to be temporary as there is a clear growing interest for high quality accommodation in the CBD. Figure 2: Cape Town office vacancy rate 12.0% 10.0% 9.8% 10.3% 11.2% 9.9% 9.7% 9.5% 9.3% 9.2% 8.2% 9.0% 8.0% 6.0% 4.0% 2.0% 0.0% Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 Data: SAPOA 170 160 150 R/sqm Recent activity will see a reduction in the next quarter’s vacancy figures once tenants, who have just finalised leases, have physically moved. Recent deals include ABSA Barclays having taken 14,000m² in Bridgepark, Century City. Completion of new developments in this node has seen the vacancy rate increase. However, this is likely to be temporary as Century City has also enjoyed success in the marketing of their sectional title offices with approximately 95% presold. 140 130 120 110 100 90 80 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Average Grade P Average Grade A Average Grade B Data: Baker Street Properties Tenants should be aware of this change and position themselves accordingly, as rental rates are likely to accelerate in the coming year. Rental Performance The positive take up of offices is starting to push rentals upwards with quality office space continuing to show growth. Although rental rates for Grade P accommodation remained largely unchanged with a 1.0% y/y increase in Q3 2015, these properties have maintained a significant gap in comparison to Grade A accommodation, well over 20.0% higher in gross rental rates. Grade A accommodation recorded an average 6.4% y/y increase in gross rental rates, with Century City outperforming other nodes with a 10.9% y/y rise driven by the completion of new accommodation. Outlook The South African GDP outlook forewarns of slower business activity in the year ahead, with the National Treasury having revised the GDP growth downwards for 2015 and 2016. However, the gradual recovery in demand for accommodation in Cape Town is set to see all nodes showing better performance in 2016. Investor confidence in the Cape Town market continues to improve in the hope of an economic recovery. High quality accommodation continues to dominate the market while the growing interest of corporates bodes well for landlords with the potential for increasing rental rates in the coming year. Recent Deals ABSA Barclays 14,000m2, Bridgepark Century City EXL 2,800m2, 5 star Green Star SA Portside building in Cape Town Pepcor, Tygervallly COPYRIGHT © JONES LANG LASALLE IP, INC. 2015. Cape Town Office Market Outlook About JLL Cape Town Office Statistics Table 2: Average gross rental/m² for Prime buildings Q3 2014 Q3 2015 Q3 2015 y/y % change q/q% change City Centre 165 167 167 1.0% 0.0% V&A Waterfront 165 167 167 1.0% 0.0% Average Grade P 165 167 167 1.0% 0.0% Q3 2014 Q3 2015 Q3 2015 y/y % change q/q % change City Centre 119 132 132 10.9% 0.0% Century City 122 127 131 7.7% 3.4% Tygervalley/Bellville 102 105 110 8.2% 4.8% V&A Waterfront 165 167 167 1.0% 0.0% Average Grade A 127 133 135 6.4% 1.8% Table 3: Average gross rental/m² – Grade A buildings Table 4: Vacancies by Grade, m2 For further information, visit www.jll.com JLL offices Grade P Grade A Grade B Grade C Overall Q3 2014 19.1% 6.1% 9.8% 26.8% 9.5% Q2 2015 13.7% 5.4% 9.0% 20.7% 8.2% Q3 2015 32.5% 5.5% 9.6% 18.6% 9.0% Table 5: Future supply 2016 JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual fee revenue of $4.7 billion and gross revenue of $5.4 billion, JLL has more than 230 corporate offices, operates in 80 countries and has a global workforce of approximately 58,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.4 billion square feet, or 316 million square meters, and completed $118 billion in sales, acquisitions and finance transactions in 2014. Its investment management business, LaSalle Investment Management, has $57.2 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. Completions (m²) y/y % change Future supply (m²) y/y % change 75,700 161.0% 2,521,27 3.1% Johannesburg Office 303, The Firs Cnr Biermann & Cradock Ave Rosebank, South Africa, 2196 Tel +27 11 507 2200 Zandile Makhoba Head: Research, South Africa Johannesburg Tel +27 11 507 2200 [email protected] Dave Russell Director: Commercial Leasing and Sales Baker Street Properties Cape Town Tel +27 21 461 1660 [email protected] www.jll.co.za www.jllpropertysearch.co.za COPYRIGHT © JONES LANG LASALLE IP, INC. 2015. This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Statements that are forwardlooking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report.