Cape Town boasts the top-performing office market in SA

Kobus Lamprecht, head of research at Rode & Associates, says besides the return of workers to the office, the Mother City is benefitting from companies expanding or opening offices due to the city’s better power-supply situation, in addition to growth in tourism and semigration on the back of good governance in the metro.

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Welcome to the latest edition of The Property Pod, South Africa’s premier property investor podcast, where we gain insider insights from leading executives, analysts, developers and entrepreneurs in the country’s expansive property industry.

The latest Rode Report on the SA property market for Q4 2023 came out in December. It’s a comprehensive quarterly report brought out by well-known property economists Rode & Associates. A standout section of the report is on the Cape Town office property market, with its research revealing Cape Town is the best-performing office market in South Africa.

That may not be a surprise for many, but to discuss the report’s findings further on this week’s podcast is Rode’s head of research and editor of the Rode Report, Kobus Lamprecht.

Highlights of his interview appear below. You can also listen to the full podcast above or download it from iono, Spotify or Apple Podcasts. 

Kobus Lamprecht, Rode Report, SA property market, Cape Town, office property sector

Kobus Lamprecht, head of research at Rode & Associates. Image: Supplied

Highlights 

Cape Town’s reputation as the best-run city is reflecting in another economic indicator, the office property market … The latest Rode Report that was brought out in December says, and I quote: “All in all, the city had a stellar performance in 2023, with office rental growth averaging around 10% in the mother city”. That was the highest in the country, and inflation-beating too. Can you share some insights on the performance and what your research showed?

“Cape Town has great wine, good rugby, a recovery in tourism, and another airport on [the] horizon. So what more do you want?

“It’s really been quite a remarkable comeback by the Cape Town office market …

“Perhaps it’s worthwhile just to look at the trends over the past few years. Very importantly, Rode uses decentralised rental trends as a proxy for what’s happening to the market, and ‘decentralised’ essentially means all the nodes together. Then we compile the index and look at that trend. That excludes the CBDs because in some parts of the country, like Johannesburg and Durban, the CBDs are really run-down. So it doesn’t make sense to have just a Cape Town Index or a Johannesburg Index. We’d rather split it into decentralised trends.”

Strong recovery

“In this index for Cape Town ‘decentralised’ shows that the market rentals fell by roughly 11% in the pandemic. And then in 2022 and 2023 we saw strong recovery. Then rentals ended last year about 6% higher than the 2019 level. So essentially, rentals were 6% higher at the end of last year (2023) compared to 2019. That’s quite a mean feat if you take into account, as you mentioned, what’s happening in other cities. And also, if we take it further, the V&A Waterfront, Century City and Claremont stand out. And if you start at the Waterfront, it’s been performing very well.

“We all noted strong tourism numbers, positive news from Growthpoint in their financials, and we found the vacancy rates of the V&A Waterfront to be 7% in the fourth quarter of last year. That was the lowest compared to all the other nodes in Cape Town. But that 7% vacancy rate is the average of the Grade A and B vacancy rates together. It excludes the Grade C vacancy rate.

“In terms of the other nodes, Claremont and Century City also had big improvements last year, and that led to their rentals also beating inflation. If you remember, Claremont and Century City had vacancy rates of close to 20% during the pandemic. Both of them now are at around 10% or so. So there have been more companies coming to Cape Town and expanding office space. Maybe we can touch a bit on that later – why that is happening.”

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Just for clarity, what’s the 10% figure mentioned in the report, as you now mention it’s 6% growth?

“The 10% is the growth of the … rentals in 2023 compared to 2022, because it’s important to see how the market stands when you compare it to pre-pandemic levels. And if you take the fourth-quarter level of last year and compare it to 2019, the rental is about 6% higher. So that gives you sort of the trend over the last few years as to what’s been happening with the office market.”

Read: Top landlords ditching Gauteng for Western Cape where ‘returns are better’

How does that compare to decentralised office nodes in other major cities like Johannesburg, Pretoria and Durban?

“The nominal rental growth was mostly in the low single digits, or even declining in the other major cities. That said, start with Johannesburg – which is the biggest office market, of course – here the decentralised rentals managed to increase by only 1% in 2023. That was for us a slowdown from the 2% growth in 2022. If you look at the major nodes of Sandton and Rosebank, they show us a similar sort of slowing trend occurring …

“Very importantly, the vacancy rate for decentralised space averaged about 16% for Johannesburg as a whole in the fourth quarter of 2023.”

“So that means that the Johannesburg office market is still under pressure. The national vacancy rate is about 14%. That’s a little higher than the national figure, but it must be said that the Johannesburg market also saw a small improvement last year. Also, Sandton saw fewer vacancies. And then there’s been a return-to-work component as well as companies pushed workers back to the office. We’ve also seen traffic levels pick up.”

“And then if you look at the other nodes like Waterfall and Rosebank, the vacancy rates are a lot lower at 12%. So there are still some nodes that are shining in Johannesburg, but if you look at Sunninghill, Randburg, the CBD and Rivonia, they’re still battling with vacancy rates of about 20% on average.”

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“Vacancy rates in Pretoria are still about 13%, 14%. In Durban, it has been a tale of two cities, with Umhlanga and La Lucia really performing well …

“But as a whole, Durban’s decentralised rentals fell 1% in 2023, so there hasn’t been a good performance from Durban; but there’s been one standout node there that really has been carrying the city.”

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What are some of the other factors behind the growth in office rentals in Cape Town, because there are several things contributing and attracting tenants to the Mother City?

“As [mentioned], there are workers that are returning to offices after the end of the pandemic, and that boosted the market last year. These workers are back at the office two or three days a week – in some cases even more than that. And we also see this trend internationally. Remember, even Zoom last year pushed the workers back to the office.”

“I’ve noted some major companies internationally that also announced this year again – like SAP, the big global software company with 108 000 workers – last month saying they want workers three days at an office or on-site with a customer. And IBM had a similar announcement. This trend of workers getting back to the offices is still happening. It’s helping the market a little. Remember, the office market was basically written off in the pandemic, so this is helping the market a little.”

“It’s also that companies are expanding or opening office space in Cape Town due to the better power supply situation. I think everyone by now knows that Cape Town has less load shedding than the normal national schedule. This will be so even more in years to come, owing to various investments by the government in Cape Town and the private sector.”

Cape Town Central City Improvement District, The Property Pod, Kobus Lamprecht, Rode & Associates, Office Property market, Cape Town, Cape Town office sector, Growthpoint, City of Cape Town

Investec’s new Western Cape regional office at the V&A Waterfront in Cape Town. Image: Suren Naidoo/Moneyweb

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What about the semigration trend, because a hot topic on Moneyweb is the whole ‘swallows visa’ debacle?

“Yes, that’s definitely happening. And also in the other cities in the Western Cape – like George also benefitting from that; we are speaking there of office markets. So that’s definitely happening. I must say it’s great to hear [the] foreign languages …”

I see Rosebank is still the most expensive office node in the country based on the report, but there is a section in your latest research titled ‘Pioneer Rentals’ – and [here] Cape Town claims the top spot, which is around R320 a square metre. Can you explain what ‘pioneer rentals’ mean and also where in the Cape Town office market are landlords asking for such rates?

“I’m glad you picked that up because it’s a very interesting topic, and I think a lot of listeners will not know what it means. ‘Pioneer rentals’ essentially means the highest rentals actually achieved for any new lettings. So in most cases, it will be a brand-new office space, newly built; but it can be also a space that’s renovated, for example.”

“And if you look at this ‘pioneer rental’ level, you must compare it to the market rental level trend. So if your pioneer rental level is a lot higher than your average market level, then you know that a node or a city has very good growth prospects. And that’s what we found with Cape Town because of that high level of R320, and those rentals were actually achievable.”

“It wasn’t only at one building; it was at another building as well. It was two buildings, and it was achieved in Claremont and Newlands, close to the Cavendish Square and public transport that has benefitted the office demand in those nodes.”

“If you look at the average rental level of Claremont, it’s a lot lower than R300. So essentially it means that in time, if optimal conditions continue and there is a lot of office [space], the average rental could increase to that level …”

Just turning back to Durban for a moment, you talked about La Lucia Ridge and Umhlanga, not Durban central, showing the second-highest office-rental growth in the report at 3.6% after Cape Town. Did I read it correctly because 3.6% is still below inflation and it is still negative territory, as it were.

“Look, we all know that Durban as a city has had its fair share of challenges – the riots, the flooding and infrastructure failures – but Umhlanga has really been standing out with very low office vacancies and relatively better rental growth, as you’ve mentioned, and it’s still attracting investment. That will likely continue.”

“But if you compare it to other Durban nodes like Berea and Westville, for example, we found their vacancy [rate] has actually risen, with rentals declining, which shows the opposite trend to La Lucia and Umhlanga, what’s actually happening there …

“La Lucia and Umhlanga have by far the most office space if you compare them to the other nodes. So at the moment that’s where most of the investment is happening.”

“As for semigration, I think that the Western Cape will still get the most influx of new people, especially Cape Town and other hot spots like Langebaan, Hermanus, George and Plett.”

“I think if you invest, first choose the Western Cape, and then investors who want to take more risk might invest in other cities.”

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Just to conclude, on your Cape Town expectations, do you think these trends are going to continue? And could Cape Town become the highest-grossing property rentals market for the office sector?

“If you look ahead five years or so, Cape Town definitely has the best prospects because of the power supply situation. I think if the current government [there] can stay in control, or a similar type of government that’s well perceived by the public, then Cape Town will likely continue to outshine the other cities.”

You can listen to previous episodes of The Property Pod here

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