Adventurous investors affect cap rate improvement
06-09-2004
Adventurous investors and cyclical factors could account for the recent sharp decline in office capitalization (“cap”) rates in most of South Africa's CBDs.
Over the past year, not only did cap rates dip sharply, but nominal rentals have also been improving, says Rode Report editor Garth Johnson. And although the marketing efforts of the various central improvement districts may have played a role in changing investor perceptions for the better, the change is probably both structural and cyclical, he says.
Three structural phenomena may be at the basis of the change, Johnson says. "The market seems to have adopted lower inflation expectations. Secondly, we have to consider a 'spatial' structural change as well – prospects for the CBDs have improved considerably due to the efforts of CIDs, which has opened up new possibilities for alternative uses of buildings. Thirdly, urban living seems to be coming in vogue, although mostly still in Cape Town," he says.
The net result of these structural changes is that adventurous investors are willing to pay more for suitable office space to convert to alternative uses, and hence cap rates decrease. "We don't think the decrease has anything to do with an increased demand for grades B and C office space," Johnson says.
Leon de Vernon of Ithemba Property Trusts in Johannesburg says they are seeing (and are involved in) buying up and re-structuring vacant and derelict office space for use as either residential or student accommodation.
"The current 'feel' in the Johannesburg CBD and immediate surrounds is that a greater level of residential accommodation is required than was the case in the past. The migration of people to the city has increased the demand for social and affordable housing. The city is also a Mecca for students because of the proximity of learning institutions - around 30 at the present count," he says.
Coupled with this is the government approach that its departments must support the city in taking up suitable office space in the CBD. "There is a definite inflow of new investors to acquire buildings for all kinds of uses. We have recently seen residential projects selling for around R500 000 per unit – this was unheard of for many years."
He says there are also a number of new 'greenfields' residential projects being developed in the city. This has lead to an uptake by civil servants and the like.
Rode’s analysis of Sapoa’s office vacancy surveys shows that although Pretoria CBD (33.0727m²) and Cape Town CBD (25.181m²) had a robust take-up for the year ended June 2004, Johannesburg Central’s demand contraction of almost 65.000m² dragged national CBD take-up into the red.
These structural changes seem to coincide with cyclical changes in the economy and with expectations that the inflation rate will decrease even further.
