More clues as to the future path of office rentals

05-09-2005

The Rode team recently did some calculations to establish what rentals investors would expect from new office developments in popular office nodes such as Bryanston in the northern suburbs of Johannesburg, and Tyger Valley, in the eastern suburbs of Cape Town, to make them viable.

"Critical variables in our calculation were the bulk rate of office land in these nodes, which is currently around R1.600 per bulk m², capitalization rates of about 10%, building costs of about R4.000 per bulk m², and an assumed pre-tax developers profit of, say, 20%", says Garth Johnson, editor of Rode's Report.

"Our calculations suggest that for a typical low-rise office development developers need to sign leases at gross market rentals of roughly R115/m². This is almost 65% higher than current grade-A rentals, which are about R70/m². Moreover, with building-cost inflation expected to be in double-digit territory during the next few years (as noted in our previous newsletter); market rentals will have do some more catching up by the time they reach R115/m². So the conclusion is, don’t be surprised if gross market rentals double in the next five years,” says Johnson.