Will expectations of an office-property “boom” be realized?

04-05-2005

Listed funds with property portfolios that are heavy in office property could be disappointed by the short-term effect that the anticipated “boom” might have on their income streams.

Rode’s Report editor Garth Johnson says that while market rentals of office (and industrial) properties are expected to show robust growth over the next few years, market-rental levels are still well below contractual rentals that were signed some years ago.

Consider the following example: according to Rode’s Report the market rental for grade-A Sandton CBD office space was about R78/m²/month 3 years ago, while market escalation rates were 11% at that time. Hence a tenant who signed a lease at that stage will currently have a contractual obligation of close to R96/m²/month. However, we all know that the office market has put in a poor showing over the last few years, resulting in the current Sandton CBD market rental being even lower than it was 3 years ago, at about R68/m²/month. That means, the tenant would sign the renewal lease at a radically reduced rental. And that’s not even factoring in ageing of the building over the 3-year period.

The industrial property market fared much better than the office market, especially over the last year or so. Take the example of the Central Witwatersrand where a tenant 3 years ago would have signed a lease on premises of 500m² for approximately R15,50/m²/month. Given that market escalation rates were about 11% at that time, this tenant should be paying about R19/m²/month at present, which is exactly what the current market rental is according to Rode’s Report.

The upshot is that listed funds with a significant office portfolio should not bank on rental growth as yet, but should rather reduce vacancies to boost income streams.