More pain for Landlords as they convert Office Parks into Residential Units

Growthpoint Properties, the JSE’s biggest primary listed REIT, will convert its Riverwoods Office Park in Bedfordview, Johannesburg, into residential apartments.

The South African commercial property sector is still experiencing tougher conditions, especially weaker economic growth coupled with the decline in demand for office space — prompting listed funds to convert their office parks into Residential apartments.

Businesses’ plans to have employees move back to offices after many months of working from home have been derailed by the emergence of the Covid-19 Omicron variant, among other factors.

Remote working, especially in white-collar jobs, has resulted in many offices across the country lying empty, devoid of employees who have been asked to work from home. The remote-working trend initially formed a part of the government’s lockdown strategy to curb the spread of Covid-19.

It has, however, continued to push down demand for office space in the country, with JSE’s listed property funds coverting office buildings into residential units with some exiting the sector completely.

Beyond this, the country’s low economic growth, which has resulted in a jobs bloodbath, has also exacerbated the downward trend in demand for office space.

South Africa's office vacancy rate has reached a new all-time high of 15.4%, according to a report by the South African Property Owners Association (SAPOA) for the third quarter of 2021.

Growthpoint Properties, SA's biggest listed property group, recently teamed up with BlackBrick Hotels and office parks developer Setso Property Fund to convert its luxury Riverwoods Office Park in Bedfordview, Johannesburg, into residential apartments.

The project sees Growthpoint converting the 35,000m² site at St Andrews, a predominantly residential area, into more than 250 apartments at a cost of R200 million.

ALSO READ: Standard Bank cuts Office Space, camps inside Pick n Pay stores

The owner of the V&A Waterfront said the decision to convert the Riverwoods office park was a response to the surplus of office space in the market and the scarcity of residential space, especially for the new and upcoming generation of first-time buyers.

“As part of our ongoing asset management, we frequently evaluate the properties in our portfolio and consider all options to unlock the best value from our assets. There is no recipe, no single solution, so we take care to find the right approach unique to every building,” says Paul Kollenberg, Growthpoint Head of Asset Management.

Last year, Private property developer Africrest Properties began the largest conversion of an office to residential property in SA’s history.           

The Sunninghill building in Johannesburg, which used to be auditing firm PricewaterhouseCoopers (PwC’s) Gauteng office, is being converted into a R400m residential building called The Apollo, which will house more than 700 apartments. The conversion is being completed in phases.

It is a clear indication of how much companies are prepared to spend to capitalise on the oversupply of offices around Sandton.

SA Corporate Real Estate Limited (SA Corp), a JSE-listed property company, plans to completely exit the office property sector in South Africa by selling its buildings. Less than 2% of its property investments worth about R15-billion comprise office buildings. The CEO Rory Mackey says South Africa’s negative economic outlook and last year’s major job losses also suggest less office space will be needed, making the company nervous about future investments into the office property market.

In a move to save costs, Africa’s largest banking group, Standard Bank announced last year that it plans to cut office space by opening up mini branches in Pick n Pay stores.

While many companies and workers around the world are still contemplating if and when they set foot inside an office again, some big firms have already told employees the work-from-home experiment is over.

Last year, Google and Amazon, told staff they will have to ask for approval if they want to work remotely more than 14 days a year. Investment bank Goldman Sachs told its global workforce it wants them back in the office by September. Meanwhile, a Deloitte survey shows 28% of workers are keen to get back to the office, while another 42% will be happy to spend three days a week there.

Sapoa Office Vacancy Rate

SAPOA found that office development activity remains constrained, and the report foresees that, given the uncertainty surrounding the Covid-19 pandemic, office development activity is likely to remain mainly tenant-driven.

While the current office vacancy rate is now roughly the same as it was in 2003, an addtional 1.3 million square metres are vacant.

The A-grade office sector vacancy rate increased to an all-time high of 13.6% during the quarter due to what the report found to be a persistent supply/demand imbalance. Sandton has the most space available and accounts for the bulk of Prime and A-grade space currently available to let.

Among the country's five largest metropolitan municipalities, the City of Tswhane had the lowest overall office vacancy rate of 11.3% at September 2021.

The increasing vacancy rate has also impacted asking rentals, which have been under increased strain since the middle of 2020. There has been no growth in rentals year-on-year and the report foresees that asking rentals will remain under pressure. Anecdotal evidence suggests that deals are being done at substantial discounts to asking rentals.

SAPOA is the representative body of the commercial and industrial property industry.