Office landlords slash rents to retain tenants

The largest office landlords in the country are still making steep cuts to rentals in an effort to retain tenants. One, Burstone (previously Investec Property Fund), says negative reversions in the year to March averaged 28.5%.

Meanwhile the majors – Growthpoint and Redefine, which have 1.6 million and 1 million square metres of office space respectively – have been battling rental reversions in the teens, with some periods over 20%, since the shock of the Covid-19 pandemic.

Burstone

Burstone was impacted by “renewals in Midrand at the end of a 10-year lease”.

The reversion on its long-dated leases (which had been in place for more than five years) was a stunning -47.3%. This means the rental rate upon renewal would’ve nearly halved for these leases (likely the large Midrand property).

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One can see why this is the case, given in-force escalation rates of 7% and higher. On a 10-year lease, this will mean rent more than doubling over the term.

The group says oversupply still results in negative reversions and that, on average, its portfolio remains “over rented” by between 10% and 15%. This means that if it had to end all its leases now, rentals would go backwards by 10% to 15%.

Certain nodes, such as Bryanston and Fourways, are outperforming, but Sandton is still struggling.

Growthpoint

In the last six months of 2023, Growthpoint saw negative reversions of two thirds of the nearly 100 leases it renewed. The average reversion on these 57 leases was -17.45%, with the overall average across its portfolio at -15.8%. It renewed 20 leases (10%) at the same (flat) rentals, while for the 22% of its renewals where it managed to sign at increased rents, the average was a meagre 1.6%.

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Vacancies remain very high at 17.8% across its office portfolio, and the Sandton node is still a headache for the group. Vacancies in the area are 24%, and the node equates to over 350 000m².

Growthpoint’s vacant office space in Sandton alone is more than 80 000m². It managed to reduce this significantly last year, as this number was over 100 000m² in June.

It says it is working to “reduce office exposure” in non-performing nodes in Gauteng and is “considering all usage options” for its properties, including redevelopment and repurposing.

Notably, its two major new developments in this portfolio are both in Cape Town – the redevelopment of Ninety One’s head office (36 Hans Strydom), and the development of a new Hilton Canopy Hotel at Longkloof Studios.

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Its net property income from its office portfolio declined by 6% in the six months due to “pressure on market rentals on new deals, negative reversions, vacancies and increased operating costs”.

Redefine

Redefine says “new office developments has stagnated since 2019 due to the lack of growth in the economy and post-pandemic shifts in office usage”.

“Most of the capital spent in the office sector during this period has been on refurbishments and residential conversions.”

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It highlights that the “migration of businesses and individuals to Cape Town has resulted in an undersupply of quality office accommodation in Cape Town”.

Johannesburg and Tshwane have a combined office supply of 14.6million square metres, while Cape Town only has 2.6 million square metres of office space.

Part of the pressure on this space is from call centres, which “are competing for limited suitable space” in their preferred nodes in Cape Town and Umhlanga.

In the six months to end-February, Redefine says renewal reversions across its office portfolio were -13.6%, worse than the -12.4% from H1 2023. Across 96 leases, a full 40 were renewed at lower rentals. This equated to half of the total space it renewed leases on during the period, which is 10% of its lettable area (equal to nearly 100 000m²).

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Of note is that while leases over 10% of its space expire this year, in 2025 that jumps to 23%, and in 2026 it is 20%. This is a lot higher than the run rate in recent years.

This article was republished from Moneyweb. Read the original here