Building fuels office glut in South Africa's financial hub

More properties are being built in Sandton, with developers struggling to fill growing office space that is keeping a lid on rents

PUBLISHED : Wednesday, 10 September, 2014, 4:43am
UPDATED : Wednesday, 10 September, 2014, 4:43am

Bhekumuzi Makhubo is the man who helps put the boom in Johannesburg office construction.

The 25-year-old, an assistant with a blasting contractor, helps clear space with explosives for properties under construction in Sandton, Africa's biggest financial district.

More than 257,300 sq metres of commercial real estate were planned there in June, 73 per cent more than a year earlier, according to Jones Lang LaSalle.

"It's a sign of more development," Makhubo said. "There is going to be more and more construction."

The building boom is running ahead of demand. Developers are struggling to fill the buildings that have been completed and the pace of the district's expansion also is keeping a lid on rents. The vacancy rate in Sandton was 12.7 per cent in the second quarter, up from 4.5 per cent a year earlier, Jones Lang said in a report last month.

"There's a bit of an oversupply," said Fran Teagle, a director for Broll, a unit of broker CBRE Group. "Leasing is slow at the moment and we don't expect rentals to rise in the short term. There's quite a lot of vacancy."

The average monthly rent for prime office space in Sandton was about US$18.70 per square metre, Jones Lang said. That was about US$1.74 per square foot, compared with US$8.25 per square foot in the City of London financial district. The average asking rent per square foot in Manhattan is US$5.32, according to broker Knight Frank.

Sandton, once a single 20-storey tower and a shopping mall, is also set to displace Johannesburg's city centre to become South Africa's largest commercial hub. The stock market and other companies moved their operations to the suburb starting in the 1990s because of an increase in crime in the city's historical business district.

Makhubo's blasts shift rock for the newest office block within the square mile that houses the Johannesburg Stock Exchange and local headquarters for Citigroup and Deutsche Bank.

Developers were attracting tenants in Sandton by offering incentives such as rent-free periods and subsidising the cost of fitting-out offices, Teagle said.

About 20 per cent of office development in Sandton is speculative, according to Ndibu Motaung, the head of research at Jones Lang.

More than 257,300 sq metres of commercial real estate development were planned in Sandton at the end of June, compared with about 148,400 sq metres a year earlier, Jones Lang said.

Buildings under construction include a 34,500 sq metre office for law firm Webber Wentzel and 67,000 sq metres for Sasol, the world's largest producer of petrol from coal, Jones Lang said.

Eight more towers are planned, including the new headquarters of Discovery, South Africa's largest medical insurance provider, over the next three years.

A 25 per cent unemployment rate, electricity shortages and strikes have limited growth in Africa's second-biggest economy. While the country avoided its second recession in five years with 0.6 per cent annualised growth in the second quarter, GDP is forecast to have expanded by the slowest pace this year since 2009. That has limited company investment.

Older buildings are being refurbished to keep pace with the new modern styles. The Sandton City Office Tower, which sits above Africa's biggest shopping mall, replaced its stark, concrete exterior with a new, glass facade.

The construction boom is not only about commercial properties. Homeowners looking to avoid Sandton's increasingly congested roads were living closer to the financial hub, said Jake Hoddinott, a sales and development manager at developer Barrow Group.

More than 100,000 commuters travel to Sandton each day, and that will increase by about 27,000 after current office developments are completed, according to Jones Lang.