A weak macroeconomic environment characterised by low growth, instability and policy uncertainty has stifled investment in South Africa. The commercial property sector remains under pressure, particularly the office market which is experiencing significant oversupply. This webinar reviewed the size and structure of the Johannesburg office market, its evolution and current outlook in the wake of the COVID-19 outbreak.

The information presented within these slides has been compiled from reports issued by the following organisations: Broll, Knight Frank, JLL, Property Sector Charter Council, South African Property Owner’s Association and MSCI

Evolution of Modern Office Design

The webinar began with a review of the evolution of the modern office design in Johannesburg. With South Africa facing increasing electricity and other operational costs, the number of green buildings has increased vastly over the last decade. In 2009 there was only one green-star certification in the country; by 2015 there were 100, and by 2017 there were 300. Going green and mixed-use developments seem to be the forerunners in the office buildings of the future. To showcase this, the webinar presented the case study of 1 Discovery Place.

Case Study: Bringing together the Discovery Group’s businesses under one roof, key features of this building include its 5-star green certification rating. The building accommodates one thousand employees per floor, it has restaurants and coffee shops, a rooftop running track and a member-only gym on the 8th floor. Discovery Group pays annual rent of approximately £14 million pounds. Discovery Place is considered to be “the largest single-phase commercial office development in Africa”

Standard Terms of An Office Lease:

A further important aspect considered involves the contractual agreements governing rental leases. There are several key clauses in a modern commercial lease for an office under the South African legal system.










Size & Structure of the South African Office Market:

Furthermore, the webinar went on to discuss the size and structure of the South African office market. Making up 27% of commercial property, the market size of the South African office space is worth approximately R357 billion. At an exchange rate of 20 SA Rands to one GBP, this is equal to roughly £17.85 billion pounds.

The office market is currently experiencing a turbulent time though. Offices have been the worst performer among traditional property types, such as retail and industrial, for the last 5 to 6 years as they have struggled to shake off a stubborn vacancy rate of around 11%.  As a percentage of existing market stock, development activity at a national level is currently at 2.2% – below the 10-year average of 4.4%.

As discussed in the webinar, the current negative trends in commercial property can be primarily attributed to the high levels of political and economic uncertainty, with investors and business leaders preferring to hold back on long-term commitments while the country remains in a fragile position.


Johannesburg v Cape Town:

The webinar undertook a comparative analysis of the cities of Johannesburg and Cape Town. A SAPOA report released in April last year notes an interesting trend between the vacancy rates of these two nodes; specifically, as one node improves, the other worsens. This implies that the tenant pool is not necessarily growing, but rather rotates as tenants look elsewhere for efficient and more cost-effective solutions.


In Johannesburg, the office space vacancy rate in 2019 stood at 12.2%, compared to Cape Town’s rate of 7.7%. In fact, among the major metropolitan municipalities, Cape Town had the lowest vacancy rate in Q4 of 2019. According to JLL, the commercial property market in Cape Town is in a recovery phase, and demand for office space is expected to be stable. That said, there has been some encouraging demand amongst financial institutions and technology companies, with the emphasis on proximity to transport infrastructure and other live-work-play amenities.


However, as explained within the webinar, nationally the market is still battling to record above-inflation rental growth, with nominal rentals even declining in some nodes. A Rodes report reveals that nominal market rentals for grade-A office space grew by 4% in the fourth quarter of 2019 compared to Q4 of 2018. This implies that rentals continued to decline in real terms, after accounting for building-cost inflation (BER BCI) of about 6%.

Johannesburg submarket: Sandton

A prime point of discussion was the review of Johannesburg’s submarket node of Sandton, the most highly valued commercial hub in Africa. Approximately 7-10% of South African JSE listed companies have postal addresses in Sandton, including:  FirstRand, Investec, Growthpoint Properties and Sasol. The average lease lasts 3 to 5 years.  However, the Sandton node is currently experiencing its worst office vacancy level (17.6%) in more than 20 years, with mass oversupply.


Why is there such an oversupply?

The discussion revealed that, in general, oversupply stems from weak economic growth and a glut of developments, combined with corporate consolidation and competition from new commercial nodes. South Africa’s economic boom in the mid-2000s prompted large property groups such as Growthpoint and Zenprop to plan an assortment of developments in Sandton. By the time the 2008/2009 crisis hit, it was too late for developers to pull the plug — so a large supply came on stream in the late 2000s.

SAPOA contend that given economic headwinds and structural growth constraints in the country, such as electricity supply, it is hard to imagine the national office vacancy rate returning to mid-single digits within the next three years.




To conclude, the panellists discussed commercial property in the light of the COVID-19 outbreak. As expressed during the webinar, the macroeconomic environment in South Africa is in a precarious situation particularly because the country was already in recession prior to the Covid-19 shock.

Currently, the Minister of Trade, Industry and Competition, Ebrahim Patel published regulations on March 24 outlining details of a block exemption shielding certain agreements or practices between designated retail tenants and retail property landlords. Thus, there is currently no government reprieve for office tenants and landlords.

An FNB report released in Q4 2019 highlighted that the office space is likely to continue to be the underperformer of the three major commercial segments. The report cites the fact that the sector has experienced technological challenges as more companies become flexible in terms of whether staff work from home or office, which may lower the need for office space. With COVID-19, almost all corporate employees have been forced to work from home. This first-hand and ‘firm-wide’ experience, provides employees with the opportunity to weigh up the benefits and cost of working from home. Thus, there are some positives in this sense. For example, companies may realise that they do not need as much office space as they previously thought. Nonetheless, there are several factors to be considered. First, is the issue of productivity. How productive are employees working from home relative to the office environment, considering that many individuals have home care duties that may hinder their productiveness? Secondly, and maybe less spoken about, is the fact that some individuals do like to divide and separate their workspace environment from their home environment.


In summary, the panellists expressed that looking ahead, the challenge is how long the lockdown will last, and what the economic implications over and above the downgrade to junk status will be for commercial property.