Over the past few months, we have identified a definitive trend which shows that buyers and sellers are moving further apart. What does this mean?
There has been a noticeable increase in the bid-offer spread with purchasers bidding approximately 20% lower than the asking price of a given building.
In the South African market, contractual escalations are typically in the region of 7-9% per annum compounded with leases ranging from 3 – 10 years in length. In a low-growth scenario such as the one currently facing South Africa contractual rentals way outstrip market rentals which are flat if not declining. At the end of the lease period, there should be a significant correction to market-related rentals.
South African tenants are in most cases not represented by a corporate real estate professional and therefore at the end of their lease term end up renewing on terms very much higher than market given the lack of available data.
Struggling Office Investment Sector
The most challenging sector by far is the office investment sector where sellers have to look at offers for prime office assets in the northern suburbs of JHB at yields in the mid 10’s. 18 Months ago these same assets would have traded in the low 9’s.
With a significant increase in office vacancies, price pressure is put on rental figures achieved. When tenants renew their leases, we typically see reversions in excess of 20% across the board, specifically in markets where there is enormous competition for tenants and large vacancies reported.
In markets such as Rosebank, Illovo and the Corlett node, we see less pressure given the low vacancy figures, and therefore rentals are remaining relatively firm.
Investors have to carefully weigh up the remaining lease term of tenants occupying properties that are being considered for purchase. In order to determine precisely how much the reversion will cost them in value at the point of renewal, a market comparison must be compiled. You don’t want to overpay for something today that will be worth 20% less in 2 years.
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