Cape Town Office Market Report

2017 set for rental growth as economy improves, but the city continues to struggle to cater to large occupiers Q4 2016

1 In association with Central Baker London Office Street Market Report Properties | Q3 2016 Overview

Global confidence in the City of Cape While the economy is not out of the Town has reflected in two global rankings, woods yet, any recovery in 2017 will getting the city off to a positive start in only work to boost the Cape Town 2017. Cape Town featured in the Financial office market. The city has also seen a Mail’s FDI Intelligence report, ranking 21 diversification in interested occupiers. in the world for its FDI strategy, Invest Traditionally viewed as the financial Cape Town. Cape Town also featured capital of , Cape Town is 37th in the world as a city where property now attracting many ICT businesses and investors should invest, according to a is one of the largest business process report produced by Wealth X, surveying outsourcing locations in South Africa. investment activity by global high net worth individuals. More than a holiday Although investor and occupier destination, Cape Town’s commitment confidence is strong, one of the major to investing in technology, improved challenges is the lack of large office transport and world-class infrastructure developments that are attractive to has allowed it to attract highly skilled large occupiers. Although the city saw individuals, as well as companies from the completion of almost 90,000m² various sectors from within and outside of of developments in 2016, only two the country. developments were over 10,000m² and none reached 20,000m². This means All this is evident in the city’s office market that Cape Town is likely to continue to performance in 2016. Over the past year, lose large occupiers to Johannesburg. Cape Town has seen growing interest from Is this an opportunity that the city will global occupiers including DSG and the Norwegian Investment Fund, while KPMG pursue in the long run? and EY renewed their commitment to the city. Cape Town’s office vacancy rate sits at 3.1% below the national office vacancy rate. Rental growth is also higher at 8.0%

2 Cape Town Office Market Report | Q4 2016 In numbers

Rental growth Rents falling slowing

Rental growth Rents rade P accelerating bottoming rade A out 7.6%Office vacancies rade B

e rert l

R1,78/m²Grade P rentals

Average capitalisation rate Total stock 9.5% 2,511,937m²

Cape Town Office Market Report | Q4 2016 3 Supply Economic conditions did not dampen While the market had started off with Established office nodes have seen a the outlook for property owners in Cape a development pipeline of just over reduction in vacancies in the quality Town as confidence in the city remained 60,000m² in Q1 2016, this has slowed Grade A and P categories. This remained consistent throughout 2016. Overall, office down to just 31,000m² in Q1 2017. The the trend in Q4 2016, with occupiers stock increased by 2.5% y/y in Q4 2016, number of developments is also smaller, taking up accommodation in the CBD with the rise in stock dominated by Grade and the speculative portions have and Century City. Key deals included P accommodation, which accounted for narrowed in comparison to last year. Vodacom’s occupation of 5,500m² and the majority of new completions in the Nevertheless, this should not be read Innovation’s 4,000m², both in the CBD. year. New developments were dominated as an indication of a decline in investor Century City welcomed MasterCard by Century City, responsible for 40% confidence. Although vacancies have and Derivco among others. As there are of new completions in 2016, a notable remained flat, they are low enough very few office developments presently proportion of these being speculative. for additional developments to be under construction we see this trend of considered. Economic prospects have declining vacancies continuing in the Other areas included the prime node of improved and this should stimulate future short term. the V&A Waterfront and the CBD, together demand. working towards higher rental rates in It is worth noting that, at this time, there Cape Town. New developments have Demand is a shortage of large space options in been well received in the office market excess of 3,000m² in all of the nodes and are either now fully let or enjoying Two key factors drove stronger demand in surveyed. This continues to be a hurdle considerable interest from prospective the Cape Town office market in 2016, the for large occupiers who are keen on tenants. Data from SAPOA indicates first being the conversion of traditional moving into the city. that 88,868m² of new developments office buildings to residential which were completed in 2016. Although lower required some occupiers to relocate. quality accommodation (Grade B and Second is a growing interest in the C) recorded a decline of 20,400m² in city, from both local and international 2016, less than a quarter of the addition occupiers. This allowed all nodes to in accommodation during the year. maintain a relatively low office vacancy However, the vacancy rate in the city had rate despite the notable addition of new not seen much movement. buildings.

Office stock Q4 2016

159 080 6,0%

137 660 6,0%

1387 129 % 55,0 Grade P 828 068 Grade A % Grade B 33,0 Grade C

4 Cape Town Office Market Report | Q4 2016 Office stock growth

60 52.1 50

40

30

20

10 2.5 0 -0.2 -10

Percentage -20 -16.4

rade P rade A rade B rade C

Recently concluded leases

TNS CBD 2,500m² Vodacom CBD 5,500m² Amazon CBD 3,600m² Innovation CBD 4,000m² Randtrust CBD 1,400m² Derivco Century City 2,500m² Mastercard Century City 1,100m² IT Labs Century City 1,100m² Willis Towers Watson Claremont 1,300m²

Source: Baker Street Properties 23,000m²

5 Cape Town Office Market Report | Q4 2016 Issue to watch : Lack of space options over 3,000m² is limiting choice for large occupiers

6 Central London Office Market Report | Q3 2016 Vacancies The office vacancy rate in Cape Town Vacancy rates in both Grade B and C remained at 7.6% in Q4 2016 compared accommodation remain at double-digit to the national vacancy of 10.7% (SAPOA). levels. However, stock in these categories The vacancy rate for Grade P buildings is on the decline as a result of conversions was at 12.0% in Q4 2016, well above the to alternative uses or refurbishments to city average. While Grade P vacancies better office grading. While the relocation have been dominated by Century City of occupiers from buildings such as and the CBD, this will reduce as tenants Triangle House, which is currently being take occupation of their premises on the converted to residential, has contributed back of leases that were signed at the to higher demand in the city, this should end of 2016. It is worth noting that the not be seen as the major driver of Grade P vacancy rate has declined from a demand. peak of 14.9% in Q2 2016. The downward trend is expected to continue in 2017 with The estimated net absorption or take- demand gravitating towards quality office up in accommodation in the city over space. the past year, taking into account new completions and remaining vacancies, is Accounting for the lion’s share of higher than the total loss of stock in Grade accommodation in the Cape, Grade A B and C offices (45,760m² vs 28,404m²). office space maintained a low 5.0% vacancy rate in Q4 2016. Vacancies in this category have also been on the decline, speaking to the broader office market trend.

Vacancy rate

14 12.1 12

10 9.4

7 5. 6 5.3

4 3.1 2.2 2 Percentage

0 Belville Pinelands Claremont Waterfront Cape Town CBD Century City / Newlands

7 Cape Town Office Market Report | Q4 2016 Rental Rates Market Outlook On average, rental rates in the Cape There has been a recovery in rental Town office market saw a robust 8.0% growth following the downward trend y/y increase during 2016, consistent with which began in 2009. This has seen traditional escalation rates. The rise was average Grade A rentals in the CBD dominated by the 9.0% y/y increase in increase from around R110/m² in 2009 to Grade A accommodation, which accounts R140/m² today. Grade P asking rentals in for over half of the office stock in the the CBD are reaching R185/m² and in the city. Encouragingly, the rental growth V&A Waterfront they are asking R235/m² in 2016 falls well above the inflation for newly completed offices. rate, indicative of stable demand in the market, and a more landlord driven Both rental and vacancy trends suggest climate than one might have anticipated. continued rental growth in the Cape Town office market. This will create some The introduction of Grade P buildings optimism for investors as we begin 2017. over the years is also beginning to play a The economic outlook has improved more important role in the city’s average from 2016 which is likely to further rental growth rate. Grade P buildings stimulate demand. closed the year on an average rental rate of R178/m², well above the Grade A average rental rate of R150/m². While prime quality accommodation only accounts for 6.0% of total office stock in the city, it is important to note that stock of this kind is on the rise and will likely result in an overall upward shift in the city’s average rental rates.

Cape Town office rental rates

200

10

160

140

120

100

0

60 40 rade 20 rade rade R/m² 0 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016

8 Cape Town Office Market Report | Q4 2016 Grade A office Rentals

Waterfront Century City Bellville Cape Town Pinelands Rondebosch Claremont Cape Town International Airport

9 Cape Town Office Market Report | Q4 2016 Contact us JLL South Africa Johannesburg 3rd Floor, The Firs Cnr Biermann & Cradock Ave Rosebank, South Africa, 2196 Phone: +27 11 507 2200

With other regional offices in Dubai, Abu Dhabi, Riyadh, Jeddah, Al Khobar, Cairo, Casablanca, Lagos and Nairobi

Tom Mundy Head: Research, Sub-Saharan Africa [email protected]

Zandile Makhoba Head: Research, South Africa [email protected]

Dave Russell Director: Commercial Leasing and Sales

Baker Street Properties Cape Town [email protected] +27 21 461 1660 www.jll.co.za www.jllpropertysearch.co.za

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