SA buildings hit by 'ghost vacancies', warns property giant
- Almost 15% of the offices owned by Redefine, one of SA's biggest landlords, are now standing empty.
- The company says that many offices are planning to sub-let empty office space, and that these "ghost vacancies" may further hurt the market.
- Redefine is also worried about Ster-Kinekor, which is in business rescue, given the cost of repurposing its cinemas and the oversupply of retail space in SA.
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South African offices and malls continue to bleed tenants as the pandemic fall-out continues, with a concerning trend in so-called "ghost vacancies" - unoccupied offices which are still being leased by companies.
Redefine Properties, which owns more than 300 large properties including big malls throughout South Africa and office buildings in Sandton, says the vacancy rate in its office buildings is now 14.7%. The vacancy rate has increased by 44% since 2019.
“Consolidation, down-sizing and flexible working continues to adversely impact office demand,” the company said. Many South African office dwellers are still at home almost a year since the country’s lockdown sent them home.
Redefine says the second wave of Covid-19, which only recently started to subside, triggered additional cancellations of short-term contracts. It has also severely impacted co-working businesses with many smaller operators closing.
The US office-sharing giant WeWork, which opened its first African location in Redefine’s Rosebank Link building in 2019, has reduced its occupancy in that building to 62%, while at the 155 West Street building, WeWork now only has 26% of the building.
READ | I spent a day working at WeWork Johannesburg - where R3,000 a month will buy you a desk, unlimited coffee and beer, and breakfasts on Monday
The real rate of office vacancies may also be worse than it seems. Tenants are now putting large amounts of sub-lettable office space in the market as the economy remains weak, Redefine says. These empty offices are not currently counted as vacancies - called “ghost vacancies” - and should put office rent under even more pressure.
Already, Redefine is seeing an average rental reversion rate for its offices of negative 18% - compared to -2% before the pandemic.
A rental reversion rate shows whether expiring leases that were renewed in the past six months had higher or lower rental rates than before. A negative rental reversion rate confirms that rental rates were lower.
To be clear, this is not for the entire portfolio – just for those properties where leases had to be negotiated. In the past six months, this was fewer than 3% of the total area that Redefine is letting out.
But it implies that future renewals may be at lower rates.
The company also says that more tenants now want to restructure existing leases, but its is hopeful that some companies now want workers to return to the office, with “the impact on employee health, collaboration, integration, efficiency, load shedding and productivity (…) driving a desire to return to the office environment”.
The state of malls
Redefine, which owns more than 20 malls in South Africa, including East Rand Mall, says the vacancy rate at its malls is 5.7%, from 4.6% before the pandemic.
Foot count in November and December 2020 was down 14% on 2019 , but retail sales were flat thanks to growth in essential services, “value fashion” and home improvement. Redefine expects more sit-down restaurants are expected to close, and it says trading at Edgars – which was recently bought by Retailability - remains a concern
In addition, Ster Kinekor in business rescue is a concern for the industry due to the cost of repurposing and oversupply of retail space, Redefine says.
It is forecasting that it will have to provide rental relief of R169 million for shopping centres in the coming months (to August 2021). Rent reversion on renewals to January was -13.7%.
Redefine says the trend towards smaller, neighbourhood malls – and away from the large, regional malls - is continuing, with more fashion retailers opening stores in convenience centres. Most retailers are reporting better sales in smaller stores. Regional malls centre foot count is unlikely to recover in the short to medium term, likewise malls located in office nodes, says Redefine.
Its industrial property vacancy rate is 7.3%, but Redefine says that automotive parts and service centres are experiencing an increase in demand as the second-hand car market is expanding.
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