Listed landlord explores novel ways to mop up double-digit office vacancy rate

Increasing office vacancy rates amid a difficult leasing environment is keeping JSE-listed company Redefine Properties awake at night.

Redefine COO David Rice

Redefine Properties released its annual results this week. The Covid-19 pandemic saw distributable income per share decline by 49% to 51.50 cents, from 101 cents last year.

The company saw vacancy rates across its portfolio of 104 office properties in South Africa reach 13.8% by 31 August. Vacancy rates for A-grade offices were in double digits at 14.9%, while Premium-grade (6.5%) and secondary-node offices at 22.6% also reported more empty space.

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A-grade space accounts for 37% of Redefine’s office portfolio, Premium-grade (51%) and offices in secondary nodes, for 12% .

There is also an increase in “shadow vacancy” – space that is occupied but not used – a practice common among corporates with room to spare.

During the reporting period, Redefine sold its vacant building at 22 Fredman Drive in the Sandton CBD.

The company reports that while its co-working building at Rosebank Link, WeWork, is 66% occupied, 155 West Street in Sandton has an occupancy of 26%.

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Office supply will increasingly outstrip demand, thereby increasing vacancy rates, according to the JLL SA Real Estate Market Performance Q3 2020.

The oversupply has led to softening rentals, with initial corrections showing average asking rental compressions of between 10% and 15%, according to the report.

JLL Sub-Saharan Africa research analyst Michael Scott says these average rentals will continue falling as landlords compete for tenants.

Research analyst Michael Scott

“Significant contraction is seen in achieved rentals with lease agreements being signed at 30% below initial asking prices,” says Scott.

Tough leasing environment

According to David Rice, Redefine Properties COO, downsizing of offices will continue to be driven mainly by occupiers’ need to cut costs.

“The office leasing market has become extremely competitive. However, Redefine Properties managed to lease 20 000m2 of office space in the last three months,” he says.

Growth in rental income was 3.2%, with average rental escalations across the portfolio at 7.6%, according to the company.

Rice says the future usage of office space, remote working, co-working spaces and work-from-home is not yet clear.

“Rental levels remain under pressure due to increasing vacancy rates and sub-letting.”

Some buildings in secondary nodes are 100% vacant, and the company will look to dispose of these in due course, he says.

Innovation and key priorities

Redefine is seeking innovative ways to mop up vacancy rates across its portfolio, he says.

Discussions are underway with educational institutions, and health clinics, for example, to get them into their buildings. “Discussions will continue next year,” says Rice.

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Tenants require more lease flexibility, in particular break clauses and more regular rent reviews, according to Rice.

In addition, tenants would consider a lower installation contribution to achieve acceptable rent and escalations.

Rice the company will focus on reducing tenant installation costs by retaining outgoing tenant installations where possible.

The company’s head office will move from Rosebank to West Street in Sandton, he says.

“We will monitor the co-working space performance with a view to possibly grow our exposure to this office model,” he adds.

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