CHAPTER 4: JOHANNESBURG INNER CITY DEVELOPMNET TRENDS 4.1 INTRODUCTION This chapter aims to provide an effective overview of development trends associated with the Johannesburg Inner City over the past few years. This provides background context of the area in which the proposed BRT system will be located and function. 4.2 JOHANNESBURG INNER CITY IN CONTEXT The Johannesburg Inner City forms part of Administrative Region F, within the City of Johannesburg Metro. Region F is bound by Killarney Ridge in the north, Regions E and B and the Ekurhuleni Municipality to the east, the Klip River to the South and to the west by Regions D and G. The region includes Southgate, Fordsburg and Mayfair. It combines Johannesburg s inner city and lower density residential areas to the east of the city centre. The higher density suburbs of Berea and Hillbrow are to the northeast and the areas of Newtown, Fordsburg, Pageview and Vrededorp to the west. The Region is an area of contrast; it ranges from degraded residential areas such as Bertrams and the more stable commercial suburb of Braamfontein, to the affluent middle and upperincome suburbs of Glenvista, Mulbarton and Bassonia along the region s southern boundary. The central area has a vibrant street life, with an estimated one million commuters passing through the inner city daily. It functions as a regional shopping node for residents from around Johannesburg and visitors from other African countries. The Region is well integrated with the surrounding urban areas. All major arterials originate from this area and radiate out into other parts of the city. The main railway stations, bus terminuses and large taxi ranks are also situated within the inner city. Key issues pertaining to the inner city is vested in the regeneration efforts: to raise and sustain private investment, leading to a rise in property values. Key focus areas include: Addressing city blight, degradation of buildings and physical deterioration of service infrastructure Decreasing high levels of crime and lack of security Reversing the flight of office workers and users to suburban nodes Addressing physical degradation of public areas caused by litter and decay Upgrading the areas to stop the decline in rentals and property values Decreasing illegal occupation and land invasion in residential suburbs and vacated buildings Paying attention to the increasing presence of immigrant entrepreneurs and associated xenophobic tendencies. 74
4.3 JOHANNESBURG INNER CITY TRENDS AND DYNAMICS Economic development: Estimated 8 704 formal businesses within the Johannesburg Inner City R87 billion annual turnover from these businesses as estimated from RSC levies 7.0 million square metre of floor space 3.0 million square metre of office floor space 2.15 million square metre A & B grade office space Approximately 160 000 jobs Host to major corporations and growing array of SMMEs Secondary centre for back office data processing Place of cultural productions, consumption and training Vibrant wholesale and retail trade Centre of legal administration Site of returning small manufacturing Commercial core is shrinking as residential components are moving into the core providing increased community income CBD dominates as office node within JHB with the largest productive floor area 2.2 million gross leasable floor area Institutional investment decreased from 9.3% to 2.0% over the past few years Declining vacancy rates emphasis on A & B Grade office Space C & D grade office space (1.6 million square metres) is underutilised, often abandoned, invaded or prone to slumlords, and illegal conversions. Nett take up of office space amounts to approximately 50 000m 2 per annum Rentals have increased by 15% over the past three years although from a low base Property transfers and the value of property transfers increased from 1996 Areas with highest number of property transfers include: Jeppestown, Bellevue, Yeoville, Johannesburg CBD, Berea, City and Suburban, Vredesdorp and Troyeville. Number of Transactions Source: Urbaninc Analysis Value of Transactions Source: Urbaninc Analysis 75
Figure 4.1: Number of property transactions per suburb Source: Urbaninc Analysis Estimated 10 000 informal street traders annual turnover of R4.2 billion Management by MTC and CJP Markets include: Metro Mall, Faraday, Kerk Street, Quartz Street, Hoe Street, Park Station and Noord Street Highest concentration of informal trade along Bree, Plein, Jeppe, King George and Noord Street 400 000 to 500 000 cross border shoppers annually contribution between R10 and R17 billion towards the City s economy Garment industries are concentrated in the so-called Fashion district More than 100 fashion related business and this number is growing on a monthly basis 32 properties with a combined floor area of over 120 000m 2 and combined value of over R30 million Fashion district currently accommodates 200 firms, employs 1 000 workers and generates an annual turnover of R120.0 million Jewel city operates as a secure enclave for the diamond industry 3 interlinked adjacent buildings house the Diamond Bourse, SA Diamond Board and Diamond Foundation Currently fully let with about eighty on waiting list 46 rough dealers, 44 manufacturing firms and 58 polished dealers within Jewel City Houses 66% of Gauteng s diamond cutters, 54% of diamond polishers, 48% of its rough diamond dealers and two training colleges Jewel city tenants employ 3 800 people monthly turnover approximately R11.0 million Residential Development Approximately 35 000 residential units in the inner city with overcrowding placing increased strain on current infrastructure New residential projects are being completed within the inner city with increased focus on the middle to higher income market Population growth not matched by the provision of schools and public facilities Approximately 120 people move into Johannesburg each day Private sector investment since 1996 results in 10 000 units and R2.0 billion investment Future estimations based on new projects approximately 4 950 units. 76
Public Space, Arts and Culture 4 500 new theatre seats opening in Jhb this year resulting in increased competition for the Inner City 2007 there were plans for 13 Broadway Musical Productions in Johannesburg more than any other city apart from New York and London 14 and 6 million were respectively invested in the Market and Windybrow Theatres in 2007/2008 Significant increase in attendance with emphasis on the Bassline Significant decrease in daytime visitors, whereas evening audiences increased Private sector taking responsibility for the upgrade, management and maintenance of public space: Civic Park Braamfontein, Braamfontein streetscape, Main Street, Gandhi Square, Fox street, Fashion Square, FNB Block, ABSA Campus, Std Band Superblock and Anglo Main Street. Transportation 1.6 million live within 1.5km radius of a station 80% of rail users walk to and from stations Rail use in inner city declined between 2001 and 2005 from which it stabilised Increased use of taxi transport more door-to-door convenience 285 000 commuters use core Inner City rail network on daily basis Proposals for the closure of Ellis park Station and upgrade of Doornfontein/a new site between the two in line with 2010 specifications Will link with BRT stop sand housing densification in the area Stations include Braamfontein, Park Station, Ellis Park, Doornfontein, Jeppe and Langlaagte 72% of all public transport trips are by taxi Estimated 12 350 taxis supported by 39 informal minibus taxi holding facilities in the inner city, and 14 formal holding facilities, and 7 formal long distance holding facilities Inner City Gautrain station cost R100 million and will accommodation 31 170 passengers per day. Urban Management, safety and security Open Air Parking in inner city amounts to 9 731 bays, formal parking garages built since 2005 amounts to 7 552 parking bays Number of preventative actions with respect to bad buildings Development of the Better buildings programme (run by CJP) CIDS have driven urban management over the past ten years In excess of R16 million/annum in levies contributed by private sector to public environment maintenance and upgrade Noticeable decrease in crime since CCTV installation in the inner city Lack of sufficient numbers of staff for effective visible policing results in increased private sector involvement. Social Development Increase in educational facilities, pre-school and day care facilities - High demand results in large classes Medical clustering has become a noticeable trends currently 9 primary health care clinics and one community health centre 17 CBSs and FBOs exists that supports people with HIV/AIDS Estimated 3 500 homeless in the inner city of which 550 represents street children Inner city also remains a reception point for migrants from SA and other continents 77
Inner City includes a high proportion of people with better than average education and income on the one hand and on the other a high proportion of people with little or no education. 4.4 JOHANNESBURG INNER CITY REGENERATION The inner city is characterised by a large resident population and over 800 000 commuters passing through the inner city every day. It is one of the busiest parts of Johannesburg and brings with it the problems of over-crowding, crime and grime. To get people to stay in the area these aspects should be addressed and a balance should be created between social and economic opportunities. Community facilities should be provided ensuring that the residents are not just merely prisoners in a house. The Johannesburg CBD business node represents the largest part of the inner city and represents the traditional city centre of metropolitan Johannesburg. It is the largest central business district in South Africa. Its importance is rooted in its history related to the gold rush; it has been home for financial institutions, banking, government institutions and mining companies. In the 1990s a number of prime tenants decentralised and resulted in the mass movement of many national tenants out of the CBD. Although decentralisation affected the vacancy levels within the CBD a number of still important tenants have remained within the CBD: Gauteng Government and Legislature, mining institutions such as Anglo America, Transnet, Standard Bank, ABSA, SAPPI, Chamber of Mines, Vodacom Call Centres, Liberty Life, SA Breweries etc. Despite the decentralisation trends that took place towards external nodes such as Sandton several major tenants have remained - including ABSA, AFHCO, AFFIN, Atterbury, Apexhi/Broll Properties, Aengus Properties, City Properties, iprop, JD Group, Jozi Housing, JHB Land Company, Liberty Properties, Old Mutual Properties, Standard Bank, SAPPI, Investec Properties, Chamber of Mines, Anglo American, Liberty Life, FNB, SA Breweries and a number more. With the regeneration and redevelopment initiatives that took place a number of corporate have moved back to the inner city including Anglo Ashanti, Vodacom Call Centres and Zurich Insurance Properties. Map 4.1 indicates the property ownership within the inner city. Several mega projects were undertaken over the past few years such as the Mandela Bridge, the Newtown Precinct and Constitution Hill. The city is a dynamic place offering a mixed use environment that has in recent years been attracting high income residential developments which are conversions of degenerated office properties into loft style apartments. However, the majority of residents are from a lower income population and it is viewed that this population segment represents an important driving force of the CBDs functionality. Park Station railway station, coupled with the Noord Street Taxi Rank, is one of the largest public transport hubs in the country. Park Station will also be one of the stops of the Gautrain resulting in positive spin offs for the property market in the inner city. 78
Map 4.1: Johannesburg Inner City The Urban Development Zone incentive has been introduced to attract investments into the CBD. UDZ applicability incentive comes in the form of an accelerated depreciation deducted from the UDZ eligible taxpayer s taxable income thus reducing the taxpayer s payable tax. Deduction is applicable in respect of: Erection, extension or improvement of or addition to an entire building Erection, extension, improvement or addition of part of a building representing a floor area of a t least 1 000m 2 The purchase of such a building or part thereof directly from a developer on or after 8 November 2005 subject to certain requirements. Features of the UDZ Renewal Tax Incentive the incentive differentiates between new building construction and refurbishment of existing buildings. Improvement of an existing building or part of deductable amounts are equivalent to 5 year straightline depreciation or: 20% of the cost of improvement of the building in the year of assessment during which the buildings i bought into use by the taxpayer solely for the purposes of trade; and an amount equal to 20% of the cost in each of the four succeeding years of assessment provided that the person does not cease to use the building or that part of the building solely for the purposes of trade. Erection of a new building deductions computed as follows: 20% of the cost of either the erection or extension of or addition to the building in the year of assessment during which the building is brought into use by the taxpayer solely for the purposes of trade; and 5% of the cost in each of the 16 subsequent years of assessment provided that the person does not cease to use the building or that part of the building solely for purposes of trade. The incentive covers all construction costs related to the erection, extension, addition or improvement of UDZ situated buildings. In respect of purchased buildings the amount that will be deemed to constitute 79
eligible costs amount to 55% of the purchase price of the building or part thereof in case of new building and 30% of the purchase price of the building in case of building improved by developer. The CBD still remains the largest single office node in the country with 1 637 473m 2 GLA. The CBD also enjoys a variety of retail outlets from malls to street front retail and informal trade. The Metro Mall is one of the latest developments aimed at providing retail space and space for an informal trader s market linked to bus and taxi facilities. The largest portion of the initial estimated retail space of approximately 700 000m 2 is located on street level with the dominant shopping centres represented by the Carlton Centre, Metro Mall and The Bridge Shopping Centre. The node is also characterised by the following market strengths and risks: Committed investment by banks, government and mining tenants Property conversion and demand for property resulting in positive impact on vacancy levels Urban Tax incentives have driven more investment into the CBD Strong local government and Gauteng initiatives drive developments in the CBD Crime and grime still affects some parts of the city Parking is still a problem. A number of successes have taken place within the Inner City under the co-operation of the City of Johannesburg Council, Central Johannesburg Partnership (CJP), Kagiso Urban Management (KUM), Johannesburg Development Agency (JDA), Blue IQ and a range of other stakeholders. Just to reflect on some aspects: The CJP has managed to turn around a number of inner city areas and has boosted the number of legislated city improvement districts to a total of 14. It was also transformed into Kagiso Urban Management. Blue IQ has contributed towards the development of Constitution Hill (R375 million) and Newtown (R299 million) contributing to the marketing of the business opportunities vested in these projects JDA involved in number of projects Newtown, Braamfontein, Constitution Hill, Drill Hall, the Fashion District, high Court precinct, Main Street Upgrade, Metro Mall, Mary Fitzgerald Square, Faraday Taxi Rank, Nelson Mandela Bridge. Inner City Improvement Districts - Examples Fashion District comprise 26 city blocks, hosts more than 100 fashion-related businesses home to established designers such Clive Randell. Fashion core consists of 32 properties with combined floor area of over 120 000m 2 and combined value exceeding R30 million. The larger commercial buildings have high vacancy rates of between 35% and 65%. Many buildings have been completely vacated above the ground floor retail use. 80
Retail Improvement District - Consists of five city blocks in the main retail area of the inner city. RID boasts retail outlets such as Edgars, Woolworths, Game, Truworths, Foschini, Markhams, Green and Richards, Lewis, Cuthbert s and many more. RID operational since June 1997. South Western Improvement District - Characterised by financial institutions and corporate head offices, legalised in January 2004. It covers 24 blocks in the south-western part of the city and incorporate the Standard Bank Superblock Complex and the head offices of various organisations including Chamber of Mines, BHP house, Rand Club, Samancor, Anglo Platinum, Anglo Operations, South African Revenue Services, national Union of Mine Workers, National Government, Provincial Government, etc. Central Improvement District - Covers 25 city blocks and legislated in 2003. Incorporates the landmark Carlton Centres, with Transnet head office as the main occupier of the 50 storey office tower, small street retail shops, the Kine Centre building, FNB home loans in the Colleseum building, Ghandi Square Bus terminal, National Education and Health, two hotels and approximately 300 shops. More than 12 000 people work in the district in 238 000m 2 of office space and 71 524m 2 retail floor space. In terms of residential accommodation it is also evident that at least R2 billion has been invested in the market over the past five years, contributing at least 10 000 new or refurbished units, and another R3.0 billion has already been identified as known projects planned for the next few years: Jeppe-Bree-Plein Corridor focus for the provision of middle income residential, as well as Braamfontein (latter also caters for higher income bracket) Area west of Rissik Street and between Commissioner and Anderson Streets 850 to 1 000 units are in various stages of development Newtown Brickfields Project 742 units for middle income category, Central Place and at the Majestic site higher income category, 43 units developed and sold in Quinn street, The Sidings and development west of Quinn Street will bring a further 440 units to the market. The pace of refurbishments, conversions and upgrades in higher density areas such as Berea and Hillbrow have not been as active as expected. Aspects leading to the development of the Inner City Regeneration Charter Mid-1997, President Thabo Mbeki launched a new Vision for the Inner City Golden Heartbeat of Africa This has evolved in the development of the following concrete strategies and plans: Inner City Economic Development Strategy 1999 Inner City Spatial Development Framework 1999 City Centre Development Framework 2000. These plans have guided the work of the Inner City Office established in 1998. Initiatives included Constitution Hill, Newtown, Joubert Park Precinct Pilot Project and the Better Building Programme. The ICO was institutionalised into the Johannesburg Development Agency. Table 4.1: Total number of potential properties identified under the Better Buildings Programme Area No of Potential Properties Per Area Approximate Arrears Per Property Berea 283 58.5 million Bellevue 215 15.3 million Bellevue East 163 14.1 million Braamfontein 192 25.2 million Bertrams 126 28.3 million City and Suburban 18 23.5 million Doornfontein 45 16.0 million Doornfontein Farm Portion 36 10.2 million Fairview 99 15.4 million Judith s Paarl 81 11.0 million Jeppestown 278 41.1 million Johannesburg 579 338.9 million 81
Area No of Potential Properties Per Area Approximate Arrears Per Property Marshalldtown 96 20.9 million Newtown 80 19.4 million New Doornfontein 125 14.2 million Troyeville 177 26.5 million Yeoville 429 35.0 million Hillbrow283 460 235.9 million Total 3 482 R949.4 million Source: CJP, 2008 In 2000 more importance and urgency were placed on inner city regeneration which led to the development of the Inner City Regeneration Strategy of 2003 and an Inner City Regeneration Strategy Business Plan in 2004. Under the JDA a number of initiatives were successfully implemented: Constitution Hill, Newtown redevelopment including the Mary Fitzgerald Square, Fashion District upgrade, the Main Street Upgrade, Metro Mall and the Faraday Taxi Rank, upgrading of Braamfontein, Nelson Mandela Bridge etc. These initiatives were successful due to the fact that it was planned and implemented in conjunction with stakeholder and partners from government, business and civil society. Private Sector Investors also took the lead with reference to the City Improvement Districts. This situation was furthermore strengthened by the positive impacts of the Urban Development Tax Zone. The challenge going forward is to scale up regeneration efforts to ensure more rapid, even and sustained positive impacts on the entire Inner City. This has led to the development of the Inner City Regeneration Charter July 2007. The charter focuses on the future of inner city as a place that: Will be developed in a balanced way in order to accommodate all people and interests Which remains as the vibrant business heart of Johannesburg as a whole, but which balances future commercial, retail and light manufacturing development with a large increase in residential density Which works as a key residential node where a diverse range of people from different income groups and backgrounds can have their residential needs met Be a place where people want to stay because it offers a high quality urban environment with available social and educational facilities, generous quality public open space and ample entertainment opportunities Which serves as both the key transportation transit point for the entire Gauteng Region, as well as destination point for people to want to walk in the streets Where the prevailing urban management, safety and security concerns are a thing of the past. Overall the focus is to create an inner city that is well managed, safe and clean. The focus areas of the Charter include: Urban Management, safety and security responding to the unique challenges presented in different areas. Focus on urban management planning and reporting, by-law enforcement and education, waste management, visible policing, improved surveillance technology, addressing of bad buildings and underlying issues, disaster management and liquor outlets. Public spaces, arts, culture and heritage focus are on parks, playgrounds and other public areas, creation of walkable streets and public environment upgrade, contributing to iconic public places to reach its full potential, creation of a coherent visual city landscape, promotion of public events and public art, improving development of the arts and culture sector connections and networking, profiling the inner city as a cultural capital, improving 82
the programme of arts and culture offerings, supporting arts and culture production and protecting the heritage of the city Economic development focus on addressing street trading, improvement of access to broadband telecommunications, targeted support to key economic sectors (business process outsourcing, cross-border shopping, hospitality and tourism, fashion, arts, culture and entertainment etc.), intensifying UDZ marketing to ensure broader take up, targeted support to key economic anchors and area focused regeneration, creation of supportive built environment, improved data and information made easily available to investors interested in the inner city Community development support to NGOs, CBOs and FBOs driving carious community initiatives, address the needs of the vulnerable groups (street children, aged, orphans, vulnerable children, destitute, homeless, abused etc), support to early childhood development, conditions faced by migrants and refugee populations, development and implementation of sports and recreation facilities and programmes, access to health facilities and health care, access to advice, education and training and information through library facilities, community pride, human rights and political voice Transportation development of buss rapid transit, development of Park Station Precinct into international transit and shopping centre, upgrade of commuter rail, addressing parking problems, addressing taxi-ranking and holding facilities, improving mobility and reducing congestion, promoting transportation and traffic safety Residential development implementing the Inner City Housing Plan, getting the basics right, getting the basics right, focus on emergency and transitional accommodation, incentives for inclusionary housing, access to social packages, support to the Better Buildings Programme, Promotion of ownership options and sectional title support, improvement districts in residential areas, accelerated programme of hostel upgrading require and measures to prevent informal settlement development and expansion. It is anticipated that this will contribute to increased levels of inner city upgrades and redevelopment extending the successes currently taking place within the inner city. General progress in the inner city Neil Fraser indicated the following progress which, which have taken place within the inner city over the past year: Newtown: Conversion of Turbine Hall into Anglo Gold Ashanti s Corporate headquarters is coming to an end and the company has moved in SAB World has just completed a R20 million upgrade to its facility The crane on the Sci Bono extension site is also working again The JDA moved into its new building quite some time ago in the Bus factory Refurbishments of the office block into residential flat in Quinn Street has been completed now called The Newtown Work has also begun on the second of the old Premier Millings office buildings The proposed residential project named The Sidings has not yet started A hoarding has gone up at a site just southwest of the Brickfields Project The Moving into Dance facility should begin this year, as should a number of other refurbishments and renovations. Deal on the Transport House development no signed and sealed hotel, residential accommodation and retail No movement taking place at the Majestic Site Opposite Transport House the Moving into Dance Mophatong is well under way Carr Street development set for huge development including hotel and major retail initiative Number of developments was restricted by the heritage impact. Chinatown: 83
Urban Design Framework has been approved a few years ago however nothing has happened since then. South of Chinatown: Work is progressing on the new office block on Diagonal Street, the refurbishing of 11 Diagonal Street and the AA building is proceeding as is the Franklin. First commercial office building development in the inner city over approximately 20 years In Ferreirasdorp excavations and foundations are proceeding at pace on the new headquarters for the Zurich Insurance Group Anglo American Corporation s parking garages has been completed and operational Four Star sectional title development the Mapungubwe Hotel Apartments previous French Bank Building completed A number of residential refurbishments from office space took place in the following buildings Isibaya House, Loveday Place, Harrison Place, Dogon, Ashanti. Provincial Government precinct: Nothing appears to be happening around the provincial government precinct Rissik Street Post Office continues to degrade The Barbican reflects continuous neglect Parking areas around it however are to be redeveloped hopefully in 2008 Refurbishment of buildings on the corners of Rissik, Market and Commissioner Streets is under way Aegis/St Andres buildings into residential/hotel accommodation Nothing is happening at the CNA/Shakespeare House complex opposite it seems to be abandoned by developer There is no more news on the sale of the Carlton Centre but it is anticipated that something might happen in 2008 Carlton and Southern Sun Hotels remain vacant West of the Carlton Centre there is a great deal of refurbishments going on Office building that replaced the Grand Old Colosseum building is about to be refurbished into 400 flats Another building diagonally opposite the Carlton has already been sold and will be converted into residential accommodation Buildings on the southern side of Ghandi Square have been upgraded and new fast food and coffee shops reflect new success Behind the square is the wreck of the old police barracks Braamfontein Alexander Theatre re-opened a few months ago New street art has been erected on the Juta Street Corner A lot of residential refurbishment of buildings has taken place over the past year or so and at least one Greenfields project Bridgeview has started construction 400 residential units Anticipated to see more residential development Dunwell and Softstone properties New Metro Centre visitors building looks as though it is ready to be occupied. Constitution Hill Exterior of the fort is making progress and the construction of light towers over the two western retained sections of the Awaiting Trial Block New art work underway on the paving at the square in front of the Court Some additional work to ramparts and walkways to begin soon Limited work to make it a major national and international heritage site has started. Hillbrow Bulk of upgrading work at the Hillbrow health precinct appears to have been completed Final stage of parking, lighting and landscaping to be completed in 2008 Massive effort to upgrade Hillbrow, Berea and Yeoville to be launched soon Sectionalised Ponte Flats have been sold out Legal Precinct The public environment around the high court legal precinct is underway but progressing very slowly Fashion Precinct 84
Fashion Kapital advancing very slow delayed due to heritage and construction difficulties Limited amount of pavement upgrade has taken place Number of residential blocks has been refurbished in the area. ABSA is progressing well in terms of the construction of its massive R1.1 billion block East of the ABSA campus there is further upgrading of the public environment Jewel City - R11 million upgrade public private sector approach talk of expanding jewel City Greater Ellis Park Work is well underway - work on the Northern Gateway and Simert/Sivewright roads progressing Parts of Bertrams also to become a focus area in the near future Area below New Doornfontein reflect a number of residential and housing projects progressing around the Ellis Park precinct Conversion of 120 End Street from offices to residential will represent 924 flats, 6 000m 2 shopping centre, 500m 2 gym and 400m jogging track Previous Checkers building converted to 330 residential units Purchase Lace conversion into 440 residential units. 4.5 JOHANNESBURG INNER CITY PROPERTY MARKET TRENDS 4.5.1 Advantages of the Johannesburg Inner City: The inner city is well placed to attract and hold tenants, to the betterment of property returns. Rentals are competitive and particularly attractive for emerging businesses Various new projects are underway through Blue IQ, JDA, Propcom, Private Landlords and investors etc. Johannesburg has always been a one stop destination for people especially those depending on public transport Urban revitalisation are an ongoing trends meeting the needs of tenants and residents Demand stems from the black emerging class, professional services and the arts/design sectors. From a retail perspective there is a broad mix including nationals such as Foschini, Mr Price, Truworths, Game, Clicks, Woolworths, Ackermans, Jet, Charlie Parkers and Edgars. The rejuvenation efforts has drawn public and private sector investment Standard Bank, FNB, large retailers, and the investments into residential conversion by the developers Urban Ocean, renewed commitment from large parastatals, mining giants and banks. Johannesburg inner city characterised by 7.0 million square metre of floor space - 3.0 million square metre of office floor space 2.15 million square metre A & B grade office space This floor space is available in sizes ranging from 15m 2 to 2 000m 2 There is a big demand by retailers for good well located premises but very limited supply exists. The retail box of opportunity can be defined by Wolmarans Street, Von Wiellig, Commissioner, Sauer, Bree, Jeppe, Eloff, King George, Noord, Joubert and Wanderers. 4.5.2 Local Development Perspective Table 4.2 provides a snapshot of how the property market has performed over the past four quarters by comparing the latest information (quarter 2008:1) with that collected a year earlier. This is supported by Table 4.3 indicating the typical buyer profile within the market. 85
Table 4.2: Snapshot of South African Property Market, 2008:Q1 Prime CBD office Rentals Nominal Growth Real Growth Johannesburg 22.3 1.7 Pretoria 42.5 18.4 Durban -4.8-20.8 Cape Town 27.7 6.2 Prime Decentralised Office Rentals Sandton CBD 27.1 5.6 Randburg Ferndale 16.5-3.1 Brooklyn/Waterkloof 9.1-9.3 Hatfield 14.7-4.6 Berea (Durban) 18.0-1.9 La Lucia Ridge 15.5-4.0 Claremont (Cape Town) 18.9-1.1 Tyger Valley 9.8-8.7 Prime Industrial Rentals Central Witwatersrand 27.0 5.6 East Rand 28.0 6.4 Pretoria Metro 3.6-13.9 Durban Metro 21.9 1.3 Cape Peninsula 23.6 2.7 Port Elizabeth 14.3-4.9 House Prices (all classes) Johannesburg Metro 10.0 0.7 Pretoria Metro 7.7-1.4 Durban Metro 7.4-1.7 Cape Town Metro 7.9-1.2 Port Elizabeth 10.0 0.7 Flat Rentals (Standard quality, 2-bedroom) Johannesburg Metro 38.7 15.3 Pretoria Metro 6.8-11.3 Durban Metro 11.2-7.6 Cape Town Metro 2.7-12.1 Port Elizabeth 9.2-9.2 Source: Demacon Ex. Rode, 2008 Table 4.3: Typical Buyers of Property Type and Size, Means for 2008:Q1 Shopping Centres Purchase price below R10 million Purchase price above R10 million Institutions 18.6 30.0 Syndicators 23.8 18.4 Listed Funds 17.5 49.9 Private Investors 51.7 15.5 Owner-occupiers 17.0 6.0 Offices Institutions 10.8 23.4 Syndicators 20.7 16.2 86
Purchase price below R10 million Purchase price above R10 million Listed Funds 16.9 47.7 Private Investors 43.1 14.2 Owner-occupiers 34.5 13.9 Industrial Institutions 11.5 21.2 Syndicators 13.3 16.4 Listed Funds 13.9 39.7 Private Investors 35.9 23.9 Owner-occupiers 50 18.4 Source: Demacon Ex. Rode, 2008 It is evident from Table 4.3 that private investors are the most likely buyers of lower-priced shopping centres and office properties, while lower-priced industrial properties are most likely to be bought by owner occupiers. Properties with a market value of more than R10 million, whether a shopping centre, an office block, or an industrial building, are most likely to be purchased by listed funds. The second most likely buyers of these properties are institutions. RETAIL MARKET DEVELOPMENT PERSPECTIVE Prognosis for the economy The latest data released by Statistics SA indicates that retail sales have lost some momentum in recent months. During the third quarter of 2007, real retail sales were up by 6% on a year earlier, down from annual growth rates of 7% and 9% in the second and first quarters. Consumers confidence levels also reflected a marginally declining trend since the first quarter of 2007 The index of consumer confidence, compiled by the BER on behalf of FNB, declined in the second and third quarters of 2007, after reaching a historically high level in the first quarter. Consumers have come under pressure over the last year or so, mainly as a result of higher food and fuel prices, higher interest rates and tighter credit rules. Adding to this situation is the widening current account deficit which could result in a drop in the value of the rand, which could feed into inflation and, consequently, higher interest rates, resulting in a further waning of consumer confidence, spending and retail sales. This could impact negatively on retail trading densities, the demand for shop space and market rentals. New shopping centres Table 4.4 indicates the breakdown of new shopping centres larger than 5 000m 2 that are either completed or under construction within the various South African towns. It also includes major extensions exceeding 5 000m 2. 87
Table 4.4: New Shopping Centre Completions (m 2 ) new and extension larger than 5 000m 2 2005 2006 2007 2008 Cape Peninsula 189 000 47 812 13 500 42 200 Durban 27 000 39 300 26 900 67 000 Port Elizabeth 15 000 0 0 0 Pretoria 66 272 124 500 55 000 52 000 Pietermaritzburg 0 24 200 0 0 Reef 104 552 145 171 287 534 204 500 Other 130 223 271 900 183 380 199 881 Total 505 047 652 883 566 314 565 581 Source: Demacon Ex. Rode, 2008 The data suggests that nationally the square meterage of new shopping-centre completions in 2008 will be similar to 2007. This reflects that from 2005 to 2008 more than 500 000 m 2 of retail space per year will have been completed, with no sign of abating. This is not good news for owners of shopping centres in the light of slowing consumer spending. Nevertheless, from statistics on buildings completed during the 12-month period ended September 2007 it would seem that over the last year most of the activity, in terms of the square meterage completed, was on the office and industrial fronts. As far as building plans passed for retail space is concerned, the acceleration in plans passed seems to suggest that there might still be some strength left on the shopping-centre development Market rentals for street-front shops Street-front shop rentals continued to move sideways during the third quarter of 2007, the only exceptions being the Pretoria and Port Elizabeth CBDs, where street-front shop rentals grew by 6.5% and 6.0% respectively. The poor performance of street-front shops in general is the result of decaying inner cities In the case of Port Elizabeth, the better performance could be ascribed to the ongoing upgrade of Govan Mbeki Avenue. Pretoria s CBD is also known to be doing relatively well due to the strong support vested in state departments remaining within the CBD and the consequent growing spending power there. Table 4.5 indicates the Street Front Shop Rental Index for the Johannesburg CBD and decentralised areas compared to national data. This is supported by Tables 4.6 and 4.7 indicating actual street front shop rentals and shopping centre rentals within the Johannesburg Inner City. From Table 4.5 it is evident that the Street Front Shop Rental Index for the Johannesburg CBD and Decentralised areas has remained constant over the past number of years, compared to the national figures that reflected slight increases and decreases over time. In terms of actual market rentals it is evident that street front retail floor space of 50m 2 moved between R175 and R300 per month, 100m 2 moved between R175 and R300 per month and 500m 2 of floor space moved between R155 and R250 per month. Retail centre floor space in general moved between R90 and R215 for 50m 2 and 100m 2 floor space, and between R85 and R160 for 500m 2 of retail floor space. 88
Table 4.5: Street Front Shop Rental Index Based on 100m 2 premises, 1995:1 = 100 05:01 05:02 05:03 05:04 06:01 06:02 06:03 06:04 07:01 07:02 07:03 07:04 08:01 Johannesburg CBD 114.2 114.2 114.2 114.2 114.2 114.2 114.2 114.2 114.2 114.2 114.2 114.2 114.2 Decentralis ed 111.4 111.4 111.4 111.4 111.4 111.4 111.4 111.4 111.4 111.4 111.4 111.4 111.4 National CBD 152.3 153.0 153.0 152.1 153.3 151.0 152.6 149.9 149.5 152.6 157.2 157.7 165.1 Decentralis ed 148.6 148.2 148.3 148.7 150.1 152.9 152.9 152.9 154.2 154.3 154.1 155.8 163.0 Source: Rode, 2008 Table 4.6: Street Front Shop Rentals, 2007:Q4 Street Front Shop Rentals - 2007:Q4 Size Midpoint Low High Station District (Eloff, Klein, Jeppe & North) Malls Area (Eloff, Small, Commissioner & Kerk) Library Area ( Commissioner, Sauer, De Villiers, Joubert) Hawker Trade Area (Von Wielligh, Commissioner, Nugget, President) Stock Exch (west, Sauer, Pritchard & Bree) Source: Rode, 2008 Table 4.7: Shopping Centre Market Rentals Carlton Centre 50m 2 185 120 250 100m 2 185 120 250 500m 2 175 100 250 50m 2 300 250 350 100m 2 300 250 350 500m 2 250 200 300 50m 2 200 150 250 100m 2 200 150 250 500m 2 175 150 200 50m 2 200 150 250 100m 2 200 150 250 500m 2 175 150 200 50m 2 175 150 200 100m 2 175 150 200 500m 2 155 110 200 Retail Centres - Market Rentals Size Midpoint Low High Ground Floor 50m 2 215 180 250 100m 2 215 180 250 500m 2 160 120 200 First Floor 50m 2 125 100 150 100m 2 125 100 150 500m 2 100 80 120 Second Floor 50m 2 110 100 120 Newgate 100m 2 110 100 120 500m 2 100 80 120 Ground Floor 50m 2 135 120 150 100m 2 135 120 150 500m 2 110 100 120 First Floor 50m 2 90 80 100 89
Source: Rode, 2008 Retail Centres - Market Rentals Size Midpoint Low High Retail Capitalization rates 100m 2 90 80 100 500m 2 85 75 95 Regional-shopping-centre capitalization rates in the Central Witwatersrand, Cape Town, Durban and Pretoria regions generally moved sideways during the third quarter of 2007 On average, investors required a minimum income return (capitalization rate) of roughly 8% in these major metropolitan areas. The best and largest shopping centres could nevertheless command cap rates of around 7%. Community and neighbourhood shopping-centre capitalization rates could be bottoming out. This is most likely in response to the confusion of interest-rate hikes experienced recently. Despite this, in the metropolises, community-shopping-centre capitalization rates still hovered around the 9% mark, while for neighbourhoods they were closer to 10%. Figure 4.2 indicates the changes in retail cap rates for the Witwatersrand Area, this is supported by Table 4.8 also indicating cap rates for street front properties. Figure 4.2: Witwatersrand Retail Cap Rates, 2005:Q3 to 2008:Q1 14.0 Witwatersrand Retail Cap Rates Percentage (%) 12.0 10.0 8.0 6.0 8.4 9.8 9.3 8.0 10.1 8.8 11.1 9.7 12.0 12.0 11.1 9.5 4.0 2.0 - Super Regional Regional Community Neighbourhood Local Convenience Retail Warehouse 2005:Q3 2006:Q3 2007:Q3 2007:Q4 2008:Q1 Source: Demacon Ex. Rode, 2008 Table 4.8: Capitalisation rates (%): Shopping Centres Means for 2005:Q3 to 2008:Q1 Retail Centres Retail Centres 2005:Q3 2006:Q3 2007:Q3 2007:Q4 2008:Q1 Super Regional 8.4 7.0 7.8 7.8 9.8 Regional 9.3 8.0 8.0 8.0 8.0 Community 10.1 9.3 8.6 8.6 8.8 Neighbourhood 11.1 9.9 9.4 9.4 9.7 Local Convenience 12.0 11.0 8.8 8.8 12.0 Retail Warehouse 11.1 9.5 8.5 8.5 9.5 Streetfront Shops Metro CBD 13.9 12 9.4 9.0 N/A Decentralised 12.8 11.8 8.8 9.8 N/A Source: Rode, 2008 90
Johannesburg CBD Retail Nodal Performance The following graphs illustrate the annual performance of the Johannesburg CBD retail node between 1995 and 2006. This is based on a nodal report obtained from SAPIX/IPD latest data available 2006. Figure 4.3: Johannesburg CBD Retail Market Annualised Performance 1995 to 2006 Performance - Johannesburg CBD Retail Percentage (%) 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0-10.0-20.0 68.9 23.0 24.3 26.0 22.5 21.8 20.7 20.1 19.3 15.4 14.8 15.7 15.7 13.6 10.5 7.0 9.2 6.6 1.7-1.5-5.5-4.8-10.6-15.3 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Total Return % Income Return % Capital Growth % Net Income Growth % Source: Sapix/IPD Nodal Report, 2008 Figure 4.4: Johannesburg CBD Retail Market Capital Value (Rand/m 2 ) 1995 to 2006 Retail - Capital Value R per m² 16000.0 14000.0 14 020.4 14 191.9 12000.0 11 492.0 10000.0 R per m2 8000.0 6000.0 4000.0 2000.0 1 915.3 2 167.0 3 434.3 2 874.6 2 949.5 2 778.6 2 817.6 4 215.3 5 334.2 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Sapix/IPD Nodal Report, 2008 Findings: (Figures 4.3 to 4.7) It is evident that total return, income return, capital growth reflected similar trends over the time period 1995 to 2007. Net income growth reflected a different trend than the aforementioned factors. The weakest performance was reflected in 1998 and 2001. Best retail nodal performance was recorded in 1997, 2000 and 2003. Figure 4.4 indicates that the capital value for retail floor space in the Jhb CBD remained relatively stable up until 2001, from where it escalated positively. Capital value for retail floor space increased from R1 915.3 in 1995 to R14 191.9 in 2006. 91
Figure 4.5 indicates that the retail monthly market gross rentals also reflected relatively positive performance with emphasis on the period beyond 2002. Rentals increased from R11.1 in 1997 to R82.9 in 2006. Figure 4.6 indicates fluctuations in monthly operating costs of retail floor space within the CBD. These costs have fluctuated between R4.4 and R17.2 ending off with operating costs of R8.2 in 2006. Figure 4.7 indicates the vacancy rate for retail floor space within the CBD and it is evident that vacancy has increased between 1998 and 2003, from which it recovered drastically to reach levels of 6.6% in 2004 and 0.1% in 2005. These trends reflect relatively positive towards new retail developments planned for the market area. Figure 4.5: Johannesburg CBD Retail Market Gross Rent (Rand/m 2 ) monthly 1995 to 2007 Gross Rent R per m² (monthly) 90 80 70 60 76.4 81.4 82.9 R per m2 50 40 30 27.2 29.9 26.1 27.1 39.5 45.4 20 10 0 0 0 11.1 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Sapix/IPD Nodal Report, 2008 Figure 4.6: Johannesburg CBD Retail Operating Costs (Rand/m 2 ) monthly 1995 to 2007 Operating Costs R per m² (monthly) 20.0 R per m2 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 4.9 5.6 4.4 5.2 11.9 16.5 17.2 13.9 12.5 13.2 15.5 8.2 2.0 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Sapix/IPD Nodal Report, 2008 92
Figure 4.7: Johannesburg CBD Retail Vacancy Rate (% of floor space) 1995 to 2007 Vacancy Rate % floorspace 20.0 18.0 16.8 18.2 16.0 14.0 13.8 15.2 Vacancy % 12.0 10.0 8.0 6.0 6.5 10.7 6.6 4.0 2.0 0.0 0.0 0.0 0.0 0.1 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Sapix/IPD Nodal Report, 2008 Current trends and impact on retail market With inflation expected to stay above the upper-limit of the target range until late in 2008, consumers and retailers alike can definitely factor in another interest rate hike or two. This does not bode well for the retail property market, as it could eventually lead to a marked slowdown in market rentals. Furthermore, higher interest rates (i.e. opportunity costs of not being invested in a less risky asset) and slower expected retail-income growth, could also lead investors to require higher income returns (capitalization rates) in order to invest in shopping centres. OFFICE MARKET DEVELOPMENT PERSPECTIVE Capitalization rates While capitalization ( cap ) rates for prime office property still showed some strength in the first quarter of 2008, capitalization rates on industrial leasebacks and shopping centres seem to have started to feel the pinch of deteriorating investor sentiment. Evidence provided by property dealmakers already suggests that for some properties, which were formally valued at 8% cap rates nine months ago, the sellers are now willing to settle at prices equivalent to 9%-plus cap rates. The non-residential property market has been a seller s market since 2003, when declining interest rates, together with listed funds insatiable demand for non-residential properties, resulted in rising selling prices, and consequently, diving capitalization rates. Should deteriorating inflation expectations, rising interest rates, a strong de-rating of listed funds and lower economic growth prospects result in weaker investor demand for property, and hence, lower prices and higher cap rates, the market could turn to being a buyer s one. 93
But, the prospects of strong rental growth could still be the lifeline for sellers negotiating powers. During the reporting quarter, capitalization rates for prime multi-tenanted office property in the CBDs of Johannesburg, Pretoria and Durban ranged between 10% and 11%, with a standard deviation of roughly 1%. In contrast, prime office properties in the Cape Town CBD are being bought at prices equivalent to forward income yields (cap rates) of about 9%. Of course, Cape Town s lower capitalization rate could be reflecting greater investment demand for office property or better capital appreciation prospects relative to the other CBDs. Table 4.9: Survey of Capitalisation Rates (%) office buildings, means for 2005:Q3 to 2008:Q1 Johannesburg CBD 05:03 07:03 2007:04:00 2008:Q1 Grade A Multi-tenant 12.8 12.8 11.1 10.0 Grade A Leaseback 12.2 12.4 10.4 9.5 Grade B Multi-tenant 13.8 13.5 13.5 10.0 Grade C Multi-tenant 15.1 14.3 14.3 11.0 Braamfontein Grade A Multi-tenant 12.9 12.8 11.1 9.5 Grade A Leaseback 12.1 12.3 10.3 9.3 Grade B Multi-tenant 13.8 13.0 13 10.0 Grade C Multi-tenant 14.8 14.0 14.3 11.0 Source: Demacon, 2008 Hurdle and escalation rates Rode s survey results for the first quarter of 2008 suggest that property investors require a total return (income return plus capital appreciation) of roughly 15.0% to 15.5% on their property investments. The sharp deceleration (or strengthening) in hurdle rates since 2000 serves as an indication of how favourable investor sentiment was towards non-residential properties. This was not only as a result of the fact that the South African economy had just started out on a strong business-cycle upswing (the promise of low vacancies and, hence, good rental growth) but also as a result of the belief in structurally low and stable inflation and interest rates (the promise of lower risk-free opportunity costs). Should the electricity crisis be perceived as causing increased uncertainty in future cash flows, or should rising inflation expectations and concomitantly rising interest rates result in substitute assets yielding higher returns, investors might soon require higher minimum income and total returns to induce them to acquire directly held property. A straw in the wind is the sharply deteriorating market rating (derating) of listed property funds. Listed property Notwithstanding steady income-stream growth, listed-property prices continue to be plagued by weakening market sentiment. Since the end of last year, historic income yields on listed property weakened (increased) from roughly 6% to above 8% during May 2008. This resulted in price growth averaging - 6%, year-on-year, during the first four months of 2008. Over the same period, 10-year bond yields moved up from 8% to almost 10%. Of course, this deterioration in market rating, and the related fall in prices, can largely be attributed to 94
the contagious effect of the current uncertainty in global financial markets and soaring inflation coupled with rising interest rates domestically. Worsening inflation figures certainly spell more bad news for listed property, as concomitant hikes in interest rates, intended to restrain inflation and inflation expectations, at the same time increases income returns on alternative (substitute) investments like long bonds. Thus, investors now demand higher income returns to hold listed property, leading to price declines. Office rentals In the first quarter of 2008, rentals in Johannesburg decentralized were collectively up by 16%, while rentals in Pretoria and Cape Town decentralized grew by 15% over the last year. Market rentals in Durban decentralized showed the poorest growth, growing by only 2% on the same period a year earlier. In contrast, building cost inflation, as measured by the BER BCI, is expected to have grown by an astonishing rate of 20%. This implies that none of the decentralized office nodes could, collectively, achieve positive real rental growth over the last year. During the reporting quarter, nominal rentals in the Pretoria CBD grew by a phenomenal yearly rate of 48%. Our respondents were of the opinion that the average gross market rental for prime office space in the CBD of Pretoria was about R68/m 2 /month with a standard deviation of R6. A year ago the average gross market rental was R46/m 2 /month with a standard deviation of R8. Logically, this can be attributed to the exceptionally low prime office vacancies and government s commitment to remain in the Pretoria CBD. Regarding the other CBDs, rentals in Cape Town were 28% higher than a year ago, followed by Johannesburg (+22%) and Durban (-5%). Table 4.10: Pioneer Office Rentals Highest Gross Nominal Market Rental Rate achieved Rands per rentable m 2, gross leases (excl VAT) 2005:Q3 to 2008:Q1 2005:Q3 2006:Q3 2007:Q3 2007:Q4 2008:Q1 Johannesburg Dec. 106.0 96.5 82.0 152.5 117.5 Pretoria Dec. 77.5 130.0 N/A 120.0 120.0 Durban CBD 57.5 N/A N/A 55.0 60.6 Durban Dec. 79.4 N/A 75.0 55.0 91.7 Bloemfontein Dec. 65.0 N/A 75.0 76.7 79.0 Port Elizabeth Dec. 65.0 N/A 147.5 84.1 N/A East London N/A N/A N/A N/A East London Dec. 65.0 78.0 95.0 95.0 N/A Cape Town CBD 76.0 77.3 120.0 150.0 165.0 Cape Town Dec. 82.2 87.5 103.8 111.5 123.3 Source: Demacon Ex. Rode, 2008 95
Figure 4.8: Johannesburg CBD Market Rental Rates for Office Buildings 2005:Q3 to 2008:Q1 - rand per rentable m 2, gross leases (excl VAT) JHB CBD Market Rentals Rand/m2/month 70 60 50 40 30 20 10 44.0 35.5 33.0 26.3 23.4 24.7 59.1 57.9 59.2 48.3 50.0 40.5 30.5 30.5 32.3 0 2005:Q3 2006:Q3 2007:Q3 2007:Q4 2008:Q1 Grade A+ Grade A Grade B Grade C Source: Demacon, 2008 Figure 4.9: Braamfontein Market Rental Rates for Office Buildings 200:Q3 to 2008:Q1 - rand per rentable m 2, gross leases (excl VAT) Braamfontein Market Rentals 80 70 65.6 66.0 68.7 Rand/m2/month 60 50 40 30 45.8 34.9 24.3 52.8 39.2 30.6 48.0 41.5 50.8 51.5 43.3 32.3 20 10 0 2005:Q3 2006:Q3 2007:Q3 2007:Q4 2008:Q1 Grade A+ Grade A Grade B Grade C Source: Demacon, 2008 It is evident that market rentals experienced positive growth within the two nodes. In terms of the Johannesburg CBD Grade A office rentals increased from R35.5 to R59.2/m 2 /month, Grade B office rentals increased from R26.3 to R51.5/m 2 /month and Grade C office space from R23.4 to R32.3/m 2 /month. In terms of Braamfontein office rentals; Grade A office rentals increased from R45.8 to R68.7/m 2 /month, Grade B office rentals increased from R34.9 to R51.5/m 2 /month and Grade C office rentals from R24.3 to R43.3/m 2 /month. Cumulative Take-Up of Office Space Vacant office space remains a rare commodity with virtually all of the current prime office stock in the decentralized office nodes being fully occupied. Based on the latest data, more than 95% of the total rentable area in the decentralized office nodes is taken. From a practical point of view, this is equivalent to a fully let office 96
market and, hence, should the economy not be stalled too much by power shortages and rising interest rates, the office market s upturn remains intact. On the whole, prime office vacancies in Johannesburg and Cape Town decentralized averaged around 3%, while in Pretoria and Durban decentralized they were a miniscule 1%. Regarding the take-up of office space, Durban decentralized (7,2%) recorded the strongest take-up rate for the 12-month period ended March 2008, followed by Johannesburg decentralized (5,9%), Pretoria decentralized (5,8%) and Cape Town decentralized (3,7%) Looking at vacancy rates in the CBDs, prime space available for leasing continued to decline in all of the CBDs, barring Pretoria CBD. This explains the negative take-up rate for the Pretoria CBD. Even so, vacancies in the Pretoria CBD were still the lowest, averaging about 3% in the reporting quarter. In the Cape Town and Durban CBDs, vacancies were around the 4% mark, while they were much higher in the Johannesburg CBD, at about 12%. Table 4.11: Cumulative take-up of office space (m 2 ) Grade A & B combined 2008:Q1 6 Months 12 Months Take-Up % of stock Take-Up % of stock Johannesburg CBD 32 505 2.5 84 765 6.7 Braamfontein 10 695 3.0 8 922 2.6 Johannesburg Central 43 200 2.6 93 687 5.8 Source: Demacon Ex. Rode, 2008 It is interesting to note that over the past 6 months a total of 43 200m 2 of office space were taken up in the Johannesburg Central Area representing 2.6% of total office stock. Over the past 12 months office take-up reached 93 687 for the central area representing 5.8% of total office stock in the central area. This bodes well for office buildings and new developments within the central area Committed New Office Developments Table 4.12 indicates the new committed office developments as at March 2008. It is evident that a total of 13 708m 2 of new office floor space is committed towards the Johannesburg Central Area. This is higher than for the Durban and Pretoria CBDs. Table 4.12: Committed New Office Developments as at March 2008 Node Size (m 2 ) % unlet % of stock Johannesburg Central 13 708.0-1.0 Jhb dec. 400 536.0 57.0 7.0 Cape Town CBD 22 000.0-3.0 Cape Town dec. 72 000.0 49.0 6.0 Durban CBD 6 831.0 100.0 1.0 Durban dec. 47 929.0 54.0 12.0 Pretoria CBD - N/A N/A Pretoria dec. 192 866.0 63.0 12.0 Total CBD 42 539.0 16.0 1.0 Total Dec 713 331.0 58.0 8.0 Source: Demacon Ex. Rode, 2008 97
Nominal Outgoings In the reporting quarter, operating costs in Central Johannesburg recorded the strongest growth, with operating costs up by almost 12% on the same period a year earlier. In the Pretoria CBD, operating costs were about 9% higher, while in the CBDs of Cape Town and Durban operating expenses grew by roughly 8% and 5% respectively Table 4.13: Mean Gross Outgoings for Named CBD Prime Office Buildings, 2005:Q3 to 2008:Q1 Rand per letable square metre 2005:Q3 2006:Q3 2007:Q3 2007:Q4 2008:Q1 Johannesburg CBD and Braamfontein 14.0 13.5 15.3 14.2 16.0 Sandton CBD 23.4 24.0 24.1 23.3 27.2 Pretoria CBD 12.6 17.6 17.5 17.5 24.0 Durban CBD 21.9 20.0 21.2 21.0 21.1 Cape Town CBD 17.8 17.5 13.6 23.6 20.4 Source: Demacon Ex. Rode, 2008 It is evident that mean gross outgoings for named CBD prime office buildings experienced positive growth from R14.0/m 2 /month to R16.0/m 2 /month between 2005 and 2008. These figures are much lower than that of the other CBD areas. Office Vacancies Subsequent graphs indicate the office vacancy within the two nodes between 2004:Q2 and 2008:Q1 in terms of Grade A and Grade B office space. Figure 4.10: Johannesburg CBD Office Vacancy Grade A and B, 2004:Q2 to 2008:Q1 Johannesburg CBD Office Vacancy 40.0 35.0 33.1 34.1 33.0 32.3 32.3 31.4 30.6 30.0 26.9 26.9 27.1 27.3 27.1 Vacancy (%) 25.0 20.0 15.0 23.0 18.2 20.1 12.8 22.0 22.2 22.2 14.7 13.8 13.8 20.6 20.1 11.4 11.4 17.0 16.6 16.0 16.1 16.0 23.5 23.5 23.5 14.5 14.5 14.5 21.0 12.0 10.0 8.4 7.9 6.5 6.5 6.5 7.3 7.3 7.3 5.5 5.0-04:02 04:03 04:04 05:01 05:02 05:03 05:04 06:01 06:02 06:03 06:04 7:01:00 07:02 07:03 07:04 08:01 Grade A Grade B Total Source: Demacon Ex. Rode, 2008 98
Figure 4.11: Braamfontein Office Vacancy Grade A and B, 2004:Q2 to 2008:Q1 Braamfontein Office Vacancy 25.0 22.1 20.5 Vacancy (%) 20.0 15.0 10.0 5.0 14.8 13.9 13.2 13.7 12.9 13.0 12.0 10.8 11.3 15.5 10.8 6.9 17.1 8.9 2.3 12.5 7.7 3.9 12.6 4.9 14.7 9.6 5.5 15.3 11.3 8.0 18.6 13.8 10.0 16.0 13.5 13.5 9.5 8.2 8.2 4.0 4.0 4.3 17.3 10.5 8.7 1.9 1.9 12.6 9.0 6.0-04:02 04:03 04:04 05:01 05:02 05:03 05:04 06:01 06:02 06:03 06:04 7:01:00 07:02 07:03 07:04 08:01 Grade A Grade B Total Source: Demacon Ex. Rode, 2008 It is interesting to note that office vacancies in the Johannesburg CBD declined at a relatively constant rate. Vacancies declined from 23.0% in 2004 to 12.0% in 2008. Grade A space (5.5%) also reflected much lower vacancy rates than Grade B office Space (21.0%). In terms of Braamfontein office vacancies reflected a much more cyclical trend. Office Vacancies declined from 10.8% to 9.0%, with Grade A office space at 6.0% vacancy and Grade B office space at 12.6%. Johannesburg Inner City Nodal Office Performance Subsequent graphs illustrate the annual performance of the Johannesburg Inner City office market between 1995 and 2007. This is based on a nodal report from SAPIX/IPD and includes the following areas: Johannesburg CBD Braamfontein. Findings: (Figures 4.12 to 4.17) In terms of the CBD office performance it is evident that total return, capital growth and net income growth reflected similar trends. Performance peaked during 1997, 2000, 2003 and 2006 and reached its weakest points during 1998, 1999, 2002 and 2004. In terms of the Braamfontein office performance it is evident that total return and capital growth reflected similar trends. Performance peaked during 2000, 2005 and 2007 and reached its weakest points during 1998, 2002, 2004 and 2006. Figure 4.14 indicates that the capital value for office floor space in the CBD and Braamfontein remained relatively stable with positive growth over the last few years ending off at R5 772.1/m 2 in 2007 for the CBD and R6 618.2/m 2 for Braamfontein boding positive towards office developments in the market area Figure 4.15 indicates that the office monthly market gross rentals also reflected relatively positive performance ending off in 2007 with an average monthly market gross rent of R61.8/m 2 for the CBD and R72.3/m 2 for Braamfontein. 99
Figure 4.16 indicates fluctuations in monthly operating costs of office floor space within the market area. These costs have experienced slight increases ending off at R20.7/m 2 /month for the CBD and R19.2/m 2 /month for Braamfontein. Figure 4.17 indicates the vacancy rate for office space in the inner city it is evident that an increase in office floor space demand has taken place reflected in positive office take up over the past few years. Office vacancy has declined to a mere 7.8% for the CBD and 10.2% for Braamfontein in 2007. These trends reflect positive towards new office developments planned for the market area. Figure 4.12: Johannesburg CBD Office Market Annualised Performance 1995 to 2007 Johannesburg CBD Office Nodal Performance 30.0 25.0 23.1 25.2 24.4 Percentage (%) 20.0 15.0 10.0 5.0 0.0 4.5 11.8 1.4 7.0 8.0 6.4 12.9 6.2 15.8 3.6 5.3 10.2-5.0-10.0-15.0-2.5-3.7-4.8-8.9-10.1-10.1-2.0-3.5-2.7-11.2-12.7-20.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Total Return % Income Return % Capital Growth % Net Income Growth % Source: Sapix/IPD Nodal Report, 2008 Figure 4.13: Braamfontein Office Market Annualised Performance 1995 to 2007 Braamfontein Office Nodal Performance Percentage (%) 30.0 25.0 20.0 15.0 10.0 5.0 25.3 22.2 22.3 19.8 16.8 15.7 13.7 14.3 11.6 10.0 10.5 4.1 1.9 8.6 13.7 10.4 9.9 28.0 18.2 5.4 3.7 22.8 3.0 0.0-5.0-10.0-4.7-1.5-15.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007-11.7 Total Return % Income Return % Capital Growth % Net Income Growth % 100
Figure 4.14: Jhb Inner City Office Market Capital Value (Rand/m 2 ) 1995 to 2007 R per m2 7000.0 6000.0 5000.0 4000.0 3000.0 2000.0 1000.0 0.0 Capital Value 6 618.2 6 041.7 5 772.1 5 301.9 4 271.3 4 338.6 3 827.4 3 805.3 3 541.7 3 437.1 3 511.2 3 544.7 3 658.8 3 868.7 3 127.1 3 235.1 2 250.5 2 292.5 2 199.1 1 787.6 1 672.1 1 492.4 1 375.1 1 957.5 2 278.7 936.1 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Jhb CBD Capital Value R per m² Braamfontein Capital Value R per m² Source: Sapix/IPD Nodal Report, 2008 Figure 4.15: Jhb Inner City Office Market Gross Rent (Rand/m 2 ) monthly 1995 to 2007 Gross Rent R per m2 per month 80.0 70.0 60.0 50.0 40.0 30.0 20.0 23.7 20.1 22.4 31.5 25.0 33.9 30.3 22.4 21.1 40.5 43.5 45.1 25.4 24.5 16.6 43.0 20.4 46.2 26.7 52.7 41.3 57.9 53.7 63.9 61.8 72.3 10.0 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Jhb CBD Gross Rent R per m² (monthly) Braamfontein Gross Rent R per m² (monthly) Source: Sapix/IPD Nodal Report, 2008 Figure 4.16: Jhb Inner City Office Operating Costs (Rand/m 2 ) monthly 1995 to 2007 Operating Costs 25.0 23.1 R per m2 20.0 15.0 10.0 15.1 15.1 7.5 9.7 14.1 10.5 11.9 12.0 12.4 9.7 9.1 10.5 13.0 11.7 12.5 14.6 13.9 13.2 18.3 16.8 17.4 15.4 20.1 20.7 19.2 5.0 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Jhb CBD Operating Costs R per m² (monthly) Braamfontein Operating Costs R per m² (monthly) Source: Sapix/IPD Nodal Report, 2008 101
Figure 4.17: Jhb Inner City Office Vacancy Rate (% of floor space) 1995 to 2007 Vacancy Rate (%) 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Vacancy Rate 42.3 42.7 32.0 24.2 24.4 26.1 25.8 21.1 21.9 22.5 21.8 20.7 15.5 16.9 11.6 13.0 12.7 13.2 9.1 10.2 7.8 7.8 3.6 3.7 0.1 1.5 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Jhb CBD Vacancy Rate % floorspace Braamfontein Vacancy Rate % floorspace Source: Sapix/IPD Nodal Report, 2008 FLAT MARKET DEVELOPMENT PERSPECTIVE In the first quarter of 2008, there was at last some rental magic in the Johannesburg metro. Year on year, nominal flat rentals in this metro ended on average 26% higher, thereby far exceeding the growth rate in consumer inflation of 9%. However, in the other metros, growth was more pedestrian, with Durban up by 13%, whilst Pretoria, Cape Town and Durban grew by roughly 8%. Over the last 10 and 5 years, however, the rental performance looks much more impressive, with nominal rentals in all of the major cities growing in excess of consumer inflation. Of course, this implies that over these periods landlords purchasing power of their nominal rental incomes was actually sustained. As for the levels, rentals for standard quality 2-bedroom flats were the highest in the Johannesburg metro at around R4.014 per month, followed by Durban (R3.199), Cape Town (R3.030), Pretoria (R2.608) and Port Elizabeth (R2.316) Table 4.14: Nominal Flat Rental Growth, 2008:Q1 Last 10 yrs Last 5yrs Last 2yrs Johannesburg 10.2 9.4 14.5 Pretoria 9.4 6.1 5.5 Durban 10.4 8.4 12.1 Cape Town 9.3 6.4 5.0 Port Elizabeth 10.8 8.9 4.5 Source: Demacon Ex. Rode, 2008 Table 4.15: Flat Rentals Standard Units, R/month, 2005:Q3 and 2008:Q1 2005:Q3 Bachelor 1-Bedroom 2-Bedroom 3-Bedroom City (Joubert Park/Braamfontein/Hillbrow/ Berea/Parktown) 1 118 1 336 1 660 2 425 Yeoville/Bellevue/Highlands 1 500 1 780 2 100 2 450 Jeppestown/Fordsburg/Malvern/ Kensington/Lorentzville N/A N/A N/A N/A 2008:Q1 Bachelor 1-Bedroom 2-Bedroom 3-Bedroom City (Joubert Park/Braamfontein/Hillbrow/ Berea/Parktown) 1 738 2 225 3 050 3 217 Yeoville/Bellevue/Highlands N/A N/A 3 000 3 600 Jeppestown/Fordsburg/Malvern/ Kensington/Lorentzville N/A 3 700 6 000 N/A 102
It is interesting to note that the rentals for stand quality units in the Johannesburg Central area experienced positive growth between 2005 and 2008. In terms of the City area rentals increased from R1 118 to R1 738 for a bachelor pad, R1 336 to R2 225 for single bedroom unit, R1 660 to R3 050 for two bedroom unit and R2 425 to R3 217 for a three bedroom unit In terms of the Yeoville/Bellevue and Highlands area rentals increased from R2 100 to R3 000 for two bedroom place and R2 450 to R3 600 for a three bedroom place Jeppestown/Fordsburg/Malvern/Kensington and Lorentzville are characterised by rentals in the extent of R3 700 for a one bedroom pad and R6 000 for a two bedroom flat. This bodes well towards the flat market within the Johannesburg Central Area. Flat Vacancies Figure 4.18 indicates the flat vacancies for a number of urban areas. Figure 4.18: Flat Vacancies Average for All Grades Combined, 2006:Q3 to 2008:Q1 Flat Vacancies - Average for all grades combined 7.0 6.0 6.0 Vacancy (%) 5.0 4.0 3.0 2.0 1.0-1.8 1.2 0.5 1.8 1.7 1.5 2.0 2.0-2.9-3.9 0.9 2.0 2.2 Source: Demacon Ex. Rode, 2008 It is interesting to note that flat vacancies declined in merely three of these areas Johannesburg, Pretoria, and Cape Town. Johannesburg s flat vacancy declined from 1.8% to 1.2% - boding well for these types of property developments. Confidence Remains High In Commercial 06:03 06:04 07:01 07:02 07:03 07:04 08:01 Johannesburg CBD continues to surprise as growth area, offering opportunity for refurbishment due to increasing rentals and well provided infrastructure. Coupled with this is the Gautrain Development, which PGC reports are impacting very positively on the demand for commercial property in the near vicinity of the Gautrain Stations. In spite of the current somewhat constrained trading conditions, the outlook for commercial property remains upbeat for the medium and long term. Savvy investors are realising that now is a good time to make the right purchase. The shortage of properties for sale during 2007 translates into an ongoing demand for investment properties as well as owner occupier space. It is believed that the Inner City has reached a tipping point, where properly managed buildings provide solid returns to investors with an acceptable risk profile. 103
Overall: The Johannesburg Central Area s Property Market is reflecting positive signs of revival. The market is reflecting positive growth in market rentals, increasing capital values and declining vacancy trends. Operating costs are increasing steadily, although at a much lower rate than other South African CBDs. New developments are committed towards the Central Area reflecting positive growth and redevelopment trends within the area. This reflects a positive investment climate suitable for the manifestation of new private and public sector investment boding well for the BRT station precinct development. 4.5.3 Private Investors and Their Perceptions with Regards to the Johannesburg Inner City and Upgrade Projects Based on study conducted for JDA in 2008/2009 Analysis of the Impact of the JDA s Area- Based Regeneration Projects on Private Sector Investment - the following valuable information were obtained reflecting the perceptions of private investors on the Johannesburg Inner City: Top key investment drivers were highlighted as Area Based Regeneration Projects/initiatives (ABIs), investment climate, financial incentives, urban management and good returns Just over half of the investors interviewed invested in the identified nodes prior to the JDA implementing ABIs Of those, just over half were aware that JDA had various ABIs planned for the nodes The same proportion of respondents who were not aware of the JDA s plans for upgrade in the area, would have invested there regardless of the planned ABIs due to a number of factors for example that they were historical land owners, private sector investment was taking place regardless of JDA, the size of the commuter and resident markets sufficient to support retail and recreational use regardless of what the city did to the area etc. Investors regard the work of JDA and their ABIs as important to very important with reference to their investment decisions The quality of the ABIs were rated as average to good Key inhibitors to private sector investment include lack/poor service delivery, lack/poor urban management and crime, lack of affordable property, general economic climate and attractiveness of returns. Comments and concerns raised include: Sustainability of the upgrade projects Lack of comprehensive and logical financial incentives for development rates incentive and the UDZ further incentives would have resulted in greater investment in each node. Existing incentives seen as a nice to have rather than a driver of investment attraction. The UDZ tax incentive not regarded as strong enough to attract additional investment in Johannesburg. It is seen to have largely increased returns for large property owners rather than unlocking significant new property investment. Urban management boundaries which stop short of areas into which investment has been made or where there is great potential for investment. 104
Figure 4.19: Key Investment Drivers Area Based Intervention Impacts - Key Drivers Consolidated Institutional Support 3 Establishment of the JDA 5 Reduced Inner City Crime Attractive Returns 6 6 Urban Management Financial Incentives 7 7 Investment Climate 12 Urban Renewal Interventions 21 0 5 10 15 20 25 Urban renewal comprises Environmental Improvements; Physical Improvements; Amenity Improvements; and Regeneration projects to date Investment climate includes both public and private investment climate Urban Management includes both public and private initiatives 4.6 SYNTHESIS It is evident that the City of Johannesburg has made remarkable progress in its efforts to attract investment and regenerate the Inner City. The progress is clearly demonstrated in the development trends and property indicators provided in this chapter. This is indicative of the solid institutional framework and pragmatic policies that the city has adopted. However, Inner City regeneration is an ongoing process, and, although much has already been achieved, many challenges remain. The BRT system will contribute to this process and will contribute to the attraction of private sector investment. The next chapter focuses on the characteristics of BRT systems and provides a number of case studies in order to identify the advantages and economic impact generated by these systems. 105