Trends in the South African office market are closely reflecting those experienced in Europe, but be thankful that we're not faced with the rentals upwards of R730/m² per month as in the West End of London says Broll commercial director Fran Teagle.

CB Richard Ellis - the world's largest property organisation, of which Broll is the sub-Saharan partner - released their quarterly review of the European market indicating further strengthening of the office market in almost every major centre.

'CBD vacancies across Europe are now below 4%, closely mirroring the 5% situation we are experiencing in the Sandton and Rosebank nodes,' says Teagle. 'But from a South African perspective it's the actual rentals that can be mind-boggling. Typical European rentals are in the R220 to R300/m² range, whereas rentals in our own Melrose precinct are topping the local market at R135m/².'

Leasing activity accelerated last year - particularly in the last quarter - with rentals in Sandton increasing on an almost monthly basis and vacancies at an all-time low.

The number of new developments planned for the area is also driving rentals, with developers not necessarily building on spec. 'Most developers release the project to market and pre-let at least half the space they are building before construction even commences. Most of these will come on stream in the next two to three years,' Teagle continues. 'Similarly in the European market, the future supply pipeline over the next couple of years has become vital to the evolution of their market.'

'Unique to the South African market - and adding impetus to rental increases - is the steadily rising cost of construction in South Africa, a not-so-welcome side effect of the large construction projects initiated in light of the 2010 World Cup. Material and labour shortages are driving prices up, compounded by a shortage of suitable land. Land that is suitable is not always appropriately zoned. With applications for rezoning getting stuck in bureaucracy for extended periods of time, the cost of land increases accordingly, applying further upward pressure on rentals, she says.

'The yield on investment sales in the Sandton CBD has now dropped to between 7 and 8%, from between 10 and 11% in the recent past but still higher than the CBRE European weighted average of 4.95%. As in Europe, we feel that prime office yields are reaching their floor, meaning that it is rental growth that will be driving investor returns in the near future. However, longer-term prospects are going to be determined by the number and cost of new developments being released to market over the next few years.'

However in drawing comparisons with, say the UK, one must bear in mind that they do not have annual rental escalations like SA - these rentals remain flat until a market review every three to five years.

'Added to this, the fact Minister of Finance, Trevor Manuel announced in his budget that commercial buildings will qualify for tax depreciation means that investment in this sector will be boosted even further,' Teagle concludes.