Urban regeneration and inner city property markets
Category General News
The decline of many commercial and industrial urban precincts and Central Business Districts globally through urban decay, economic shifts and obsolescence the last few decades has spawned a plethora of urban regeneration projects across many cities.
While many of these cities have a lot in common, the location, nature of the built environment and property market fundamentals together with the creativity and strategic vision of governments and developers determine the scope, design and composition of the regenerated urban landscape, explains Frank Reardon, Broll Divisional Director for Broking KwaZulu-Natal.
“A common thread globally is to breathe life into decaying spaces through the ‘live, work and play’ concepts which have become common themes leading to a strong emphasis on vibrant mixed-use developments. “Much like in many US cities, for South African cities, this represents a radical departure from the original ordered urban landscapes that promoted areas of single use with much of the residential areas located away from the CBDs in the suburbs,” says Reardon.
He says these themes have played out across South African metros with different locations and precincts delivering different solutions. Possibly a function of the historic lack of significant residential in South African cities, a significant and possibly the most important outcome of many projects has been the large scale conversion of commercial space into residential dwellings.
The flight of corporates from our major CBDs to suburban areas left a glut of high rise office buildings with low occupancy and poor economic prospects. Years of neglect often created opportunities for developers to buy buildings for extremely low values, points out Reardon. In Johannesburg buildings were often bought for as little as R1,000/m², making the financial prospects of a conversion low risk and, if correctly managed, extremely lucrative.
“The insatiable demand for centrally located middle-income housing in South Africa’s economic powerhouse of Gauteng saw mass scale conversions in Johannesburg and Pretoria catering to both the residential and highly lucrative student housing markets.”
Reardon notes that the Durban CBD market mirrored the Gauteng CBDs but never saw the massive plunge in prices that made conversions so profitable and low risk as in Johannesburg.
Gauteng based developers were shocked that empty and sometimes dilapidated office blocks in Durban still commanded around R5,000/m², up to five times what they were used to paying in Johannesburg. This meant that residential conversions did not have the same momentum as it had in Gauteng. Greater impact came with the growth in the student housing developments, explains Reardon.
“The higher densities and returns per square metre allowed developers to get over the relatively higher asking prices to successfully convert many CBD properties for this purpose.” Converted and well-maintained buildings attract prices of up to and sometimes higher than R15,000/m², three times what the properties were probably bought for.
Reardon says the Durban CBD appears to have witnessed strong growth in demand for government offices off a very low base as compared to other CBDs, creating economically viable alternatives to residential conversion for property owners who are prepared to upgrade old office spaces.
The softening office market of the last few years, characterised by low rental growth has meant that institutions/ listed property funds have found it increasingly difficult to meet their growth targets with office properties. However, points out Reardon, a few have started looking at the residential rental market as a more lucrative sector to invest in.
According to Sean Berowsky, Broll Property Group: Head of Broking SA, the Cape Town CBD did not experience the full fallout of the commercial tenant migration away from the CBD as the rest of the country, although during the early to late-1990s it suffered hugely from a lack of investment, poor policing and a high element of crime. Blessed with astounding natural beauty it weathered the storm and it is now comparable to some to of the most beautiful cities in the world.
“Cape Town has seen a resurgence of conversion schemes to hotel and residential uses. “In what happened initially in the mid to late-1990s and then largely stalled for over a decade has re-established itself as the main thrust of redevelopment in the CBD,” he says.
Berowsky explains that the role of the Cape Town Central City Improvement District spearheaded the city’s CBD’s innate potential for a work, live and play environment. The hugely successful redevelopment of Old Mutual’s Safmarine House by Signatura into a Radisson Blu and The Radisson Residences has energised the market and there are a number of other CBD proposed schemes in the making. These include Ingenuity’s 117 on Strand (a mixed-use office, retail and residential scheme which is currently being built), The Onyx (former Nedbank House – a JV between Signatura and Nedbank Property partners – 18,000m² mixed-use hotel apartment and residential units with ancillary ground floor retail), 16 on Bree (FWJK’s 350 residential units with site works commencing in the second quarter of 2018), Harbour Arch (Amdec owned Culemborg site with in excess of 200,000m² of permissible bulk which is going to be redeveloped into two Marriott hotels/ residential, retail and showroom space with Phase One scheduled to commence during the first quarter of 2018. In addition to these, there are also other notable potential schemes such as Zero to One which still is still at planning stage .
“While the sales price of many of the abovementioned Cape Town schemes vary between late R50,000/m² to R75,000/m², the increase of available units needs to be absorbed by a robust tenant market as most of the units acquired are being bought by investors. “Time will tell if the amount of new stock available will be absorbed by tenants willing to pay a rental which allows for a reasonable rate of return to investors that have bought into these new schemes,” says Berowsky.
According to Broll Research, the Johannesburg CBD has been undergoing a steady transformation with a number office blocks being converted into chic and affordable residential apartments.
More recently, non-corporate commercial tenants have been showing interest in the in the inner city while businesses including architects, graphic designers, marketers, social entrepreneurs and non-profit organisations continue to take up space lured by affordable rentals and accessibility of the Johannesburg CBD. In addition, many of these buildings have incorporated restaurants and eateries, art galleries, small business services and convenience services on the ground floor thus making them sought-after.
Dineo Siziba, Broll Office Broker for Johannesburg CBD explains that the Johannesburg CBD office market is currently performing well with an increase in demand for rental space, especially for smaller units.
“There are still many large pockets open, adding to the bulk of the current vacancies, which are much harder to let and an increase in untenanted buildings for sale, some of which have been on the market for six months and even up to two years in certain instances,” says Siziba.
Also notable is that landlords who own these buildings have been reluctant to negotiate on selling prices, as few of the sales are urgent. Prospective buyers feel that the buildings are overpriced and under-maintained and that they would rather invest in income generating buildings.
Rental rates in the CBD are slightly lower than those found in Braamfontein with gross achieved rentals ranging from R75-95/m² for A-grade, R55-R70/m² for B-grade and R50/m² for C-grade.
Although Braamfontein falls under the CBD geographically, it is considered an independent office node due to the operation of a Central Improvement District (CID). The CID ensures improved node management thus resulting in higher achieved rental rates, according to Broll Research.
Siziba points out that construction activity in the Johannesburg CBD is fairly low, with no major redevelopment commitments other than isolated maintenance projects to selected office buildings. There have been projects to prioritise public transport plans as part of the City of Johannesburg’s Growth and Development Strategy, Joburg 2040. One of these strategies is the development of an African Food and Culture Hub at the Park Station Precinct. The objective of this collaborative project is to redevelop the precinct to represent a range of African cultures’ cuisines and lifestyles, and in turn, improve the City’s nightlife, public spaces, green spaces, pedestrian walkways, cyclists’ lanes and children's’ play areas, she adds.
Author: Broll Property Group