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The Recession and the Future of Corporate Real Estate

11 March 2020

The Recession and the Future of Corporate Real Estate

The announcement of South Africa’s third recession
since 1994 has sent shock waves across the country. While we all saw it coming,
the market shrinkage reported by Stats SA yesterday confirms one thing: we have
now reached our lowest point since 2009. 

Industries such as agriculture, the country’s catalyst
for job creation and future economic growth, is down by -7.6% and more than
10 000 jobs have been cut in the past three months alone. Interestingly,
finance and personal services saw some positive growth which usually reflects
in the office market.

Demand is Erratic

John Jack, CEO for Galetti Commercial Real Estate
notes that although this news is not good, this has been reflected in office
and industrial property demand for quite some time now.

“Large vacancies exist specifically within the office
sector. That said, we are seeing increased demand for offices which saw a nett
take up in the Bryanston and Sandton nodes of just under 30000sqm in January
and February of this year”.

“There are clear trends taking place in the industry.
Tenants are hard pressed to move from their existing space given the costs of
relocating. They remain at their current premises but continue to negotiate
reduced rates and this puts major pressure on the market,” he explains.

“At the same time, companies have reduced their head
count to reduce their salary bill and in doing so they now require less office
space which contributes to the vacancies we are seeing”.

Jack also notes that interestingly, the tenants who
are looking to sublet space are often the landlords biggest competition being
able to offer far better terms for their space. “We have recently concluded a
lease where the exiting tenant was able to offer two years rent free to the
incoming sub-tenant,” he explains.

Investor Confidence

Jack notes that businesses require better market
transparency and accurate benchmarks to make decisions and that this is largely
lacking in South Africa.

“There is a lot of pressure on businesses to make big
decisions. We are seeing overinflated values, inaccurate information or a lack
of market activity information when trying to make key purchase and capital
investment decisions,” says Jack. “There is a move in the commercial property
sector to try and centralise this information to allow for better transparency
in the market. This is largely on the back of large indexing businesses like
Moody’s moving into this space globally in a big way”.

Jack concludes saying: “We have made significant
capital investments in creating our own proprietary systems, populating over
19000 commercial properties to date. This data capture is starting to gain
momentum and our information collection is starting to achieve economies of
scale but it will be a long time until this information is readily available to
the market. Opting instead to share the same with our clients to achieve an
advantage against the competition.”

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