Johannesburg’s crippling congestion and inadequate public transport system is fuelling a mixed-use development boom throughout the wider Gauteng province. Good news for international investors and occupiers – but what about the swathes of substandard stock being left behind?
How do you operate in a city where the public transport is almost universally unusable, where walking is barely an option and where the highway infrastructure is nowhere near sufficient to support the number of cars on the roads? The short-term answer is this. You leave early. You sit in traffic. And you still end up running late.
This is the current, begrudgingly accepted state of play for most people living and working in Johannesburg – the largest city in the South African province of Gauteng. As a rule, journey times come in pairs. First you get the time it should take to get from A to B, swiftly followed by the time it is likely to take if the traffic is dire. And it doesn’t take long to work out that, more often than not, the “if” is optimistic and the worst-case scenario is the norm.
The long-term answer is considerably more positive. You develop your way out of the problem. “Ultimately people in Gauteng are going to be forced to live closer to where they work,” says Guy Gordon, project manager at developer Amdec Group, overseeing the development of the 5.5m sq ft Melrose Arch scheme just north of the old central business district towards the new financial centre of Sandton.
“On top of a flawed transport system – which means that we have some staff who are driving two hours to get to work every day – we are seeing an emerging energy crisis, rising fuel prices and more decentralised developments, as the urban periphery is being constantly pushed.”
The solution, it seems, will be the emergence of sprawling mixed-use schemes to address region-wide issues of congestion and security. These types of projects are relatively new in South Africa and, along with a strongly performing industrial sector, are dominating the Gauteng property market. Against the backdrop of a saturating market in terms of existing prime stock and the lack of grade-A space creeping further away from the city’s former central business district, they are attracting considerable interest from investment vehicles, developers and international occupiers alike.
Property developer Atterbury’s Waterfall City is a 9.2m sq ft mixed-use scheme – the biggest in the country – and part of a bigger 3m-acre site halfway between Johannesburg and the capital, Pretoria. The inclusion of residential, retail, hotels, offices, a hospital, a business park and swathes of industrial space makes it a prime example of how developers are driving demand using the convenience factor. They are creating projects akin to new towns in their own right, cutting down the need to travel by offering everything on site.
But how long can the region continue expanding in this way before the need for a district-wide infrastructure boost reaches fever pitch? And as the investment flows further away from the Johannesburg CBD – now one of the most run-down parts of the city – what will this mean for the swathes of existing stock left behind?
Delivering demand
There is no question that the development of mammoth mixed-use schemes such as Melrose Arch and Waterfall City in Gauteng – a name given to the wider district derived from the Afrikaans for gold, a nod to the area’s historically thriving gold industry – is attracting attention.
These schemes have neatly leapfrogged the issue of retail oversupply in the area by delivering the product on site. Demand for this type of development is fuelled further by city-wide congestion and a massive focus on security. And campus developments are already starting to draw focus away from Sandton, which in turn drew all the major corporates out of the CBD in the 1990s.
“A major draw of these new developments, apart from convenience, is the fact they are designed for pedestrians,” says John Jack, Gauteng director of Galetti Knight Frank. “At Melrose Arch there are sidewalks, but you don’t have to step on or off pavements and there is a super car park running under the entire development to get cars off the roads. Here in Sandton it is all huge highways – not designed for pedestrians at all. In fact if you tried to walk around on foot in Sandton, someone would probably stop to ask you what had happened and what was wrong.”
The other attraction of the new campus schemes – particularly those further north, outside the ring road surrounding central Johannesburg – is that rents drop considerably for what is arguably a higher-class product. At Waterfall City average rents on the 500,000 sq ft of commercial space are much closer to the average for the Gauteng area. “It is definitely discounted compared with Sandton, which is getting expensive and is very congested,” says Jack.
“As an average you are looking at about net per sq m and the average $12 in Sandton is $14 net per sq m, going up to $20 at the top end.”
He adds that mixed-use “with absolutely everything” is becoming increasingly popular with South African developers and investors because they can see, through the success of existing schemes, that this is what key international occupiers, such as Walmart, British Airways, Topshop and Zara, want.
Apart from the convenience, the other two major boxes ticked are transport links and safety. The high-speed Gautrain, which runs from the airport to Sandton and up to Pretoria, is one of the only forms of public transport safe and reliable enough to consider using. Both Waterfall City and Melrose Arch therefore have shuttles operating to the nearest Gautrain stations. “As well as the shuttles we have a 5,700-capacity car park underground where absolutely everything is mirrored and guarded,” says Amdec’s Gordon. “Safety and security is a big issue in South Africa and it is a massive consideration for multinationals. We have over 600 CCTV cameras on site and 100 security guards patrolling every day. Plus the design of the buildings specifically avoids any dead ends or dark alleys.”
The cost of decentralisation
The big question is whether the emergence of these new campus schemes will have a long-lasting detrimental impact on the rest of the area’s property sector as empty stock accumulates.
The issue of decentralisation is a big one in South Africa, with a similar move away from the historic CBD happening in Cape Town. And the sustainability of this drive to build bigger, better space has been called into question. In the Johannesburg CBD – once the financial heart of the city – most big tenants have moved out and huge buildings have been left empty and bricked up to stop vandals and squatters from getting inside.
“We have certainly seen a large increase in vacancy levels of grade-B properties over the past 24 months, with leases expiring and tenants realising that for the same rentals they could get a brand-new building,” says Jack.
“Funds that were very exposed to that segment of the market took a lot of pain, having to revise rentals downwards to counter increasing vacancies. The more aggressive funds, such as Redefine, are demolishing blocks of offices entirely.”
But Jack adds that there is still demand for new space – in the offices sector in particular – thanks to the global recession: “In 2008/2009 most of the knock-on effects were muted as credit effectively dried up,” he says. “Therefore there wasn’t a massive oversupply of new offices in the market and as a result funds have been able to regulate quite quickly. And there are cases of less-aggressive funds refurbishing their grade-B properties and taking advantage of the ability to renew existing tenants.”
The fear that the development of such large, new schemes on top of an already creaking infrastructure system is eased somewhat by the current five-year tranche of the government’s 2012 20-year national infrastructure plan. Gauteng is a priority focus with £47bn earmarked for infrastructure upgrades. And the first part of the 25-year, 87 mile Gautrain extension has been predicted to be completed within five years.
The hope too is that the overspill from congested areas such as Sandton to new developments and the provision of on-site residential as part of the new schemes will help.
Some of the new campus developments have been designed to address traffic issues to a degree. The major draw of Waterfall City – apart from the sheer volume of available space – is the approach to the roads surrounding the development. Solet Viviers, business development manager at Atterbury Property, says: “We are upgrading two major roads and we’re adding turning lanes and creating a traffic-flow system based on four entrances to the Waterfall City part of the scheme. This hasn’t been done before.
In Sandton there really are only two ways in – one on either side – and you can wait 40 minutes just to get onto the main road from each direction. We hope this will be much better. But traffic in Jo’berg is still traffic in Jo’berg so it won’t be perfect.”
So while it is still probably best to give a double journey time, perhaps the worst-case scenario will soon become ever so slightly more bearable. Maybe.
Investor view
Amelia Beattie, chief investment officer, STANLIB, one of the biggest investment managers in South Africa, overseeing more than $50bn in assets
What are your predictions for the South African market over the next five years?
There will be a lot of consolidation in the listed sector. Growth in the market will slow down from where it has been over the past few years, but property will continue to provide a good income where returns are linked to good underlying fundamentals in the lease agreements. Retail environments will need to continue to reinvent themselves to provide for the ever-changing and more demanding consumer. They will need to create a sense of place where customers can do more than just shop – the “live, work, play” environments will become more important. To that, one could possibly add education as well.
And sustainability will become key in the next few years. This is mainly focused on development activity at the moment and will be much more widespread in the industry. It will start to drive fundamental values and the increase of property prices over the longer term.
How serious is the threat of saturation in the South African property market?
There are still opportunities around, in high-growth nodes where disposable income is not under strain. In Gauteng specifically, nodes such as Sandton City continue to trade exceptionally well.
What do you see emerging as the key investment areas over the next few years?
In Gauteng it’s the areas that will be easily accessible. In Johannesburg it will generally be around the Gautrain stations, or nodes that are serviced by the bus network of the Gautrain.
Where is STANLIB investing at the moment?
We are focusing on three key areas. We are the asset managers for the Liberty Property portfolio, the premium retail portfolio in South Africa, which holds Sandton City and Nelson Mandela Square. Second, there is our pan-Africa property focus. We will complete the capital raising and deployment activities of the STANLIB Africa direct property development fund – which invests in real estate in countries such as Nigeria, Ghana, Kenya and Uganda – before we grow the portfolio in other areas. The third focus area is the creation of in-country vehicles in the countries where STANLIB has a presence, the first of which will be the Fahari REIT in Kenya.
What have been your biggest moves over the past few years?
I would highlight the recent announcement that we have acquired 25% of the Melrose Arch precinct in Johannesburg (see map opposite), though this transaction is still subject to South African competition commission approvals.
How will you approach the market in future?
With caution, but with confidence. Once we have chosen a market, we ensure that we entrench ourselves in the environment. We walk the streets, we build relationships and we put people on the ground. Our move into Africa has been deliberate. We created the pan-African investment vehicle, but the fact that we have presence in these countries ensures that we understand the local markets.
Industrial view
Engelbert Binedell, divisional director of industrial properties, Growthpoint
The head of industrial at the biggest listed developer in South Africa talks trends, hurdles and returns in the country’s best-performing sector
“The biggest trend in industrial right now is the change in what the sector actually encompasses. It is often still perceived as smoke-stack manufacturing but we’re moving away from that now towards warehouses and distribution. Our portfolio is now roughly 60% warehouses and logistics and the rest is light and heavy manufacturing. We certainly believe that having a diversified portfolio is the right thing to do.
Gauteng is still the biggest economy in the country. While we are seeing good activity in Cape Town and Durban in the industrial sector, there are still around 20 deals being done in Gauteng for every one in Cape Town – which is the next biggest market. The key industrial areas in and around Gauteng include Pomona, just north of Tambo airport, where there are huge swathes of agricultural land and a lot of people are looking to develop big distribution warehouses. The second key area is probably the area south of Johannesburg along Route 59. The really big development area, though, is up towards Pretoria. At Waterfall City you have industrial incorporated into a major mixed-use development, which is very new here. It’s a good distance away, on the other side of the development from all the residential, retail, hotels and the hospital. But it’s a key site and what we’re calling sexy industrial.
But competition is fierce in the sector and I think we are going to have to work out a way to develop more quickly and cheaply to remain competitive. I think we’ll have to think of different ways to charge rent on retail warehouses. Instead of per sq ft it will need to be maybe a per turnover rental.
We are also looking at emerging industrial markets here in South Africa – things that are already pretty established in Europe. Self-storage, for example. That’s something we have only been dabbling with here in this country. And data storage. We don’t yet have that as an asset class but we can see the need to diversify so we are looking at these two areas – both will be a bit of a leap of faith for us.”
emily.wright@estatesgazette.com
Africa special:
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