Value emerging in the SA office property sector for long-term investors

Over the past five years, the office property sector has suffered from a mixture of negative factors, led by the oversupply of gross lettable space. According to the South African Property Owners Association, in December 2019 the office vacancy rate was 12.7% and deteriorated to 18% in December 2021. It improved marginally to 16% in Q322. Rising office vacancies were exacerbated by the COVID-19 lockdowns and an exponential increase in the adoption of remote working. Post the COVID pandemic, some companies have embraced a hybrid working model which, in most cases, allows employees to work onsite for two to three days a week. This has resulted in workspace optimisation and contributed to the downsizing of office space by tenants, especially at lease expiry. According to our research, more than 60% of listed property companies in South Africa have exposure to the office property sector. Given the low vacancy rates in retail (5%) and industrial (4%), it is prudent to conclude that high office vacancy rates have made a significant contribution to the de-rating of the listed property sector, which currently trades at a 40% discount to NAV.