The South African economy is en route to recovery from the crippling effects of the COVID-19 pandemic, and the commercial real estate sector is no different.
The decline of the actual average capital values on commercial real estate in 2020 is expected to halt as we slowly move back to normality. With this positive change comes new opportunities to invest in commercial real estate, particularly in the buy-to-let domain.
As the name suggests, buy-to-let is the act of purchasing a property to rent out the property.
Investing in this type of commercial real estate in South Africa can be a great way to generate income and build long-term wealth. When done right, buy-to-let investment can provide a steady stream of rental income and the potential for capital gains when the property is eventually sold.
In recent years, commercial real estate vacancy rates have been rising in many parts of the world. This increase in vacant space is due to several factors, including the growth of online shopping, the rise of co-working spaces, and the effects of the global pandemic.
As a result of these trends, many retail stores, office buildings, and other commercial properties are sitting empty. While this may be bad news for landlords and property developers, it can be an opportunity for investors.
By investing in these properties, investors can take advantage of the current market conditions and earn rental income from businesses looking for space.
The office market in Johannesburg is seeing an interesting dynamic at the moment. As many companies scaled down on space requirements, there has been a shift towards more remote work and rotating employees between different buildings throughout town - something known as a "rotational" or 'hybrid' commuting culture where they don't have one fixed place of employment like most people do with their 9-5 job.
According to the quarterly "Rode Report on the State of the SA Property Market", Sandton, SA’s largest business node, office vacancies rose to a record 22.5% in the fourth quarter of 2021, up from a pre-pandemic 17%.
The office vacancy rates in several major nodes, including Joburg’s Rosebank and Parktown have increased significantly. In Waterfall City, Midrand, where new buildings are currently under construction, this vacancy trend was noticeable, with an 18% increase from 4%. Cape Town's central business district saw a doubling of vacancies at 20%, while Century city experienced even higher growth reaching nearly 30%.
With vacancy rates expected to continue rising in the coming years, now is a great time to invest in buy-to-let commercial real estate.
For investors looking to buy-to-let commercial real estate, the increase in vacancy rates that the country has experienced can be an excellent opportunity. By converting commercial property into residential units, investors can provide much-needed housing while also earning a healthy return on their investment.
It is important to weigh up all of the pros and cons before making a decision. With careful planning and execution, it is possible to successfully convert a commercial building into residential property.
In recent years, there has been a trend among developers to convert commercial real estate for residential use. This has been driven in part by the strong demand for rental units and the attractive returns that can be achieved in the buy-to-let market.
However, not all CBDs offer the same opportunity for such conversions.
According to Emira, commercial to residential real estate conversions indicate good growth in the right regions.
Growthpoint Properties, South Africa's largest landlord, is converting its Riverwoods Office Park in Bedfordview, Johannesburg, into residential units to offset the glut in office space. The ZAR 200 million project will see Growthpoint teaming up with black-owned Setso Property Fund and BlackBrick Club to convert the 35,000m² sites at St Andrews, Briardale and Gullivers into 257 apartments.
The move is in line with global trends of landlords converting commercial real estate to residential to capitalise on the growing need for homes. In South Africa, this market has been particularly strong in recent years as investors seek to take advantage of rising rents and strong demand from tenants. Growthpoint's Riverwoods project is a vote of confidence in the future of the buy-to-let market in South Africa.
In Cape Town, for instance, several new higher-end offices to residential conversions have come on stream in recent months, resulting in an oversupply of luxury rental units. By contrast, there has been a lack of new affordable rental supply as developers struggle to see solid financial returns in the lower-end rental market. As a result, renters in Cape Town face increasing pressure as competition for affordable units intensifies.
Gary Palmer, CEO of Paragon Lending Solutions, explains that Cape Town's inner-city properties are far more expensive than those in other metropoles like Durban and Johannesburg. This, combined with conversion costs, makes the returns less attractive. Joel agrees that investors and developers should be selective when choosing a location for their projects.
The current circumstances in Cape Town have certainly decreased the number of opportunities available. The focus should be on good urban nodes in Gauteng, such as Randburg. There is a high vacancy in B-grade office space, indicating a trend toward converting commercial real estate to residential and an excellent buy to let opportunity for those with the means.
The demand for residential rentals is very high, making it an ideal investment. Randburg is also ideally situated for those working in Randburg and Sandton, with excellent access to public transport. This makes it an attractive option for those looking to invest in South Africa.
With that in mind, it's crucial to stay up-to-date on the latest trends in South Africa's property market.
Contact Seeff. We can help you find the best opportunities in the market and guide you through the entire process, from finding a property to getting your investment up and running.
With our extensive knowledge of the South African market, we can help you make informed decisions that will lead to success in this competitive industry.