Africa’s tallest building may signal real estate oversupply in Johannesburg’s Sandton
A classic construction boom has unfolded in the Sandton area of Johannesburg even as a worsening economic climate clouds the outlook for the city as a financial centre.
The risk of hubris is clear as Sandton prepares to unveil The Leonardo, a 234-metre skyscraper, billed as Africa’s tallest building and scheduled to open later this year.
Backed by Legacy Group and Nedbank, The Leonardo is a 234-metre skyscraper within walking distance of the Johannesburg Stock Exchange. The development will house 254 apartments, five floors of office space and leisure facilities, as well as a pre-school.
“The residential market is under pressure and there is to our mind limited capital growth in the short to medium term given the weak economy and economic outlook,” says Craig Smith, head of research and property at Anchor Stockbrokers in Johannesburg.
- “High-end residential product has not been immune to this slowdown and we therefore anticipate that returns from this type of product won’t be particularly stellar over the short term,” he says.
While there’s no prospect of the Leonardo becoming a white elephant, Smith says he’s “not convinced” that the building will prove to be a good financial investment.
- A one-bedroom apartment in The Leonardo will sell for about 5.5mn rand (330,000 euros), with two-bed apartments priced between 7mn and 8mn rand.
That note of caution echoes the findings of Will Harris, CEO of commercial real-estate software and data services provider Gmaven. He estimated earlier this year that 21.8% of Sandton’s 2-million square metres of office space lies empty.
- That’s almost double the 11% national vacancy estimate of the South Africa Property Owners Association (SAPOA).
Build it and they’ll come?
The outlook for South African real estate is cloudy at best. Growthpoint, South Africa’s largest listed property company, said in its results for the year to June 30 that tenants are spoilt for choice and negotiations are tough. The group identified an oversupply of space across all property sectors in South Africa, adding that the macro-economic environment is “weighing heavily” on the group’s ability to increase dividends in 2020.
Bruce Abbott, a specialist in real-estate recruitment with MacDonald & Co. in Johannesburg, points to the lack of a similar product to The Leonardo. Most recent developments in central Sandton, he says, have been refurbishments and not new builds, meaning that there should be demand given fair pricing.
Yet office space development in Sandton has continued at breakneck speed even as the risks to South Africa’s economy have mounted.
- SAPOA’s office vacancy survey for the third quarter showed Sandton’s office vacancy rate at 17.1%.
- The area now has more prime grade offices than anywhere else in South Africa, with the total supply having exploded from 1,000 square metres in 2010 to 95,000 in the first quarter of 2019.
- As of September, five of the country’s top ten developments, accounting for 59.4% of total office development, were in Gauteng’s Sandton, Waterfall and Rosebank areas.
Given the economic headwinds facing South Africa, a national office vacancy rate of 10% may be the “new normal” in years to come, the SAPOA report predicts.
- A return to a national vacancy rate of around 5% last seen in 2008 is seen as a tall order as it would need at least 75,000 new office jobs to be created.
Bottom Line: The opening of Africa’s tallest building may come to be seen as calling the top of an unsustainable local property boom.