Despite the perception that downtown, inner city living is fast becoming a preferred choice among Joburg's trendy set, owners of upmarket office-to-flat conversions are apparently battling to find tenants.
Property commentators say it's one thing for developers to sell high-end CBD products off-plan to buy-to-let investors - typically priced at between R10 000 and R15?000?sq?m - but to let these units once completed is an entirely different matter.
The general view is that a lack of infrastructure such as shopping facilities and restaurants as well as crime and grime are seeing high-income tenants staying put in the northern suburbs of Johannesburg.
Pace Property Group MD David Green, who is involved in a number of inner city office-to-flat conversions, says while there is huge demand for bachelor and one bedroom flats priced at rentals of below R5?000/month, the inner city is not attracting upmarket professionals (owner-occupiers or tenants) to the extent that many expected.
Green believes the reason is that upmarket CBD developments are simply too pricey, competing with developments in the northern suburbs of Johannesburg.
"Why would someone pay R15 000/sq?m in downtown Jo'burg when they can buy a new apartment for less in Sandton?" Green says tenants are also unlikely to pay R10?000/month for a luxury apartment in the inner city when they can rent in Hyde Park at the same price.
Trafalgar chairman Neville Schaefer, who manages about 3?000 rental flats in Johannesburg's inner city, Hillbrow and Berea, agrees that demand for upper priced rental accommodation has yet to materialise in Jo'burg's CBD.
He says while inner city property owners can easily fill their flats with lower and middle-income tenants who are prepared to pay between R1?800 and R3 000/month, there's little if any demand for units priced above that.
Schaefer says despite talk of upmarket retail, leisure and entertainment offerings coming to the CBD, the reality is that the inner city doesn't offer sufficient infrastructure to support high-end living. "I would be nervous to invest in anything priced at R600?000 or more in the inner city," he says.
Meanwhile, developer Urban Ocean has sold all 135 luxury apartments at The Franklin, the old Ernst & Young building across from the old JSE headquarters in Diagonal Street, from R299 000 right up to R1,8m. Buyers are still waiting for occupation. But whether investors will find tenants at reasonable rentals remains to be seen.
Scramble for inner city conversions continues
The extent to which the office-to-flat renewal and conversion trend is gaining momentum in downtown Jo'burg is highlighted in the latest annual South African Property Report by JHI Real Estate.
The report states that a key challenge facing the City of Johannesburg Property Company is to supply sufficient stock to the more than 200 investors and developers currently clamouring for inner-city buildings to rehabilitate. Some of the most popular areas for office-to-flat conversions are Braamfontein, the Newtown precinct, the financial district west of the CBD, the Absa precinct and the retail precinct (the area close to the Carlton Centre and Supreme Court).
JHI Real Estate chairman Les Weil says inner city housing stock is expected to increase significantly over the next few years as developers and property investors take advantage of tax concessions to build and renovate buildings in designated inner city areas.
He says even institutional investors are now looking at rehabilitating some of their old office buildings that were previously boarded up. For instance, the Old Mutual Property Group and City Property Administration have joined forces to convert redundant office space into more than 400 middle-income residential apartments in downtown Jo'burg.
But Weil says that not all proposed office-to-flat conversions will go ahead as escalating building costs have made some of these projects less viable. He argues that margins have no doubt shrunk, and developers have to be careful that they don't price themselves out of the market.
On the eastern side of the inner city completed units sell at roughly R3?000 to R5 000/sq m while units in the more upmarket western side around the financial district will fetch between R7?000 and R10 000/sq m, says Weil. - Joan Muller
Article courtesy of Finweek.