JSE-listed real estate investment trust (Reit) Redefine Properties has indicated optimism in the recovery of the office space rental sector, which suffered a severe drop-off in demand at the outbreak of the Covid-19 pandemic.

The office space rental sector accounts for about 35% of Redefine’s portfolio.

“Has the office sector been tough? Undoubtedly. Is it still tough? Yes, it's challenging. Looking at the Redefine portfolio, is it a viable asset class going forward? Most definitely,” Redefine national office asset manager Scott Thorburn said at the Redefine capital markets day on August 27 in Sandton.

He pointed out that, while there is currently not much growth in the office space, there are signs of positive and growing momentum.

“The stats are fairly stable, not real growth, not really where we want to be. But given where we've come from, I think it's actually a very good place to land,” Thorburn said.

He attributed the stability to Redefine’s strategy over the past decade of converting its office space portfolio to be more focused on A- and P-grade properties. In 2014, 49% of the Reit’s office space was secondary grade, with 25% being A-grade and 26% P-grade.

In 2024, only 5% of the portfolio remains secondary grade, while 41% is A-grade and 54% is P-grade.

A-grade properties are high-quality buildings in prime locations with modern amenities, while P-grade properties are the most prestigious, featuring top-tier architecture and technology. Secondary-grade properties are older or in less desirable locations, with lower-quality finishes and facilities.

“Organic growth, rental growth and cost containment is a strong focus point in a market that is constrained, particularly in office space rental growth, which is a challenge. That's when you need to make choices about which assets you actually hold on to,” CEO Andrew König pointed out.

Redefine COO Leon Kok added that most of the Reit’s operating metrics have stabilised, with the office sector being an example of a previously beleaguered sector that is now poised for organic growth.

"Take, for instance, the Western Cape’s office sector, which was engulfed in a perfect storm of oversupply, tepid economic growth and the rise of remote work.

“Today, office space is in high demand and facing a stock shortage, with the city recording a 20% increase in market rentals over the past few months. This shift is driven by the growing popularity of business process outsourcing, the semigration trend and the return of businesses to physical office settings,” he said.

Nationally, the number of vacancies in the office sector has decreased for eight consecutive quarters. The most recent data from the South African Property Owners Association for the second quarter of this year showed a decrease to 14.2%, down from the 18.4% high point for office vacancies.

Redefine’s office vacancy rate shows a similar trajectory, albeit a few percentage points lower, at 12.1% this year, down from a high of 16.1% in 2021.

Thorburn pointed out that the strongest demand appears to be for high-end A- and P-grade office assets, which now comprise a 95% majority of Redefine’s office portfolio. This has resulted in an office occupancy rate of 87.8% for the 2024 financial year.

He added that the rise in market rentals, as observed in stronger nodes in Johannesburg and Cape Town, would help ensure more sustainable and robust returns as the office sector recovers.

“Larger corporates are demanding that staff return to the office for at least three days a week, while smaller companies are returning to an office base, resulting in improved occupancy levels in decentralised office parks that are closer to residential areas,” he pointed out.

He said Redefine’s strategy for boosting office rentals was to create ecosystems around or in its office properties, as the Reit believes that tenants will gravitate towards places where people can socialise, shop, live, work and eat.

Examples include on-site coffee shops and gyms provided where feasible, creating common rest areas, adding hotel-type concierge services for visitors at the front desk, and embracing an overall smart building environment to make life simple for tenant companies and their staff.

Thorburn said that, while there was potential for vacant, underperforming office properties to be sold to residential developers to be converted into residential space, such deals often resulted in the properties being sold at significant discount.

“A lot of our peers have also sold properties to residential converters, generally at a very big cut in the actual value. We've been hesitant to do it. We did get an offer on a property we want to sell, but we weren't prepared to sell it at the price that they wanted to actually make the development work,” he pointed out.