SOUTH AFRICAN OFFICE SECTOR AS AN INVESTMENT OPPORTUNITY TABLE OF CONTENTS DECLARATION CHAPTER 1: THE RESEARCH BACKGROUND 1.1Introduction 1.2The research problem statement 1.3The research questions CHAPTER 2: BRIEF REVIEW OF THE RELATED LITERATURE 2.1Real Estate Investment as a Wealth Creation Tool 2.2Real Estate Investment Framework CHAPTER 3: ANALYSIS OF THE SOUTH AFRICAN COMMERCIAL OFFICE SECTOR 3.1Position of South African Listed Property Sector 3.1.12012 Performance 3.1.22013 Performance 3.1.3First Quarter of 2014 Performance 3.2Status of South African Commercial Property Market 3.2.12012 Performance 3.2.22013 Performance 3.3Condition of South African Office Sector 3.3.1Nominal Gross Market Rental Growth across All Grades of Regional Offices 3.3.2Nominal Growth of Regional A-Grade Office Gross Market Rentals 3.3.3Regional Pioneer-Grade Office Gross Market Rentals 3.3.4Regional A+-Grade Office Gross Market Rentals 3.3.5Regional A+-Grade Covered Reserved Parking Gross Market Rentals 3.3.6Rental Escalation Rates on New Leases across All Grades of Regional Offices 3.3.7Typical Gross Outgoings for All Grades of Regional Prime Offices 3.3.8Escalation Rates on Outgoings across All Grades of Regional Offices 3.3.9Capitalisation Rates for A-Grade Multi-Tenanted Regional Offices 3.3.10Typical Rent Free Periods across All Grades of Regional Offices 3.3.11Regional Vacancies CHAPTER 4: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS 4.1Summary and conclusions 4.2Recommendations references
South Africa’s four traditional asset classes are equities, property, bonds and cash. As diversification essential to investment strategy, most investors opt to include either listed or unlisted property within their portfolios. According to Jones Lang LaSalle (2014: 5), around R15.8 billion of the R29 billion worth of sale transactions in 2013, an approximate 54.00%, occurred within the South African office sector. The value of transactions in the office sector improved from R7.6 billion in 2012 to R15.8 billion in 2013, an increase of around 109.00%. Approximately 60.00% of all sale transactions in 2013 occurred in the decentralised office nodes of Gauteng alone. The significant increase in the value of transactions was attributed to the aggressive acquisition of quality office properties by listed property funds. The most prominent transaction in 2013 was Growthpoint’s purchase of The Towers in Alice Lane, Sandton Central Business District (CBD) from Tiber on a 7.40% yield for R563.6 million. Investors’ review of the abovementioned data may leave many with the perception that the office sector might currently be the best performing property sector in South Africa. In order to determine the accuracy of such a perception, most investors will conduct a thorough analysis of South Africa’s listed property sector, professionally managed investment property portfolios and office sector on a nodal basis.
Insufficient research by investors negatively impacts their broader understanding of the South African office sector’s current performance.
Outsourcing may be defined as a contractually managed relationship between a vendor and an enterprise whereby the vendor undertakes responsibility for a business function of the enterprise, which may have been performed by in house staff (White and James, 1996, p. XIV; Barett, 1995, p. 124). It can more concisely be described as the contracting of functional specialists to manage business units that lay outside the framework of the organizations principal activities (Dominguez, 2006, p. 5). Quelin and Duhamel describe outsourcing as the operation of shifting a function previously governed internally to an external supplier through a long-term contract, and involving the transfer of staff to the vendor for the firm. According to their definition, five features typify strategic outsourcing:
a transfer of personnel and physical assets to the service provider.
Outsourcing is a process whereby an organisation transfers a function, previously governed internally, to an external third party via a service level agreement. It generally involves an organisation contractually conferring its staff and management responsibility to an autonomous vendor (Quelin and Duhamel, 2003: 652; Barrett, 1998: 124). Brown and Wilson (2005: 20) define outsourcing as the ‘act of obtaining services from an external source’.
Outsourcing it not limited to services but also embraces business processes. An organisation can outsource any function it considers non-core and supportive of its main business. According to Unnico (2001) services being outsourced by organisations include: Table 1: Services being outsourced
Brown and Wilson (2005: 22-23) states that the most prevalent commercial functions being outsourced by organisations are information technology, administration, distribution and logistics, finance, human resources, manufacturing, contact centres / call centres, sales / marketing, real estate / facilities management and transportation. The most predominant elements of business outsourcing encompass: Table 2: Element of corporate outsourcing
The business environment as we know it changes continuously. The main drivers of such change are the revolution of technology, globalisation and financial pressure. In order for organisations to survive and prosper, it is imperative for them to focus on their core business functions. Core business functions are however reliant on non-core business functions and it is therefore essential for organisations to have a clear strategy to their support operations (Lee and Harris, 2001: 25-29). According to Brown and Wilson (2005: 45-47) the main drivers for outsourcing are:
In order for an organisation to decide whether to outsource a business support service or process, it need to study the risks involved with outsourcing. According to According to Hinks and Hanson** (2001: 48-49) the disadvantages of outsourcing are:
It is imperative for an organisation to analyse the benefits of outsourcing, and to weigh them up against the risks associated with contracting-out, before marking a decision of whether to outsource or not. According to Hinks and Hanson** (2001: 48-49) the advantages of outsourcing are:
Chapter 2 brown and wilson
Chapter 6 brown and Wilson Chapter 5 wiley from 5.9 onwards
It is evident from the research conducted, that even though the South African office sector’s total return improved from 11.90% in 2012 to 13.60% in 2013, the sector’s performance remains inferior to that of the industrial – and retail sectors. Cape Town CBD remains the best performing city centre in South Africa. The top regional decentralised office nodes are Century City in Cape Town, La Lucia Ridge in Durban, Sandton CBD in Johannesburg and Menlyn in Pretoria. The South African office sector might recover during the course of 2014, should gross domestic product growth and employment figures improve, pending the implementation of the National Development Plan by the South African Government.
Investors should ensure that they undertake adequate research in order to establish the true performance of a sector. Inadequate research can result in poor investment decisions. It is evident from the research that even though the office sector achieved the highest total investment transactions value of all three sectors in 2013, it remains the bottom performer in terms of total return. REFERENCES Capgemini and RBC Asset Management, 2013. World Wealth Report 2013. [online] Capgemini and RBC Asset Management. Available at: https://www.capgemini.com/resource-file-access/resource/pdf/wwr_2013_0.pdf [Accessed 08 May 2014]. Catalyst Fund Managers, 2013. Listed Property Sector Monthly Overview January 2013. [online] Catalyst Fund Managers. Available at: https://www.catalyst.co.za/documents/fundDocs/monthlyReview/catalystDomestic/2013/monthlyReportJan2013.pdf [Accessed 08 May 2014]. Catalyst Fund Managers, 2014a. Listed Property Sector Monthly Overview January 2014. [online] Catalyst Fund Managers. Available at: https://www.catalyst.co.za/documents/fundDocs/monthlyReview/catalystDomestic/2014/monthlyreportJan2014.pdf [Accessed 08 May 2014]. Catalyst Fund Managers, 2014b. South African Listed Property Review April 2014. [online] Catalyst Fund Managers. Available at: https://www.catalyst.co.za/documents/fundDocs/monthlyReview/catalystDomestic/2014/Monthly%20Report%20Apr%202014.pdf [Accessed 08 May 2014]. Cloete, C.E., 2005. Property Investment in South Africa. 2nd ed. Pretoria: The South African Property Education Trust. IPD, 2013. South African property delivers improved performance in 2012. [press release], 25 March 2013, Available at: https://www.ipd.com/about/media_centre/2013/SAPOA%20%20IPD%20South%20Africa%20Annual%20Property%20Index.pdf [Accessed 08 May 2014]. IPD, 2014. South African property delivers stable yet impressive performance in 2013. [press release], 26 March 2013, Available at: https://www.ipd.com/about/media_centre/news_archive/2014/IPD%20South%20Africa%202014%20Annual%20Property%20Index%20PR.pdf [Accessed 08 May 2014]. Jones Lang LaSalle, 2014. Commercial Real Estate Transaction Review: South Africa. [online] Jones Lang LaSalle. Available at: https://www.joneslanglasalle.co.za/ResearchLevel1/JLL%20Commercial%20Real%20Estate%20Transaction%20Review%20South%20Africa%202014.pdf [Accessed 08 May 2014]. Phyrr, S.A.; Cooper, J.R.; Wofford, L.E.; Kaplin, S.D.; Lapides, P.D., 1989. Real Estate Investment: Strategy, Analysis, Decisions. New York: Wiley. Rode and Associates, 2014. Rode’s Report 2014:1. Bellville: Rode and Associates. SAPOA, 2014. Office Vacancy Survey Report Q1:2014. [online] SAPOA. Available at: https://www.cmsignition.co.za/download/files_1047/SAPOAOfficeVacancyReport_April2014.pdf [Accessed 08 May 2014].
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