Major South African property developer dumping offices

Fortress Real Estate has slashed its exposure to offices in South Africa, cutting its portfolio in half to focus on premium-grade logistics and convenience retail. 

This results from a strategy implemented in 2015 to reduce its property portfolio as returns were more attractive in other property segments. 

As of 31 December 2023, the office portfolio comprised 30 buildings valued at R1.3 billion. Its total GLA was 145,906m², and the vacancy rate was 24%. 

By 31 January 2025, the office portfolio consisted of only 15 buildings, representing less than 2% of the Fortress portfolio and a GLA of only 75,000m².  

The strategy implemented in 2015 included a shift towards focussing on premium-grade logistics real estate in South Africa and Central Eastern Europe. 

However, the strategic exit from the office portfolio was hampered by a downturn in the office market both before and after the pandemic. 

This was primarily driven by the acceptance of working from home, a trend that looks to be changing once again, with office workers being recalled by many larger companies.

“We inherited a large office portfolio due to historic corporate actions, and we took responsibility for a difficult situation,” the head of asset management at Fortress, Bruce Collins, said. 

“We then developed a plan to take advantage of where we saw the long-term growth in the real estate market that worked in our favour.”

The proceeds from the non-core asset disposals have been recycled into the logistics development pipeline and strategic retail refurbishments, extensions, and redevelopment.

Fortress believes this represents a better long-term, risk-adjusted return on capital.

Since 2019, Fortress has sold 20 offices out of its portfolio of 35. To do this, it first had to invest in refurbishing some buildings, installing backup power and water sources, and increasing security. 

These aspects make office parks a more appealing workplace and make selling them much easier. 

Some have been concerned that such a flurry of sales may be a fire sale of assets that could have generated returns for shareholders if Fortress had held onto them. 

By the end of 2024, we completed seven sales – three to owner-occupiers and four to residential developers, effectively halving its office portfolio in two years. 

Most of these offices were located in Bryanston, which has experienced increased demand from companies returning to the office. 

Fortress has not completely exited its office properties, but it continues to invest heavily in buildings located in northern Johannesburg. 

Four of the six Bryanston office parks in the Fortress portfolio have been refurbished after consultation with tenants and brokers. These upgrades have enabled it to attract and retain tenants. 

Fortress has said it will continue refurbishing its office portfolio to improve valuations. In the current market, there is limited demand for office assets except from owner-occupiers and landlords converting offices into residential apartments. 

“Businesses with a large contingent of staff in the office are taking advantage of the current market conditions to purchase the buildings they occupy,” Collins said. 

This has enabled Fortress to sell some of its office buildings and has boosted the value of those it retains, benfitting shareholders. 

Its office buildings have proven attractive to property developers too, with some buying up offices to convert them into residential properties. 

For residential developers, office properties in the heart of Sandton are often too expensive for residential conversion and lack the generic design required, given the architecture of these bespoke office buildings. 

However, Fortress’s portfolio of decentralised offices in highly sought-after residential areas such as Bryanston, Fourways, Sunninghill, and Rivonia is proving to be very sought-after. 

In addition, vacant offices are being bought by residential developers who can capitalise on residential demand in urban areas. 

“With the decline of NOI (Net Operating Income) in office, valuations decreased. We are now at a point where it is feasible to convert to residential,” Collins said. 

“We will achieve better long-term, risk-adjusted returns by using the capital from selling office assets and deploying it into logistics and retail.”