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Report shows that 62% of operating expenses go to municipalities

Municipal charges continue to account for the largest proportion of commercial property operating costs, placing owners under increasing pressure in an already difficult economic and business climate.

The South African Property Owners Association’s (Sapoa) new Operating Cost Report indicates that, as at the end of June 2019, these costs – rates and taxes, electricity and other metered charges such as water – accounted for 62% of total operating costs.

As at the end of June, total commercial property operating costs equated to 35.2% of gross income. While this is 50 basis points down from December, it is 50 basis points higher than the long-term average of 34.7%, says the report.

Analysing the report findings, Sapoa chief executive Neil Gopal says commercial property owners are facing a number of challenges. These include:

* No guarantee of electricity supply.

* Water supply and water pressure issues.

* Delays in approval of zoning applications.

* “Construction mafia” invading sites and using violence to extort money and stopping developments.

* Excessive property rates imposed by municipalities to balance their budgets and internal inefficiencies.

* Low GDP growth

* Low skills base.

* Exodus of skilled professionals to other countries.

There is also legislation from the national government, such as the competitions commissioner wanting to regulate rents landlords can charge tenants. “This is unheard of in a free market and has significant unintended consequences for the country and the sector.”

Municipal charges, including electricity and water, continue to account for the highest proportion of commercial property operating costs. Picture: Denny Franzkowiak

Gopal also cites municipalities’ “inability to bill and collect outstanding rates” from residents as a major challenge. It means they then impose higher rates and tariffs on the commercial sector to make up the shortfall.

Further, inconsistent municipal property valuations have a direct impact on the fair and equitable distribution of property rates. “Based on a sample of retail, commercial and industrial properties, the values in certain municipal valuation rolls are, on average, less than 60% of the market value prescribed by the Municipal Property Rates Act. The goal should be properties are valued at 100% of market value, which will also contribute to transparency and acceptance of the tax.”

Gopal says municipalities need to take the state of the economy into consideration when determining tariffs for property rates. “They are unaware of, or simply ignore, the realities on the ground. The impact on monthly property rates as a result of the correction of the values will have a huge impact on the sustainability of businesses.”

In terms of the sector’s challenges, he says the economy is under severe strain and the limited ability to absorb additional costs could force businesses to cut back on the space they occupy or even close.

Gopal believes the challenges will continue next year, and says “the impact of junk status must also be factored in.” Sapoa is “trying” to manage these issues with government departments, but in the meantime, commercial property owners are seeking better, more sustainable opportunities offshore.

While the Sapoa report notes an improvement in the gross-cost-to-income ratio, it says this must be looked at in context. For example, the office sector’s improving cost ratio is the result of several “false savings”, such as declining letting commissions, electricity usage and cleaning costs, all a result of a decline in the level of occupied area.

Reflecting on the cost ratios, FNB commercial property economist John Loos concurs with the main view in the report that it might be difficult to avoid further decline going forward. “Base rental growth looks set to be under even further downward pressure as vacancy rates rise in this stagnating economy. Secondly, as the report points out, recovery rates are now high, and may be near their ceiling.”

In addition, he expects further “significant” inflation in municipal rates and charges and utility tariffs, most notably electricity, to exert upward pressure on operating costs. “This is because the overall state of government and relevant state-owned enterprise finances appears to remain dire. We could see some increase in cost/income ratios in the not too distant future.”

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