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Costs are stifling development

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Local authorities chasing away investors with constant rates, taxes and electricity increases

South African property investors are being put off by the high operating costs of commercial properties and instead are looking at investing in other countries.
Rates, taxes and electricity, in particular, are squeezing commercial property owners dry and the government needs to find a solution and quickly, says Neil Gopal, chief executive South African Property Owners Association (Sapoa).

These costs are a “significant portion” of operating expenses.

“We have situations where tenants are paying more rates than rental.”

Gopal says local authorities need to stop using property rates as a mechanism to balance their books. Instead, they should look at their expenses in a “more serious manner”. Paying rates is a necessity, he says, but they must be calculated and charged in a more transparent and regulated manner.

“What government officials are failing to comprehend is that local developers and investors are slowly stopping their investments in South Africa because of high costs associated with developments and/or the delays experienced with applications.

“It is fairly clear that a higher proportion of property investors are now investing internationally and not locally due to these challenges.”

Gopal says politicians will fail to alleviate poverty or create employment if they fail to find a solution to this matter as quickly as possible.

“Property owners are cutting back with energy efficiency measures on existing buildings, but the reality is there are better returns in places such as eastern Europe, Zimbabwe, Kenya, Ghana and Mauritius. Investors will, and are already, investing elsewhere.”

MSCI’s latest Operating Cost report shows that from January to June, total operating costs equated to 33.9% of gross income across all property types.

Among the major operating cost categories, municipal charges constituted 63.9% as at the end of June. “Since the early 2000s municipal charges have increased almost sevenfold from R5.24/m² in 2000 to R36.04/m² in June 2018,” the report says, adding that on a sector level, industrial property’s municipal charges make up the largest percentage of total costs at 72.7%.

The country’s office sector is spending the most on repairs/maintenance and tenant installations to boost tenant retention. Picture: Jean-Philippe Delberghe

This is followed by the retail and office sectors at 64.4% and 59.5% respectively. “Overall operating costs increased by R5.74/m² per month for the period ended June 2018. This is an 11.3% increase on a square metre basis.

The biggest driver of the increase was municipal charges (increase of R3.47/m²).” Repairs/maintenance and tenant installations grew to be the second largest cost category on an all-property level as at June 2018, the report states.

This was after an 18.7% increase in cost per square metre. The office sector contributes the most to this increase (11.8%), which is roughly double the figure recorded for retail (6.5%) and industrial property (5.7%).

Costs for companies

Total business costs as at June 2018 are:

  • Municipal charges: 63.9%.
  • Property, facilities and leasing fees and commissions: 9.7%.
  • Insurance, bad debts and other: 7.2%.
  • Repairs, maintenance, and tenant installation: 7.9%.
  • Soft services (including cleaning and security): 11.3%.

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