Tuesday, December 11

COMMERCIAL: Investors wrung out to dry

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Owners are moving outside the country, as local operating costs rocket

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

These costs are a “significant portion” of the operating expenses. “We have situations where tenants are paying more rates than rental.” Gopal says locals need to stop using property rates as a mechanism to balance their books, and to, rather, look at their expenses in a “more serious manner”.

Paying rates is a necessity, he agrees, but says they need to be calculated and charged in a more transparent and regulated manner. “What they (government officials) are failing to comprehend is that local developers and investors are slowly stopping their investments in South Africa because of the 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 because of these challenges.” 

He adds that politicians will fail to alleviate poverty or create further employment if they don’t find a solution to this matter soon.

“Property owners are ‘cutting back’ with energy efficiency measures on existing buildings, but the reality is that there are better returns in places like Eastern Europe, Zimbabwe, Kenya, Ghana and Mauritius… .”

MSCI’s latest Operating Cost Report, shows that from January to June 2018, total operating costs equated to 33.9% of gross income across all property types. And among the major operating cost categories, municipal charges constituted 63.9% as at the end of June.

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

“Since the early 2000s municipal charges have increased almost sevenfold from R5.24 per m² in 2000 to R36.04 per m² in June 2018,” the report states, and on a sector level, industrial property’s municipal charges make up the largest percentage of total costs at 72.7%. This is followed by the retail and office sectors at 64.4% and 59.5% respectively. 

“Overall operating costs increased by R5.74 per 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 per 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% per m² increase.

The office sector contributes the most to this increase (11.8%). “Driven by the office sector’s high and sticky vacancy rate, combined with the difficult operating environment, landlords are placing an increased emphasis on costs that could boost retention given the additional cost of replacing a tenant relative to renewal,” the report says.

Breakdown of expenses/fees

Total operating 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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