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Rising costs taking toll on both landlords and tenants

The escalation in municipal rates and charges has become “troublesome” for the commercial property sector in recent years and will be a key issue for the sector this year.

These increases will take their toll on commercial property owners and on tenants who are already under increasing financial pressure, says FNB commercial property economist John Loos.

Commenting on MSCI data, he says rates and taxes made up 24.9% of the total operating costs on an “all property” level, which includes residential properties, in the first half of last year. Municipal charges and electricity costs accounted for 7.4% and 29.8%, respectively.

“These categories together are the lion’s share of operating costs and above-inflation escalations in these categories have a major cost impact.”

In earlier years, rates and taxes were “perhaps of less concern” because economic growth and tenant financial positions were stronger.

However, in the current deteriorating economic environment, Loos says recovering escalating operating costs, such as municipal rates, charges and utilities tariffs, becomes “increasingly challenging”, given a tenant population under increasing financial pressure.

“Strong municipal rates and charges increases have come in a period when Eskom has also been sharply escalating electricity charges, pressuring tenants even more.” However, as these sources of pressure take their toll on the financial situation of the tenant population, from which the operating costs are recovered, he says it won’t necessarily all be seen in tenant arrears.

“It may well have a partial impact on rising rental arrears, but these escalations can also lead to a partial ‘crowding out’ of other players competing for revenue from a pressured tenant population. “These include other suppliers of services to commercial properties who may be forced into moderating their own escalations.

Electricity accounted for almost 30% of commercial property owners’ total operating costs in the first half of last year. Picture: Dan Gold

Landlords, too, would have to moderate their own rental increases/escalations in these toughening economic times.” Loos say: “I believe local government-related and electricity cost increases will be a key issue for the commercial property sector this year.” The South African Property Owners Association’s (Sapoa) latest rates and taxes report reveals that, as at June, rates and taxes was the fastest growing property operating cost category since 2009, exceeding even the growth of electricity and other municipal charges, such as water, sewerage and refuse collection.

For the 10 and a half year period ending in June, rates and taxes increased by 147%, municipal charges by 135% and electricity by 125%. This growth in rates and taxes translates into a compound annual growth rate of 8.6% compared to the 8.1% of electricity over the same period, the report states.

In 2005, rates and taxes accounted for 17.3% of commercial property owners’ total operating costs, but by June this had escalated to 25.2%. “The accelerating growth in rates post-2007 has coincided with a lower level of economic growth. This has seen rates become a larger portion of overall operating costs and total income.”

The report also compared the growth of rates and taxes for these three property types in the Western Cape, KwaZuluNatal and Gauteng, finding there was a “significant variance” as of June.

“A key driver was the different ‘cents in the rand’ rates levied by the respective underlying municipalities within the provinces and the frequency and accuracy of the respective municipal evaluation.” KwaZulu-Natal continues to have the highest rates and taxes as a percentage of total income for all three sectors. 

The report notes the comparisons in both cost per square metre and percentage of gross income in three provinces as:

Retail:

● Western Cape: R24.64/m² – 8.4%.

● KwaZulu-Natal: R29.96/ m² – 11%.

● Gauteng: R27.01/m² – 10.7%.

Office:

● Western Cape: R15.59/m² – 7.3%.

● KwaZulu-Natal: R15.66/m² – 10.8%

Gauteng: R17.04/m² – 8.8%.

Industrial:

● Western Cape: R3.87/m² – 5.6%.

● KwaZulu-Natal: R9.86/m² – 12.7%.

● Gauteng: R3.92/m² – 5.9%.

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