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Picture not all bleak for commercial real estate

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Investors and other role players in the commercial property market might have little to be optimistic about in the current environment but this does not mean there is nothing.

The rays of light might just be a little harder to see.

The economy is down, load shedding is back with a vengeance, and rates and taxes, not to mention utility costs, continue to spiral upwards, painting a bleak picture of both the present and the future.

Ultimately, it is “do or die” this year for commercial real estate industry players, with the need for adaptation, diversification and innovation at an all-time high, says Galetti chief executive John Jack.

Commercial property was under major pressure last year, with many companies downscaling or opting to renew rather than relocate. In addition, landlord incentives to attract and retain tenants had the industry battling it out and losing significant margins.

“We saw companies renewing rents at 20% to 30% discounts,” Jack says.

A survey run by Galetti echoes this, with 71% of respondents saying they expected a 5% to 20% reduction in their property rents due to the economic downturn.

Owners should not delay maintenance just because the market is soft. Picture: Supplied

On the upside already, lessors are taking care of the tenants who pay on time, every time, says Rob Odendaal, commercial specialist for Lew Geffen Sotheby’s International Realty Commercial Division in Cape Town. Lease extensions are being granted more readily to secure well-paying tenants and problem tenants are not getting their leases renewed.

“Savvy landlords are not taking any tenant, even in a high vacancy market, as they know that what starts badly usually ends up worse.”

And regardless of the cycle, there is consistent demand for 250m² to 500m² industrial space within secure parks and environs as owner-occupiers tend to drive the fundamentals in this market.

“There is strong demand from the Listed Property Funds for A-grade office buildings at good yields and secure leases and covenants,” says Odendaal, noting that Parklands, Brooklyn, the CBD, Montague Gardens and Parow had the most units registered, according to Deeds Office data. The highest values were registered in the CBD, Epping 1 and 2, and Parklands.

The general office market has come under pressure, with many offices standing empty, but Chris Cilliers, chief executive and co-principal of Lew Geffen Sotheby’s International Realty in the Winelands, says those priced correctly and which have sufficient parking will still find tenants.

Premium office space in good locations has also done “exceptionally well”.

“The best locations are the new growth nodes in Paarl, predominantly on the southern urban edge of town.”

In the industrial sector, especially in Stellenbosch and Somerset West, there is still considerable demand for small to medium-sized warehousing and industrial property of around 300m², of which there is currently very little stock available, she says.

“The main criteria for these properties are that they are in good, safe areas and preferably in close proximity to main arterials.”

While the announcement of a repo rate reduction of 25 basis points was widely welcomed by commercial property owners, Jack says the cut was smaller than the industry hoped for.

“The industry has been under major pressure with many companies downscaling or opting to renew rather than relocate. Adding to this, electricity supply constraints are likely to keep economic activity muted in the near term.”

But he believes the industry will start to recoup its losses this year.

“While some say that the private sector is on an investment strike, this is simply not true. We started seeing really promising private-sector fixed-investment growth towards the end of last year and this trend is set to continue.”

Being aware of the current commercial real estate trends is therefore crucial to capitalising on any positives there might be.

Erwin Rode of Rode & Associates was unable declare any good news in the pipeline but did offer advice for commercial property owners: “The only reasonable strategy is old-fashioned fastidious management of your portfolio, including finding a balance between the rent that the market will bear and optimising returns.

“In a soft market, only the foolhardy will try to extract a rent that the tenant cannot afford. And the temptation is to delay maintenance but this often the wrong option when you are in competition.”

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