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Survival tips for the sector

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Signing long-term leases, focusing on specific markets and managing risk are good strategies

South Africa’s commercial property sector is being challenged by the poor economic conditions and the key to surviving – and perhaps even thriving – is to focus on sustainability.

This is both from a financial and environmental perspective, says John Whall, chief executive of commercial development company Heartwood Properties.

One way development companies can ensure financial sustainability is to focus on their specific markets and to adopt a conservative approach to risk management.

Using his company’s strategies as examples, Whall explains how a unique tenant shareholding business mode can provide lower than usual risk. Tenants, he says, sign long leases of 10 or more years and, in return, receive a 20% shareholding in the properties.

This, of course, depends on their lease terms, financial stability and equity contributions. The benefit then is a building is leased by tenants who, through their investments, are fully committed to it.

This type of model also creates a long-term property partnership with tenants and encourages longevity, says Whall.

He says this is crucial as properties with long-term leases lend themselves to increased debt levels.

“It’s a relatively low-risk strategy as the debt is matched to the long-term lease profiles.”

Heartwood, he says, uses a combination of debt and equity to fund new developments, with typically 30% to 40% being equity and the balance made up of debt for each development.

A strong focus on implementing green building principles and solar installations provides additional impetus to a development company’s sustainability efforts, Whall says.

Not only are commercial buildings which offer solar technology more attractive to tenants than those which rely solely on unpredictable Eskom power but they also offer significantly reduced energy costs.

“Solar technology has become increasingly more efficient and effective in recent years, particularly as battery storage facilities have improved and costs have been reduced,” says Whall.

Solar solutions not only play an important role in the environmental challenges facing the world but tenants in such properties will be able to successfully weather load shedding.

Green building principles, he emphasises, are no longer a nice-to-have but rather an essential component of any sustainable property development company.

Load shedding has been highly detrimental to the economy.

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