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 It's a tenant's market, but not much to smile about

 

 Given the current conditions of the South African business property market, tenants should be smiling, but the underlying cause is the lacklustre economy which tends to spread its misery to both landlord and tenant.

Gerrie van Biljon, executive director of Business Partners, describes the South African business property scene as very much a tenant’s market: there is a general over-supply of retail, industrial and especially office space on the market, giving tenants much more choice than in the past.

The result is that landlords are more flexible about rental escalations or the odd rental delay, and are willing to listen to requests for improvements and the installation of features such as security gates.

Most significantly, a lease coming up for renewal under current circumstances has a good chance of being renegotiated in favour of the tenant. Van Biljon emphasises that many rentals paid by businesses to their landlords today are not market-related. They are in fact above market levels, held there by multi-year leases that were signed in times when the landlord-tenant power balance was quite different. It is only when those leases come up for renewal that many will be negotiated down to market level.

If the over-supply of business premises were only the result of overreaching property developers, then tenants would have had a reason to smile, but unfortunately, the main cause is the pain that those very tenants are feeling in tight economic conditions.

An increase in rental defaults shows that businesses are generally under a lot of pressure and struggle to meet their commitments, including paying the rent. That is why, when a lease comes up for renewal, it is often not just a lower rental that tenants are asking for, but shorter lease periods or reduced space.

“The traditional five-year lease with an option to renew for another five is no longer the norm. Nowadays, tenants want a year lease with the option of another year. It gives a business owner, who is uncertain in these circumstances, the flexibility to move to a smaller place – or perhaps even to bigger premises – when conditions change,” says Van Biljon.

Landlords have it from both sides. Reliable, financially sound tenants are increasingly difficult to find. When a good tenant starts asking for all sorts of concessions, including a lower rental, it becomes increasingly difficult to pass on rising property costs to the tenants. The landlord therefore feels the squeeze of the rising costs of maintenance, insurance, power installation, and communal utilities such as water and electricity.

There is one group of landlords that still seem impervious to the current market conditions, says Van Biljon. The managers of the mega-shopping malls, mostly owned by large listed property funds, tend to be inflexible as always and will normally not come down with rentals, nor compromise for the sake of helping a tenant tide over a bad patch. Their answer to despairing tenants who throw back their keys is to paste brightly coloured paper in the windows and wait for the tide to turn.

Large shopping-centre landlords are also increasingly reluctant to negotiate with small tenants under the current conditions, says Van Biljon, preferring, for example, to negotiate a lease with a corporate or a franchisor rather than the franchisee who will be operating the shop. “It is definitely a trend that they are pickier about finding reliable, stable and financially healthy tenants than in the past.”

The situation is somewhat different at smaller regional centres, whose owners take a more holistic management approach. A shop standing empty hurts the whole centre, including the anchor tenants, and the landlord therefore tends to be flexible and more sensitive to the pains of the tenants.

Very few property players venture into new developments under current conditions, and the cranes have largely disappeared from city skylines. Property investors may still buy an existing building, albeit with much hesitation.

But things have not entirely ground to a halt, says Van Biljon. Property owners nowadays tend to channel their energy into improving their existing businesses in the hope of increasing value.

This, together with the fact that property owners are holding on to their assets, thereby keeping property prices stable, shows Van Biljon that there is still a deep-seated belief in property as a long term safe investment.

He believes that current anaemic conditions will most likely dominate the property market for the rest of the year, and probably beyond that. No shake-ups are expected. Even if the economy picks up, the usual slight lag will have to play out before spring returns to the property industry. The best advice for landlord and tenant alike is to grit your teeth. It may even pass as a smile.


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