PROPERTY: Pressure On Commercial Property
Recent Western Cape Business News
THE current economic situation, although improving somewhat on last year, is still putting great pressure on commercial and retail property owners who are seeing significant pressure on commercial property values.
Statistics show that rentals are down and vacancies are up, which has major implications for rental growth, the main driver of optimistic valuations of commercial property.
Certain retail centres are feeling the pressure with consumers keeping their belts tightened, to the point that some retailers have shut shop or moved to cheaper premises – leaving rental vacancies that landlords can ill afford.
Marc Edwards, managing director of Cape Town-based Spire Property Management says landlords need to make tenant retention in retail, commercial and industrial property their number one priority, as the biggest threat to property owners is that tenants will (as a result of higher market vacancies) be offered a better deal elsewhere and not renew their lease agreement as a result. “This has a negative effect on property values given the likely vacancy a tenant’s departure will create,” he says.
“With a vacancy and having to source a new tenant, come the costs of increased commission payable to property brokers as well as high installation costs. An effective discussion with the existing tenants, listening to their wants and needs and accommodating those where possible is generally a far more cost effective and prudent approach,” says Edwards.
“Property operating costs need to be carefully monitored to ensure that the most competitive price is being paid for the best possible service. Property managers should ensure that service levels of soft service suppliers are carefully evaluated and managed to ensure the highest possible service level is provided to the tenant and their clients.”
Edwards advises that professional management teams need to maintain the value of the building on behalf of the owner by ensuring that the facilities are maintained regularly and that preventative maintenance is undertaken to address future problems.
“Slower economic times may actually prove the perfect time to undertake needed maintenance work to properties, as building and maintenance costs tend to reduce due to the lack of work for contractors and increased price competition in the sector as a result.”
“Most property owners are experiencing some strain from increased vacancies and lower rental collection due to increases in liquidations, unemployment factors and operating costs, and we anticipate this trend to continue for the next six to 12 months,” says Marna van der Walt, CEO of JHI property services company.
Meanwhile Tony Bales of Bales & Associates comments that, in the past one could generally rely on the property market flourishing when interest rates were in a downwards cycle. However, just like many quantum changes during the last 24 months, the current market has re-written the ‘rules’.
Interest rates are at historically very low levels, yet the property market (both residential and commercial) seem to be going sideways and in many cases edging downwards. “Why?” asks Bales.
The answer lies in “availability of cash”. Availability of cash from a tenant perspective is measured in terms of profit (and order books). Availability of cash for property investors is measured in terms of the level (and cost) at which banks will lend. As long as both these aspects are in negative territory there will be downward pressure on the commercial property market. The moment any one of these change, so the market will change.
“So, keep a close eye on company profitability - even better, order books - as well as propensity for bank lending in order to make your move ahead of the flock of investment sheep,” Bales says.
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