Western Cape Business News

Send  Share  RSS  Twitter  21 Oct 2009

PROPERTY: Tenants In A Strong Position


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Anyone driving through the CBDs of SA’s cities, the major commercial nodes or, indeed, walking through shopping malls will become aware that vacancies are now evident on a growing scale, says Tony Clarke, MD of Cape Town-based Rawson Properties. 

As always in economic downturns, a surplus of space is leading to a situation in which rentals are under pressure.”

Tenants, said Clarke, are increasingly aware that regular 8 or 9% (sometimes higher) annual rental increases now make their premises more expensive than others newly available on the market.  They are likely to move on once the lease expires.

Landlords, on the other hand, are faced with the difficult situation that if they lower their rents to meet market conditions and attract new tenants to their vacant spaces, their existing tenants will soon also start demanding rental drops.

The subsequent loss in revenue to landlords can be quite serious,” said Clarke, “because over the last 24 months new leases have often been at 15 to 20% discounts.

With the tenants now quite clearly holding the whip handle, landlords have to be “creative” about what they offer clients.

Many are reducing the new tenants’ short-term costs, but compensating for this down the line.  For example, in the initial two years the lease might be at a discounted rate and on the balance of the lease period, the tenant pays a premium to catch up.  We find that unless the tenant is a blue chip company with a lengthy lease, landlords are often reducing initial fit out costs as well.

Landlords, said Clarke, must now strive to hold onto their existing regularly paying tenants.

Landlords should bear in mind that good service, good maintenance and good facilities (especially these days as regards parking) will often induce the tenant to accept a rent at a higher-than-market rent value.”

Particular care, said Clarke, should be paid to controlling the extra costs which are distributed among tenants. 

The economies of scale achieved by the big service groups often make it cheaper to outsource the management and maintenance rather than to handle them in-house.”

Clarke said that traffic congestion and petrol costs have led to many tenants seeking premises nearer their home base.  Security concerns and a liking for leafy surrounds have boosted the attraction of enclosed, guarded parks and the dramatic demographic shifts seen among office staff in the last decade have made any offices close to major railway or bus stations very sought after.  In Gauteng the new Gautrain and rapid bus systems will spawn new developments along the routes they follow.

For the foreseeable future, landlords will have to give their products “something extra” in rent reductions or other services if they wish to survive.  Tenants for their part should now secure long leases at good rates.”

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