Commercial Property Owners Rise To SA's Economic Challenges

COMMERCIAL PROPERTY OWNERS RISE TO SA'S ECONOMIC CHALLENGES

Commercial property owners have risen to the challenge by proactively implementing innovative approaches to help them to navigate a hostile business environment.

According to the latest TPN Commercial Rental Monitor, which covers office, retail, industrial and storage rentals across SA, the number of commercial tenants in good standing recovered to 72.53% in Q1 2023.

Although this is a significant improvement from the pandemic dip of 50.36% in Q2 2020, it is still short of the pre-pandemic level of 80.79% recorded during Q3 2019.

What is becoming clear is that the commercial rental market is not recovering as quickly from the pandemic period - as quickly as it has recovered from other past crises. Since 2020, the ratio of commercial tenants that 'did not pay' versus those that 'paid on time' has remained higher than pre-pandemic. During Q1 2023, 9.59% of commercial tenants did not make any rental payments. This figure has shown small improvements when compared to the past two years at 10.27% in 2022 and 10.95% in 2021. The average 'did not pay' profile for 2019, in comparison, was 6.98% and 6.82% in 2018.

Escalating municipal costs are one of the biggest challenges facing commercial landlords with municipal costs making up 61% of total operating costs and 26.2% of the gross income generated by commercial property, according to the MSCI South Africa IMI Index. In most instances, these costs are being passed on to tenants, and are reflected in increased consumer prices. As these costs continue to rise, landlords are being forced to consider the total cost of occupation, while balancing vacancies and ensuring a return for investors. This is placing pressure on the base rentals that commercial landlords can ask for and is driving rental escalations lower.

Despite being hit by aggressive rates and tax increases aimed at keeping local municipalities afloat, commercial property owners are stepping up to help ensure the long-term success of the areas in which they operate, by helping to maintain and improve surrounding local municipal infrastructure, assisting with providing security and supporting the local community.

Commercial property rates and taxes are the lowest in the Western Cape. The province also boasts the highest rental escalations. Commercial property rates and taxes are the highest in Gauteng.

Broken down by sector, retail tenants have had the steepest climb to recovery. A total of 73.4% of retail tenants were in good standing in Q1 2023, while the vacancy rate was a low 5.4%.

The office sector's recovery has been helped by a demand by businesses that employees return to the office. However, office vacancies remain high at 15.8% in Q1 2023.

The industrial sector is the star performer of the commercial property sector with 75.67% of tenants in good standing in Q1 2023. The vacancy rate in this sector is the lowest of all the commercial asset classes.

TPN data indicates that the larger the rental, the higher the probability of commercial tenants meeting their rental obligations. The 42% of commercial tenants that pay less than R10 000 a month rental currently have the lowest good standing ratio at only 67.38% indicating that small businesses are struggling to pay rent currently. Higher rental brackets - those paying R25 000 to over R50 000 a month - have the best good standing ratios. This indicates that established and larger occupiers still offer commercial landlords a more assured and secure rental income.

Commercial landlords in the Western Cape are the most likely to get paid on time with 82.62% of tenants in good standing, well above the national average, in the first quarter of 2023. In KwaZulu-Natal, on the other hand, only 75.41% of commercial tenants were in good standing while only 70% of commercial tenants in Gauteng were in good standing. This is significantly lower than the annual average good standing rate in 2017 which was 82.33%.

The demand for commercial space is being impacted by extraordinarily high municipal costs for which, ironically, commercial landlords receive little value for money. The increasingly hostile environment, characterised by regulatory uncertainty, currency volatility and higher utility costs means that property owners with fixed-term lease agreements are having to carefully consider their return on investment.

Against all odds, however, the commercial property sector soldiers on with the total returns by SA REITs remaining above the JSE All Shares due to their innovation, agility and fierce commitment to SA and its economic success.