Economists agree on grim 2013 for landlords
Learned economists are well known for directly contradicting one another in their forecasts, but from time to time a strong consensus emerges even among this quarrelsome lot. The outlook for the business property sector in 2013 seems to be one of these occasions. Finding an economist who predicts a good year for landlords is about as elusive as finding an honest winner of the Tour de France.
Some analysts are talking about minimal to zero rental increases for commercial property, while well-known property economist Erwin Rode predicts a real drop in office rentals of between 7% and 14% throughout South Africa. Property giant Growth Point has announced dropping the requirement for deposits from new tenants in order to make a dent in the stubbornly high vacancy rates that has plagued the sector since the start of the economic slump.
Measured against such dismal views, general manager for property investments at Business Partners Limited Owen Holland’s overall forecast for the market in 2013 as “relatively flat” sounds positively rosy. Perhaps it is because Business Partners Limited’s commercial property portfolio is, according to Owen, now fully let after a few years of persistent vacancies.
But Holland stresses that any analysis of a property in the year ahead must take into account huge differences in sector, region, specific location and quality of the building.
With regards to the industrial sector, prime industrial properties that are secure, close to transport nodes and have relatively new buildings can possibly manage to achieve rent escalations approaching the higher end at 12%.
But owners of more outlying, less secure and older factory buildings will only be able to renew leases at rental escalations of perhaps 5 to 6%. To prevent further vacancies, they would also be looking at offering rent-free periods, lowering deposits or spreading the payment of a deposit over a few months. And commercial estate agents could well see double incentives from landlords to sign up new tenants.
Of course the outlook for industrial property is heavily influenced by the outlook for the manufacturing sector, and that may change depending on factors such as the value of the rand. If the rand continues its slide past nine to the dollar, it will boost export-oriented manufacturing, which may increase the demand for industrial facilities. If the government’s infrastructure roll-out takes off in 2013, it will also have a positive effect on industry.
When it comes to retail property, Holland again cautions about the wide range of situations. In prime shopping centres with good anchor tenants, rentals will continue as if the Great Recession never happened.
But quieter neighbourhood shopping centres may well have to be more flexible when they renew leases or entice new tenants. Many are still worried about vacancies and the tenant mix in their centres.
Asked the perennial question in the minds of many business owners – should I buy or should I rent? – Holland says 2013 is generally good year to buy property, because the market is pretty much at the bottom. It cannot drop much further and is certain to rise in the long term.
But once again Holland stresses that several factors specific to a business owner’s situation will weigh much more than the general condition of the market. If the business is doing well in a prime retail location with no need for bigger premises in the immediate future, then it makes sense to buy.
However, if your business has a low cost of moving and is bursting at the seams, you may well consider renting while looking for more suitable premises to purchase to accommodate your business expansion.
But then the deposit becomes a critical issue. A business owner wanting to buy a property has to look very carefully whether the cash for the deposit couldn’t be better used in the business. Business Partners offers 100% property loans which take the edge off the cash-flow knock of a deposit, but it still remains an issue because repayments tend to be slightly higher than rentals in the beginning, and drops below rentals later on. If you intend to occupy the unit for five years or more, it may pay to purchase rather than to rent.
The quality of the building can also wipe out the advantages of ownership if you suddenly find that you need to restructure or renovate. Whatever you buy, says Holland, do a careful due diligence.