Squeeze your landlord.

Posted On Friday, 24 January 2003 02:00 Published by eProp Commercial Property News
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Now is the time for tenants to fix long, low-rent leases. Here's how.

 

Sapoa CEO Neil GopalOffices vacancies are headed for 20% of total stock in almost all urban centres. It's a good time for tenants to strike long-term lease deals, before the space fills in the next two years and rents rocket again.

Prime rents, predicted five years ago to exceed R120/m²/month, can now be secured for as little as R40/m².

A SA Property Owners' Association (Sapoa) survey shows that 23,3% of office space is empty in Claremont, Cape Town, up from 14,9% in December 2001. Rosebank, Johannesburg, is 16,4% (12%) empty and vacancies in the Pretoria CBD have jumped to 17,4% (11,9%).

But Sapoa persists with publishing the fiction of landlords' 'asking rents' instead of actual rents achieved. Its members are complicit in this and, in some cases, asking rents have gone up even as premises have been vacated. For instance, Cape Town CBD vacancies have risen to 16,3% (15,9%), but average asking rents are up from R48/m² to R51/m² for A-grade space. And in Melrose, Johannesburg, where vacancies are 14,3% (1,1%), asking rents have risen from R67/m² to R70/m².

Marriott Property Services Gauteng MD David Green says landlords push prices in a soft market to maintain net rents. If, say, a landlord is getting R50/m² gross rent of which operating costs are R15/m², he would try to get R55/m² if the costs rose in the next year to R20/m². That is what has happened in Cape Town.

Melrose is different. The market has actually strengthened from early last year, when Melrose Arch came on-stream and vacancies rose to 30%. But it has filled and rents are rising.

Investec has now cut prices at its flagship Claremont building, Fedsure-on-Main, to R40/m² (a 45% discount), grabbing the lion's share of new tenants in the area. Claremont rents have plunged from R72/m² to R58/m².

Landlords are torn between their need for cash flow and their desire to establish the highest book value for their property. If they slash rents, as Investec has, they will ensure cash flow.

But with net rents of, say, R25/m², Fedsure-on-Main might have to be valued down to R2 500/m² of lettable space, perhaps 30% of its replacement cost. A R75/m² rent could increase the value to R6 000/m². A good annual escalation of 11% on a five-year lease could push it to R8 000/m², a 10-year lease to, say, R10 000/m².

Investec's rent level may be an exception. Marriott's Green says tenants could easily negotiate a 5%-10% discount on the asking rents. Estate agent Mark Bradford suggests 10%-15%. But both advise prospective tenants to see the lease as a package, including rent, escalation, length of lease, tenant installation (TI) costs such as partitioning, and a rent-free period at the beginning of a tenancy.

Tenants often achieve more by trimming costs other than rents. Where landlords will contribute R400/m² for TI on a five-year lease, they might offer only R250/m² on the three-year lease.

Tenants are advised to enter into a five-year lease to get the higher TI, but with a break every 18 months or two years. This will allow them to end their lease early by paying a negotiable penalty. They should also negotiate an initial rent-free period - three months rent-free on a three-year lease at R40/m² means an effective R37/m². Add an extra R150/m² for TI and the rent is down to R33/m².

 

Last modified on Monday, 26 May 2014 14:15

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