WHILE landlords are able to almost completely pass occupational costs on to tenants, rising electricity, taxes and rates costs are likely to see listed property companies reporting a lower growth in distributions in the next 12 months.

According to a South African Property Owners Association-IPD SA research report released yesterday, although operating costs continued to increase last year, the growth was at a much lower rate when compared with the previous year’s increases.

The electricity-sensitive retail and industrial sectors were once again hardest hit by rising costs.

Total retail costs increased 9%, industrial property endured the largest percentage increase at 15% while the generally more steady growth in office costs was 6% for the whole of last year.

Stanlib head of property funds Keillen Ndlovu said the increase in costs had been a major theme that had come out of results reported by listed property companies.

“It is one of the reasons why the income growth outlook of listed property companies is expected to slow down,” he said.

Mr Ndlovu said recent results showed that weighted average growth in distributions was 6,8%.

“We are forecasting distribution growth to slow down to around 5,5% to 6% in the next year.”

The High St Property Company MD Rodney Luntz said yesterday operating expenses were increasingly coming into focus as the slump in the property sector continued.

“Funds and investors are now concentrating on bringing these costs down to boost their bottom line. Rentals are showing very limited or no growth, so one can understand why these expenses are now being looked at more closely,” Mr Luntz said.

Big electricity increases and increases in rates and taxes were putting pressure on tenants as these costs generally were past onto them by the landlord, he said.

“However, what we are finding now is that tenants are looking at their total costs when deciding on their premises.

“This total cost now includes the cost of electricity and rates. Before tenants were merely interested in their gross rental and were not too perturbed by their electricity costs and their rates bill,” he said.

With the economy now in the doldrums and big increases in operational costs, tenants are prioritising cost control.

Meago Asset Management portfolio manager Jay Padayatchi said that while rates across the commercial sector had risen “significantly” with many municipalities seeing rates as an improving source of funding, the municipalities were delivering little by way of an improvement in services.

“However, many landlords’ leases do allow for the recovery from the tenant of any increases in rates. This however, does not leave the landlord unexposed as the tenant’s overall cost of occupation (which includes electricity and rates increases) will be going up significantly, leaving little room for the landlord to be able to enforce upward rental reversions or escalations in line with what we have seen in the past.”

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Source: Business Day