Commercial property owners are finding it hard to boost profit as soaring operating costs, especially from property and electricity rates, squeeze their net income.
This mounting pressure presents a tough road ahead for landlords trying to stay profitable in a volatile market.
One challenge facing commercial landlords is the rise in municipal expenses, such as rates, taxes and utility costs. While many of these costs can be passed on to tenants, they still place additional pressure on them.
In this context, the SA Property Owners Association (Sapoa) highlights that property rates have consistently outpaced CPI growth since 2008.
Speaking to Business Day, Sapoa CEO Neil Gopal said: “In 2023, property operating costs as a percentage of gross income continued their upward trajectory, exerting pressure on property owners’ net income.”
Shedding light on the effects of rate and electricity tariffs on the commercial property sector over the past five years, Gopal said total operating costs, as a percentage of gross income, rose by 60 basis points to 43.1% by the 2023 year-end. This drop in the gross cost-to-income ratio was primarily due to an 11.8% increase in total operating costs, which outpaced the 10.8% growth in gross income.
Steep property rates were also highlighted by Stats SA two months ago, when it reported property rates had increased 10.7% so far in 2024, electricity by 12.1% and water by 7.5%.
Gopal said that the office property sector was the main driver of cost increases, with total costs rising by 12.5%, followed by an 11.5% jump in retail costs. In contrast, industrial property costs grew more slowly at 4.6%. Gross income rose mainly due to higher tenant recoveries, surpassing the growth in base rental income.
Alongside sharp increases in municipal rates and taxes, the effect of higher electricity costs led to cost-creep and a rising overall cost of occupation for commercial property tenants across all major sectors — retail, office and industrial, Chronux research analyst Adrian Jardine said.
“This consequently inhibits the ability of landlords to grow base rentals, and thus negatively affects profitability and organic growth prospects for commercial property investors,” he said. .
While Gopal said property rates and electricity were among the main drivers of cost growth, in 2023 the building fabric maintenance category overtook electricity costs as the second-biggest driver of overall growth in operating costs.
“Building fabric maintenance includes the cost of diesel for generators and was the fastest-growing of the operating costs at 45% year on year, which translated into a 3.4 percentage point contribution to the overall growth of 11.8%. Together these three items contributed 83% of the overall growth in operating costs which was more than their 61% weighting among the different operating costs.”
According to Sapoa, rates as a percentage of gross income went up for the retail and industrial sectors, while the office sector saw a slight decline after five years of strong growth until December 2022. Property rates have consistently grown faster than CPI since 2008.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.