Interest rate hike to hit landlords

The South African Reserve Bank (Sarb) is set to make an announcement next week Thursday and experts are predicting this will be the eighth interest rate hike in quick succession.

If they’re right, we’re looking at a 25-basis point increase, which will take the interest and repo rates up to 8% and 11.5%, respectively.

This is bound to have a significant impact on the commercial real estate sector, which is already facing the effects of load shedding, increasing upkeep costs and high vacancy rates.

Predicament

Landlords are going to be caught between a rock and a hard place: they’ll be dealing with rising interest rates and levies on one side, and the need to keep their tenants happy with affordable rental escalations on the other.

But that’s not all – with load shedding looking like it might hit stages seven and eight soon, landlords are under increasing pressure to find alternative energy solutions.

At stage 8 load shedding, electricity may be off for up to 13 hours each day. Landlords place their tenants at significant risk if they cannot provide them with power.

However, installing alternative power solutions, like solar panels or generators with backup batteries, is going to be costly.

Landlords are already paying millions to install generators that can power high-rise office buildings during load shedding.

Generally, the tenants will share the operating costs, including the R22 per litre cost of diesel. So, what’s the solution?

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Compromise

I would suggest that landlords work closely with their tenants to find a compromise that works for everyone.

There’s a trend towards lease agreements in retail and manufacturing environments, where the landlord covers the capital cost for solar panels and the inverter, to power the building during the day – but the tenant pays for the batteries.

And in cases where the tenant is a heavy user of electricity, or operates around the clock, they’ll be responsible for all costs associated with the installation.

The good news is that both the public and private sectors are working together to find solutions to these challenges.

Companies like Investec are partnering with local agencies to address traffic congestion during load shedding, while the solar panel tax incentive announced in February’s national budget is making sustainable energy solutions more feasible for homeowners and companies.

Looking ahead, I urge landlords to make the most of available tax rebates, which make the installation of sustainable alternative power sources feasible.

I would also advise negotiating with banks and loan providers to secure more favourable property interest rates, as this also enables you to pass savings on to your tenants.

For best results, work with an advisor who has experience managing these negotiations. All in all, it’s tough out there in the South African commercial property sector – but with a bit of creativity and collaboration, we can overcome these challenges together.

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-John Jack is CEO of Galetti Corporate Real Estate