Defaulting commercial property tenants
Category Property News
When it comes to commercial property tenants, the lower the rent, the more challenging collection becomes.
Commercial property tenants paying monthly rentals of less than R10 000 are three times more likely to default than their R50 000 plus counterparts.
In fact, tenants who pay less than R10 000 a month are three times more likely to default than their R50 000 plus counterparts, according to the Tenant Profile Network (TPN).
The TPN Commercial Rental Monitor Q2 report reveals that commercial tenants are traditionally given significantly greater leeway in partial and non-payment when a landlord or property manager allows them time to rehabilitate.
For example, tenants who fell in the Did not Pay profile for those renting properties priced below R10 000 per month was 10 percent whereas tenants in the R50 000 plus category only reflected 3 percent non-payment.
Writing in the report, Michelle Dickens managing director of TPN says nationally the percentage of commercial tenants in Good Standing fell from 84 to 83 percent, those in the Paid on Time category remained at 56 percent, Grace Period remained the same at 9 percent and the Paid Late bracket was unchanged at 18 percent, while the Did not Pay category dropped to 6 percent.
Dickens explains that late-paying tenants in Q4 2010 bottomed out at 13 percent and stayed in the range of 19 percent to 22 percent until Q1 and Q2 of 2013, where the figure remains at 27 percent.
“This will bring increasing cash flow pressure to bear on landlords in meeting monthly operational costs.”
Furthermore, the report reveals a 35 percent increase in tenants renting properties priced below R10 000 from 29 percent indicating a shift of tenants moving out of the two mid-range brackets of R10 000 and R25 000 and R25 000 and R50 000.
While these mid-size tenants are clearly price sensitive, there appears to be little movement amongst larger organisations in the R50 000 plus bracket, who make up 22 to 23 percent of the commercial market, she points out.
The cost of this latitude can be seen in the default to rent ratio, which stands at 631 percent or 6 months’ rent lost, noting that the residential property ratio is only 2 months loss of rent.
“Ultimately the cost of this latitude can be seen in the default to rent ratio, which stands at 631 percent or 6 months’ rent lost, noting that the residential property ratio is only 2 months loss of rent.”
According to the report, the Western Cape and Eastern Cape have better performing tenants; a trend which is very similar in the residential space.
She says the monitor looks solid overall, despite a few flags indicating that some commercial tenants are finding trading conditions difficult.
“Obviously this affects monthly rental payments – hence the increasing number of tenants in the smaller space and rental value bracket, as well as the marked payment slowdown in this rental category,” she says.
Meanwhile, Org Geldenhuys managing director of Abacus Divisions says landlords are under severe pressure with the continual increases in rates and taxes, as well as utility bills from councils, which, in some cases, have risen by as much as 300 percent over the last year.
As such, he says this is now becoming impossible to include “blanket inflation linked annual escalations” for council bills when signing deals with tenants, as was the norm with many commercial leases in the industry to date.
“With the ever-increasing bills which seem to be coming from municipalities around the country, including in Tshwane, landlords can no longer shoulder these costs – in some cases, these costs could actually be the difference between make or break of a property investment.”
Geldenhuys explains that having an inflation linked or blanket annual escalation for utility bills included in rental contracts is no longer workable.
The contract must allow for council increases that go beyond inflationary increases.
At a certain pre-determined point these increases must be passed onto tenants – the preferred way of dealing with this from a landlord’s perspective is to charge operating costs such as rates and taxes, electricity and water usage to the tenant at actual cost rather than at a rate per square metre with a pre-determined escalation.
He points out that in some instances the Tshwane Metropolitan Municipality had increased some of their tenant’s utility charges by as much as 300 percent.
He adds that electricity and other operating costs have profound impact on a company’s costs, and in some cases, it causes companies to be bankrupt. – Denise Mhlanga www.property24.com
Author: Warehouse Finder
