“When you look at commercial property and you look at the expenses, ultimately what we’ve seen over the last five to six years is that expenses have increased dramatically. The major components of those expenses are property rates and electricity,” Gary Palmer, CEO of Paragon Lending Solutions, told CNBC Africa.
“Some clients told me that their rates bill has increased by 500 per cent over the last five years. Last year alone 23 per cent increases were seen. That’s one the rates side. Electricity prices as well have had a huge impact, where electricity prices have increased over 170 per cent over the last five years.”
(READ MORE: Trying times for S.Africa's commercial property landscape)
Palmer added that as a commercial property owner, a lease dictates that a landlord can pass on these costs to their tenant, but tenants themselves have begun to struggle to absorb these costs. This results in a standoff between tenant and landlord in terms of who can afford the costs.
“The municipalities require income and revenue, and the best way to do that is through property rates. It’s just another way of the municipality taxing landowners and property owners,” said Palmer, adding that the municipal cost increases ended up not translating to an improvement of services.
“On the one hand, you’re seeing the costs increase, but when you look at service delivery, it’s not there. That’s what is causing a lot of frustration. I think a greater transparency and communication between the municipality and property owners certainly is required. Communication between the landlords and tenants [as well]: these tenants can’t afford these increases, especially when they haven’t budgeted for it,” Palmer explained.
“It’s certainly a time for communication between the landlords, the tenants, municipalities, banks and the other lenders. When the costs increase and the tenants can’t afford to pay these increases, there might be vacancies and defaults, which ultimately will affect the banks.”
Palmer added that the current pressure on South Africa’s economy also won’t bode well for landlords and tenants, as analysts predict a possible recession.
(READ MORE: S.Africa's changing property market lanscape)
“Pre-2008, we used to see a lot of investors and clients looking for residential investments. That somehow stopped, banks stopped lending against residential developments and focused on commercial [property],” said Palmer.
“Now we’re seeing it coming back into the market, where some astute property investors are looking at alternative property investments like specialised residential [property].”