Commercial property landlords are balancing rental escalations with rising costs. Picture: Aleksejs Bergmanis/Pexels
It is not business as usual; tomorrow’s interest rate decision could see a bigger hike than first expected, placing commercial property landlords under more pressure than they already are.
Not only are they battling the rising costs of operating, but are trying to balance tenant rental increases and fit their properties with equipment to minimise the cost and inconvenience of load shedding.
A few weeks ago, financial experts were predicting that the interest rate would remain the same, but as time has passed, this expectation started leaning towards a 0.25% increase. Now, however, some are even predicting a hike of 0.5% tomorrow.
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Given the Rand’s recent sharp depreciation, Absa – which initially expected no change to the rate, now expects the South African Reserve Bank (SARB) to hike it by 0.5%.
“This follows a string of negative news headlines and is a key risk that the SARB will need to respond to in order to contain associated inflation risks. Given these high levels of currency volatility, there is a considerable degree of uncertainty relating to our rate call.
“Beyond May, we expect the repo rate to remain on hold until March 2024, but we see risks of further rate hikes in the near-term if the exchange rate weakens further or CPI data surprises to the upside,” the bank states.
This week’s expected interest rate hike, coupled with worsening load shedding, is yet another blow for South Africa’s embattled commercial property sector, says Norman Raad, chief executive at Broll Auctions and Sales.
“Landlords, in particular, are having a rough time – rising interest rates need to be balanced with reasonable rental increases to tenants, many of whom could also be navigating a difficult road which includes having to share the costs of alternative power solutions such as fuel for generators.”
John Jack, chief executive of Galetti Corporate Real Estate, says another interest rate hike 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.
"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, he says, as, with load shedding looking like it may soon hit stages 7 and 8, 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 back-up batteries, is going to be costly.
"Landlords are 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," Jack says.
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