Landlord's holding costs on property likely to increase as a result of new municipal wage scales

Tenants should opt for longer leases

It is, says Bill Rawson, Chairman of Rawson Properties, a little ironical that some of the largest annual wage increases ever seen in SA have, as a result of strikes, been pushed through at a time when the business sector is experiencing recessionary or near-recession conditions.

In the property sector, he adds, the new municipal workers’ wage scales will inevitably result in big increases in the rates, taxes and service costs – and these will affect property values and rentals and among those hardest hit by this will be the fairly large group of new investors who have moved into this sector as a result of interest rates dropping and who will now find that their returns are not as lucrative as they had budgeted for.

“Landlords will always have to pass on the increases to their tenants. What this means is that rentals at current levels will rise, perhaps by as much as 15% in three years.”

In the circumstances, says Rawson, the shrewd tenant of residential property will go for a longer rental with a relatively small escalation clause.

“Traditionally,” said Rawson, “tenants have avoided long leases in the hope that after one year (or even six months) lower interest rates, an oversupply of stock or other factors will enable them to negotiate more favourable terms. Right now, the right course to take would be to sign on for three years.”

Should tenants in the coming year find that they cannot afford the higher rents, they can, says Rawson, make use of their common-law right to substitute themselves, thereby mitigating the landlords potential loss. This allows them to find another tenant to take over their lease – on the same terms and conditions. If the landlord chooses to reject the replacement tenant, then in most cases the existing tenant is then legally entitled to consider his lease cancelled.

Despite the rates and taxes problems, landlords, says Rawson, will be looking the coming year to increase their profits because demand for rented premises is now strong due to the lack of property development for the past two years.

Article by: www.rawsonproperties.com