Tenants’ rising costs ‘a problem for rental market’

Vukile Property Fund has warned that increases in electricity prices and higher municipal rates would push tenants’ costs higher, which is likely to have a negative effect on rental affordability.

Chairman Anton Botha said this week in the annual report of the company, which was rated the JSE’s best-performing property loan stock company by Catalyst Fund Managers last year, that the electricity price increases that came into effect at the beginning of this month could lead to more vacancies.

Eskom’s price increases posed a huge challenge to property companies and would negatively affect all sectors of the market, with retail, industrial, offices and residential all likely to see costs rising.

In February, power utility Eskom was granted tariff hikes of 25%-26% for the next three years, less than the 35% it wanted from the National Energy Regulator of SA.

This year, electricity tariffs will increase 24,8%, followed by 25,8% in the 2011-12 financial year and 25,9% in the 2012-13 financial year. By 2012 13, the average price of electricity will have risen from 33c/kWh now to 65,85c/kWh

Norbert Sasse, CEO of Growthpoint Properties, SA’s largest listed property company, said the “excessive increases” in electricity and rates and taxes were a “big issue” for the property industry as a whole as they would result in an increased cost of occupation for all tenants.

“Let us assume, for instance, a market rental of R150m2 gross for a particular area, and that includes the cost of electricity and rates and taxes. Those costs are growing in excess of 25% a year and if annual gross rentals are only growing at 8% or 9%, then that means that every year there is less net rental for the landlord,” Mr Sasse said.

Rawson Properties national finance manager Rob Lawrence said residential property landlords hoping for a big step-up in rents this year would almost certainly have to think again.

He said Eskom’s proposed price hikes, which could add 30% to most householders’ bills as well as 10% to what is paid on municipal rates and services, would make budget tightening in the year to come essential.

Mr Botha said the increase in electricity prices might result in property companies having to absorb a portion of the costs, potentially exerting downward pressure on rental margins.

However, he said, the longer term outlook for the sector was “more positive”.

“The supply of new rentable space to the market is restricted by construction costs, electricity supply constraints and limited available funding. Consequently, when demand for rental space (eventually) improves, it is likely to have a positive effect on vacancy and rental rates,” Mr Botha said.

Vukile has done well to contain vacancies at 4,1% of gross rentals from 3,2% in the previous year, while improving its recurring cost to property revenue ratio, excluding the cost of electricity, rates and taxes, from 16,7% to 16,5%.

Source: Business Day

Article by: THABANG MOKOPANELE