Interest Rate Hikes: Trouble for landlords in South Africa

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Another likely interest rate hike will significantly impact the commercial real estate sector, says John Jack, the CEO of Galetti Corporate Real Estate.

The South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) is set to meet next week (25 May), with many experts predicting a consecutive tenth interest rate since the start of the rate hike cycle in November 2021.

The majority of experts predict the MPC will raise interest rates by 25 basis points, taking the interest and repo rates up to 8% and 11.5%, respectively.

Jack said that a further interest hike would add to the hurt real estate landlords are feeling, facing increased load shedding, vast vacancy rates and an increase in upkeep costs.

“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,” Jack said.

Moreover, landlords are under increasing pressure to find alternative energy solutions, with load shedding expected to hit stages 7 and 8 this year.

“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,” he said.

Installing alternative power solutions, such as solar panels and generators, is also extremely 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.”

Solutions

Jack said landlords work closely with tenants to ensure they can find a compromise.

“There’s a trend towards lease agreements in retail and manufacturing environments, where the landlord covers the capital cost for solar panels and the inverter to power the building during the day – but the tenant pays for the batteries. ”

“In cases where the tenant is a heavy user of electricity or operates around the clock, they’ll be responsible for all costs associated with the installation,” said the CEO.

However, the private and public sectors are finding solutions to the energy crisis.

For instance, the solar panel tax incentive announced by Finance Minister Enoch Godongwana in February can make the cost of sustainable energy far more feasible for residential and commercial real estate.

“We also advise negotiating with banks and loan providers to secure more favourable property interest rates, as this also enables you to pass savings on to your tenants,” he added.

Source: https://businesstech.co.za/news/property/689295/trouble-for-landlords-in-south-africa/

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