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The cost of buying industrial property in South Africa.

Whats important to know upfront is whether or not the Seller is
acting in the capacity of a vat registered vendor.

This will determine whether Vat is applicable or Transfer Duty.

The other important questions concerns what is actually being purchased.
Is it for example a “going concern” or is it simply a warehouse with offices to be occupied by the new owners.

Here is a link to a useful costs calculator provided by courtesy of Faurie Nell Inc of Dunkeld West.

a-calculator

Various cost items that typically affects a property transaction in South Africa are as follows:

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Rental Escalations Industrial Leases Randburg North

Negotiating industrial leases for warehouses and factories in the Randburg northern areas.

Understanding Escalation.

What is meant by rental escalation?

It is merely a mechanism to align the growth in current rentals to anticipated future market rentals.
What a landlord wants to avoid is a situation whereby lease term rentals are growing at a rate below actual market values.

Why do Landlords insists on escalations of 9%p.a and above when CPI is around 6%?

First of all lets understand how CPI is arrived at:
Consumer Price Index (or CPI) is an index generated by StatsSA that measures “the prices paid by urban consumers for a representative basket of goods and services.”
It is argued that the basket of goods used to measure CPI is not representative of the property market in general and is therefore not a fair reflection of increases for such components as wages, construction materials, consumables and rates and taxes (if applicable) etc. In other words 6% in 2016 may not be acceptable.

The other thing to consider is the make up of a gross rental:
Intuitively one would think that a gross-rental escalation rate (for a given period of lease) is a function of two factors:

  1. Expected (operating cost) inflation rate
  2. Expected net rental growth rate

If we remember that Gross rental (100%)

= Net rental (say 85%) + operating costs (say 15%), one could say that:

Net rental escalation = function of expected rental growth

Operating costs escalation = function of expected inflation rate

Now, if we accept the above weights, we can see that the main determinant of escalation rates is expected rental growth.

The final point is that property investors purchase property at a hurdle rate (IRR) which is more than double the CPI (currently) and accordingly require net operating incomes which grows at a rate commensurate with their investment. Another simple way to look at it is to say that they would like to have a rental growth rate that exceeds the bank savings rate other wise there would not be much incentive to continue investing in property.

Having said this, landlords understand the value of having a “blue chip” tenant on a long lease and can factor in lower escalation rates matching CPI. This however is achieved on high yielding properties and not on low yielding properties which have been acquired at substantially higher costs. For example a new development in an upmarket node.

In conclusion, successfully negotiating lower escalation rates will depend a lot upon the strength of the lease agreement as well as an understanding of the targeted property and its position/status in the local property market. Of course it helps to be able to discuss these factors amongst others with a knowledgeable broker.

Well thats my view. If you would like to renegotiate your current lease thats coming up for renewal you are welcome to give the author a call on 082 558 0292 to discuss your options.

Colin Jardine

Principal Agent,

 

 

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Lanseria Industrial properties to Let

Modern warehousing and offices in scenic environment.

Lanseria Business Estate will naturally take up demand from other industrial nodes on the R512 simply because of an under supply in such areas as Northlands Business Parks.

Traffic congestion, strike action and service disruptions are non issues at lanseria Corporate Estate and adds to the attraction of relocating there.

The park offers a relaxed working environment , public transport , uninterupted power supplies, voice and data services and convenient access to the airport.

Choose from 1000sqm to 9000sqm . Rental from R55/sqm net ex vat and utilities.

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