Tomorrow marks the seventh interest rate increase in the space of just one year. The speculative announcement of a 25-basis point hike will see the interest and repo rates at 10.75% and 7.25% respectively. 

John Jack, CEO of Galetti Corporate Real Estate explains that albeit minor, this announcement, coupled with ongoing loadshedding, high commercial vacancy rates in some parts of the country and economic uncertainty are all set to have a major effect on commercial real estate – and landlords in particular.

“An interest rate of 10.75% is nothing to fearmonger about, as rates are merely returning to pre-pandemic levels. However, this is further amplified by other factors such as loadshedding and high vacancy rates in the commercial property sector,” he comments. 

The compounding effect of loadshedding and its associated costs 

The reality of stage 6 loadshedding is settling in and rumors of loadshedding reaching stage 10 have many landlords concerned about staying afloat. “As interest rates rise, so do the monthly repayments. An incremental 25 basis points increase on properties worth hundreds of millions of rands can be substantial.”

Adding to this is the need for landlords to take matters into their own hands by installing solar power and other renewable energy sources as a long-term solution to combat loadshedding. “Yes, some commercial buildings now have solar power, however many still don’t. The reality is that South Africa still has a long way to go in this regard. But a key requirement for any company looking to let commercial space right now is undoubtedly an alternative energy source,” says Jack. 

Whether it’s solar panels, inverters or generators, all these alternate power sources come at a high price. “We have also been speaking to landlords who are spending hundreds of thousands on diesel for generators each month, purely to ensure tenant retention.”

Working together for a greener future 

Jack. “An alternative energy source is vital to the success of every business; therefore, a fair compromise should be reached. Whether it’s an increase in the monthly rental, a longer renewal period or an investment towards solar by the tenant, it’s important that we work together right now.”

In the next few years, Jack predicts a. “It would be great if South Africa could lead the charge among the likes of Sweden, Costa Rica, Scotland, and Germany in time to come. Becoming energy independent is crucial to our economic success.” 

It’s not all doom and gloom. “The JSE All-Share Index was up by almost 9% at the beginning of 2023. Despite concerns around a local recession, there is a global trend to rally behind the markets and a large portion of our JSE-listed companies are international. This bodes well for investor confidence and could alleviate some economic pressure.” 

Regional sector performance as it stands

Looking to commercial property demand across the country, Jack believes that the Western Cape has recovered quickly, and that space in the province is in high demand. “Companies are moving their head offices to the Western Cape to ensure better public service delivery.”

In Johannesburg, Rosebank remains a top contender for office and mixed-use buildings. “Rosebank has reinvented itself over the years and it’s an exciting place to be. The likes of Sandton, Randburg and Waterfall are still falling behind as landlords struggle to attract and retain tenants.”

In KwaZulu Natal, the aftereffects of the 2021 riot coupled with concerns around service delivery have proved to be a challenge, however, Jack believes that the region is on the up – especially in the industrial sector – due to its central location near the port.

Alleviate the pressure 

“Depending on the structure of a business, an opportunity exists for the landlord to restructure their debt profile,” explains Jack. “This allows you to become more ‘tax efficient’ and to stabilise the funding of your portfolio.”

Jack concludes by saying that it’s important to consider all the financing options on offer and to be advised accordingly. “Quite often, clients will approach their bank and settle for the best offer on the table. However, we strongly advise that you work through an advisor to raise debt at the most competitive rate on the market.”