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And then Came the Property Slump

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I knew when I read Bankele’s recent blog post on the lacklustre Property & Home Living Expo 2009 that something was up. Lo and behold, today Business Daily Africa reports that the commercial office space is experiencing a downturn as the economy heads south.

Apparently many owners of commercial office space are holding off on rent increases and some are even losing tenants as the global financial crisis begins to bite. While previously the tenants most desperate for space would have been stockbrokers and investment bankers (and we all know what happened to them), today the only real demand seems to be coming from IT and telecommunications companies.

What bothers me most is that rather than trying to hang on to their tenants by offering a rent decrease, many commercial landlords are keeping their existing tenants, some of them longstanding, on rents that have been increasing by up to 10 percent per annum. By contrast, new tenants in the same building could probably get offices for up to 20 percent lower than the standard rate. This hardly seems like a good strategy for engendering customer loyalty. If it weren’t for the cost and hassle, I could easily imagine companies being willing to up sticks and move to another part of town, especially if they’re not dependent on being in a particular area. Stilll, the landlords apparently think they’re doing their tenants a favour, so I suppose we should leave them to it.

This will have to end, eventually, however. Rents – both residential and commercial – will come down, though I cannot hazard a guess as to how much. There has been an orgy of building and development recently, and if these properties are not being rented out, they are losing their owners money. As the economy as a whole contracts and people tighten their belts, they are going to look for the cheapest deals available. It’s all very well wanting to let a property for premium rent levels, but if nobody is willing to move in at that price, economic pragmatism dictates that you have to come down to a level where they will.

Even with increased activity in the IT and telecoms sector later this year, it is foolish to imagine that the number of companies in this field alone will not only revive the moribund economy but also take up enough office space to keep the commercial property market afloat. Consequently, as economic reality begins to bite, landlords who want to let their property are going to have to revise their rent demands downwards. This is only the beginning of the economic downturn, and currently the experts are as clueless as the rest of us as to how long it will last. If I were a landlord, I would bank on confirmed tenancies and lower profits, rather than gamble on higher rents and lower occupancy.

[Image by Wayan Vota]

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3 Comments

  1. mainat says:

    If I had a commercial property in Nai right now with some capital gain on it, I’d do one of two things. Either get a cheaper tenant and lock them into a deal for 18 months or failing that, look to sell.

  2. bankelele says:

    I think that is all they will do. building owners wil not decrease/slash rents (pisses off old tenants, devalues building) but will keep them unchanged even if it means empty spaces & apartments while they hope things pick up.

  3. Inari says:

    There’s been so much building though, that there might actually be a substantial suplus of available properties. If that’s the case, how long are owners going to be willing to shoulder all the maintenance cost while these buidings lie empty? Is there tax relief for landlords during void periods or are they still liable?

    According to the linked article, some landlords are already willing to consider lower rents from tenants. Having no idea about when the market might rise again, I’d still rather gamble on full occupancy.

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