select
|

10 common mistakes commercial property landlords need to avoid

Commercial property landlords stand a better chance of remaining financially secure over the long term if they spot red flags, like an incorrect tenant mix or under-insurance, early on.

Brett Webb, head of specialised lending in the specialised sales and commercial markets division at Standard Bank, says with economic conditions remaining tough, risks remain high in the commercial property space due to the long-term nature of the investments. But there are a number of steps landlords can take to avoid being tripped up.

“A major problem is that many landlords rush in to “fill up the spaces” by taking on tenants that don’t fit in with the original plan, or vision, for the centre. A good start for landlords would be to seriously look at their mix of tenants,” says Webb.

“Landlords often feel they must just get someone in, without realising it is not only going to be tricky to evict them, but also that they would need to bear the cost of remodelling the same space for the next tenant.”

Getting over-exposed to only one geography, which also implies incorrect positioning, is well worth avoiding. Webb says you have to have the basics in place – simple things like having a fast food shop positioned for people coming from work, rather than going to work. Landlords must be aware of the demographic they are going to serve. A nightclub, for example, could raise additional security risks, but could also chase other tenants away if it’s positioned incorrectly.

It is often not just a pure numbers game either. You have to look at the type of tenants and their sustainability. The numbers might work on paper, but when you look at tenancies more closely there is less chance of it working. The ideal is to have tenants that feed off, or complement each other.

Landlords are often tempted to gear highly and reduce their equity requirements by taking on levels of debt that are not sustainable. If a tenant moves, it puts undue pressure on them and eats into their reserves.

Webb says potential investors need to bear in mind the rental rates and the escalation clauses of properties they are looking to buy. If a tenant is in the fourth year of a five year contract the current rental paid may be above the current market rate due to high escalations negotiated four years previously. The danger is that at the end of the five year term when the contract is renegotiated, there is a risk that the rentals may be lower and this would affect both value and cash flow.

Commercial property owners should ensure they have proper agreements drawn up – drawing them up themselves or relying on old agreements can lead to unintended and costly consequences.

“For example, rates and electricity increases would need to be covered in agreements. If you haven’t done it properly or explained this to tenants properly, you would end up with a lot of disputes later,” says Webb.

Getting insurance right is another common failing, as many owners often under-insure and are left dipping into their reserves when unintended events happen, like a roof collapsing or injuries to shoppers.

Many landlords still do not seem to have an adequate vision in place about their centre’s identity – the allure would make it a drawcard for potential consumers.

“For example, you need to know what type of restaurants you will go for – like convenience or large restaurants, and how many. And that’s often where the difficulty comes in – when there is a mismatch. For example, if the tenant mix is 60 percent restaurants and there is a swing in the economy and interest rates increase, consumption in areas like eating out, or luxury goods purchases, may decline and this would place undue strain on the centre’s cash flow. Successful centres often have a very good plan in place,” says Webb.

Another risk is the design of the centre. Sometimes even property experts overlook designing for the weather by having an open area patio in a location known for its inclement weather. Landlords need to make sure the design is fit for the climate, says Webb.

Another often overlooked risk is having a fabulously designed and well located centre, with a diverse mix of tenants, but where there is too little parking. It’s frustrating to have to wait to find parking. It’s also no good having overflow parking out into the street, says Webb.

Landlords would be well advised to avoid tenant conflict when it comes to parking. You can’t have one tenant having a lot of people coming to park for a long time, like you would at a pub or nightclub, only to leave too little space for the customers of tenants doing convenience shopping at outlets like Postnet, getting groceries or going to the hairdresser.

Maintenance is key, but too often not done well. Webb says the shopping experience must be pleasant to attract people, else you will struggle with tenants and foot flow. If you want to get trading densities up, do your maintenance, like ensuring the property is clean and taps and toilets are working. A commercial property is an asset you need to keep managing every day.

“Make sure you manage the centre actively or put the correct professionals in place to do it. An absent landlord without the correct support is a big mistake,” says Webb.


  Comment on this Article

  Please login to post comments

Post to my facebook wall
  
2000
Characters remaining


    Latest Property News
    • 19 Feb 2018
      Possibly one of the biggest sources of contention between landlords and tenants surrounds the rental deposit. “Most tenants rely on getting their rental deposits back when moving, so that they can use it to pay a deposit on their new home. Having it withheld or even having large amounts deducted can lead to a lot of distress,” explains Bruce Swain, CEO of Leapfrog Property Group.
    • 19 Feb 2018
      Situated approximately halfway between Johannesburg and Pretoria, Midrand was established in 1981 and forms part of the City of Johannesburg Metropolitan Municipality. It has become one of the major business hubs in the country with major pharmaceutical, textile, telecommunication and motoring giants situated within its boundaries.
    • 19 Feb 2018
      The PayProp Rental Index Annual Review of 2017 shows that the rental market suffered from much volatility during the year. It kicked off with rental growth spiking in January with weighted year-on-year growth (YoY) growth peaking at 8.3% before dropping to 6.34% in July, dipping down to less than 5% in November and then experiencing a slight uptick at 5.75% in December.
    • 19 Feb 2018
      While most homes in cluster complexes, estates and other gated communities come with at least one garage or carport, residents would often like additional permanent parking or storage areas for things like trailers, bikes, boats and caravans.
    • 16 Feb 2018
      Whether you own a property in a sectional title complex or are looking to invest in one, the financial standing of the body corporate is the single most important thing that can affect your investment or your buying decision.
    • 15 Feb 2018
      One positive consequence of the financial crash in 2008 was the rise in consumerism, especially in the property market, where buyers have steadily become more knowledgeable and more value conscious.
    • 15 Feb 2018
      While most homeowners will take the agent’s commission into consideration when they are trying to determine what the will get out from the sale of their property, many often forget to factor in the other costs involved in a home sale, says Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa.
    • 14 Feb 2018
      The forecast for the national rental market in 2018 remains a mixed bag of good news and bad news. Although rentals are expected to rise slowly as the challenges of home affordability and tighter lending criteria tighten their grip, it’s a double-edged sword as the market also will come under increasing pressure from factors like declining disposable income levels.
        
    X
    Subscribe to the MyProperty Newsletter

    Name  
    Last Name  
    Email Address  
    Email Frequency
    select
    X
    Share this Page

       
    For Sale Property
    Rental Property
    More Options
    About
    Connect with us
    FEEDBACK