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The recent power outages and electrical capacity upgrades around the country demonstrated businesses are vulnerable to energy disruptions and would be well-advised to have alternative electricity sources ready.

The National Electricity Regulator of South Africa approved a June power price increases of 4.79 – 9.4% for commercial property users, thus increasing operating costs for tenants and owners alike. Commercial property stakeholders, however, will be pleased to note the passage this year of the Infrastructure Development Bill along with the national government’s Renewable Energy Independent Power Producer Programme, both of which have been designed to alleviate the existing infrastructural projects backlog. This streamlining of the development construction process and financing thereof has likely benefits for the commercial property sector – buildings and land – as investment interest via public-private partnerships (PPPs) is stimulated. Needless to say, retailers and manufacturers – indeed, the broader national economy – stand to reap the benefits of infrastructural development as well.

Government Policy Developments

A major concern facing commercial property owners is the continuously increasing cost of municipal rates and service charges, which has resulted in pressure on net rentals. In recent years, rates and taxes in South Africa have increased at a significantly higher rate than commercial real estate values.

A June report, prepared for SAPOA by the Investment Property Databank (IPD), uncovered a weak correlation between a property’s market pricing and the size of rates and taxes levied. The office and industrial sectors reflected the largest mismatch, mainly because these properties are more likely to have unique characteristics or purposes impacting their value. The analysis further showed annual rates growth in metropolitan areas of 4 – 11% over the past five years, with a weighted average of 6.7%. This has led to the listing of rates and taxes among the fastest growing operating costs for owners and investors – second only to electricity price hikes. Indeed, municipal rates and taxes are currently outpacing inflation at 2.5 times its rate.

Foreign Investment Concerns

Of notable concern is the South African Government’s newly proposed Regulation of Land Holdings Bill. If approved, foreigners would not be able to purchase land in South Africa – instead, being limited to thirty-year leases. Amidst the voicing of concerns by industry representatives that foreign investment (minor compared to domestic investment) could take a dip, the head of SAPOA Neil Gopal explained the property market’s success is tied closely to the strength of the national economy and, by extension, the country’s ability to attract foreign direct investment (FDI). The association of property owners thus advocated a policy framework of land tenure certainty; the promotion of balanced domestic and foreign investment; and the allocation of land for best use on a sustainable basis.

Addressing industry concerns, the Rural Development and Land Reform Minister assured that the Bill would not permit the expropriation of land currently foreign-owned (which accounts for about 7% of total land in the country). Presently, foreign investment into South African commercial real estate remains steady, with the bulk of activity taking place in Cape Town followed by Johannesburg. The rand performance and lenient property laws continuously prove to be key attractions making the country a top destination for property buyers from overseas.

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