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Thursday Oct 17, 2013

More commercial property tenants pay rent on time

The percentage of commercial property tenants in good standing has slowly improved since the end of 2010 despite an increasing proportion of tenants failing to pay their rent on time, according to TPN credit bureau.

TPN warned in its latest commercial property rental monitor that there was a worrying trend of tenants migrating from the 'paid on time' category into the 'grace period' and 'paid late' categories, which were at a combined 27 percent in the second quarter.

To put this trend into perspective, TPN said, late-paying tenants in the fourth quarter of 2010 bottomed out at 13 percent and remained in the 19 percent to 22 percent range until increasing to 27 percent in the first and second quarter of this year.

'This will bring increasing cash flow pressure to bear on landlords in meeting monthly operational costs,' Michelle Dickens, TPN's founder and managing director, said.

Tenants in good standing are regarded as those who either pay on time, pay during the grace period or pay late. However, the overall rental payment of commercial tenants nationally shifted only marginally in the second quarter of this year compared with the previous quarter.

Tenants in good standing dropped marginally to 83 percent while those in the 'paid on time' category, 'paid during the grace period' and 'paid late' brackets were all unchanged compared with the previous quarter.

There was a marginal decline in the 'did not pay' category to 6 percent from 7 percent, compared with 16 percent of tenants in the fourth quarter of 2010.

The biannual property indicator released last month by the SA Property Owners Association and Investment Property Databank showed retail vacancies were stable but the office sector continued to register high vacancy levels of 12.6 percent overall.

The compilers of the indicator said recent office development activity was placing pressure on rental levels and lower-grade office space. Inner city offices continued to register low occupancy levels, recording a 22.8 percent vacancy rate for the first half of the year.

Vacancy rates in the industrial sector averaged 2.8 percent for the six-month period, they said.

TPN has categorised commercial tenants across four basic monthly rental payment brackets: tenants whose basic monthly rental is below R10 000; tenants in the R10 000 to R25 000 bracket; the R25 000 to R50 000 bracket; and tenants whose basic monthly rent is greater than R50 000.

TPN said there had been a noteworthy increase in tenants in the lowest-priced category to 35 percent in the second quarter from 29 percent 18 months ago.

Dickens said this indicated a shift of tenants moving out of the two mid-range brackets of R10 000 to R25 000 and R25 000 to R50 000.

'While these mid-size tenants are clearly price sensitive, there appears to be little movement among larger organisations in the R50 000-plus bracket, who make up 22 percent to 23 percent of the commercial market,' she said.

Dickens added that valuable insights could be gained by understanding how payment behaviour changed based on tenants' rental brackets. She said the lower the rent, the more challenging rental collection became.

'Tenants who pay less than R10 000 are three times more likely to default than their R50 000plus counterparts. For instance, the 'did not pay' profile for those in the category below R10 000 a month was 10 percent, whereas tenants in the R50 000-plus category only reflected 3 percent nonpayment,' she said.

Dickens said it was also important to note that commercial tenants were traditionally given greater leeway in partial and non-payment when a landlord or property manager allowed them time to rehabilitate. The cost of this latitude could be seen in the default to rent ratio, which stood at 631 percent or six months rent lost. To put this number into perspective, the corresponding residential property ratio was only two months loss of rent.

Dickens said the commercial rental payment performance looked solid overall, despite a few flags indicating that some commercial tenants were finding trading conditions difficult. 'Obviously this affects monthly rental payments, hence the increasing number of tenants in the smaller space and rental value bracket, as well as the marked payment slowdown in this rental category.'

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