SAPOA's retail report for the first quarter of 2020 (ending March 2020) is out and the conclusion is - as one would expect - fairly downcast.

The full implications of the nationwide shutdown as a result of the Covid-19 pandemic on the retail sector are still to be fully felt in the market, given that the shutdown only began right at the end of Q1 on the 26th March. However, some consequences are now already becoming evident, and the findings from the report may be a precursor to this becoming more widely visible.

As the report notes, "Prior to the Covid-19 pandemic, the South African economy was already in a fragile state. As the full effect of the shock starts filtering through the economy, unemployment and business confidence could continue to take further strain, which will impact disposable income growth and consequently, retail sales growth." The report also points out that while the interest rate cuts may provide some relief, the expected petrol price hikes and the prospect of loadshedding could more than offset these benefits.

Here are some more of the key research findings for the retail sector in Q1 of 2020:

- Perhaps surprisingly, spend per head did not grow significantly in March 2020, which suggests that malls recorded the same visitors and spend as in February 2020. However, the choice of goods and services consumers chose to spend their money on changed significantly (for example, there was a much higher spend on essential goods rather than on luxury consumer items).

- Over the long term, growth in the amount spent per visitor has been the primary driver of trading growth. As the industry looks ahead, it's expected that both measures will have declined during April 2020, given the trade constrictions under the Level 5 lockdown conditions. This would then be the first time since the index's inception in 2003 that both measures decline at the same time.

- Only two categories of goods saw positive month-on-month growth across all centre formats: food retailers, and health and beauty. Food retailers benefited from the bulk buying that happened pre-lockdown, as sales increased by around 20% in this category. The Health &amp; Beauty category (driven by pharmacies) also saw strong growth although not as high as the food sector.

- SAPOA's Q1 report seems to foreshadow the fallout that the retail sector has been experiencing during Q2, amid the full rollout of the nationwide lockdown. How serious the sector will be affected remains to be seen, but it's almost certain that it will have seen a sharp decline in line with the rest of South Africa's economy over this period.

<a href="https://www.sapoa.org.za/media/5789/retail-trends-report-may-2020-v2.pdf">Read the full SAPOA Retail Report for Q1 here</a>.

SAPOA Retail Report - June 2020

SAPOA’s latest report from September 2019 reports that, as at Q3 2019, the national office office vacancy rate in South Africa was recorded at 11.0% - a 30bp improvement compared with Q2. This improvement did, however, come at the cost of rental growth, as asking rental growth nationally declined by 1% year on year.

During the same period, 200 square kilometres of rentable area was taken up within South Africa, while 148k sqm of stock was added. The net result of this was a positive net absorption of approximately 52km sqm.

Since March 2011, SAPOA found that the total office vacancy rate (including unlet new developments) has not shifted substantially. Rather, it is trending sideways. To get down to a 5% vacancy rate will require at least 75 000 office-based new jobs – an increase of around 6.7%. This is ambitious given the currently fairly pessimistic economic growth forecasts on a broader scale.

<img class="alignnone wp-image-25219 size-full" src="https://res.cloudinary.com/black-pepper/image/upload/v1571681317/Sapoa-Sept-1_zpular.png" alt="" width="806" height="424" />

Generally speaking, the current status of muted employment growth and low overall economy growth dampens the sector’s hopes of a short-term recovery. The current vacancy cycle is very different to the previous two in that the recovery phase is significantly more drawn out.

South Africa’s uncertainty around its credit rating, as well as the future of Eskom, means that many property occupiers are adopting a “wait and see” approach. Simon Black, founder of Black Pepper Properties, agrees, and says that the way forward is through serious structural changes to stimulate our ailing economy. "ESKOM presents the major risk to our credit sovereignty and Government needs to issue concrete reforms to ease concerns and roadmap the way forward," he says.

Since 2015, the development of new office space has been slowing down, with the demand for space growing at a slower rate. At the end of Q3, developments under construction across the country totalled only 378 sqm – the lowest levels seen since Q4 of 2005.

During Q3 ending in September 2019, vacancy rates softened in the Prime &amp; C-grade segments but improved in the A &amp; B-grade segments.

Given the current economic headwinds and structural growth constraints that are present in the sector, SAPOA states that it is hard to imagine a national office vacancy rate returning to mid-single digits within the next 3 years.

<img class="alignnone wp-image-25220 size-full" src="https://res.cloudinary.com/black-pepper/image/upload/v1571681316/Sapoa-Sept-2_h8d7yc.png" alt="" width="939" height="495" />

Historically, 3,5% was the minimum requirement for driving employment growth, and therefore the demand for office space. However, at this point, GDP forecasts are not in this range. Therefore, SAPOA considers a national office vacancy rate in the neighbourhood of 10% as being the “new normal” for the foreseeable future. Whether or not this improves in Q4 remains to be seen.

"Ongoing tax revenue shortfalls over the past five years would indicate that increasing tax revenues have reached a logical ceiling," says Black. "A combination of strong leadership - along with difficult decisions - are required to right South Africa Inc.'s ship.

SAPOA Update - September 2019

SAPOA’s <a href="https://www.sapoa.org.za/media/5206/ovs-q2-july-2019.pdf" target="_blank" rel="noopener noreferrer">Q2 report from July 2019</a> confirmed an overall weakening of the commercial property vacancy rates, reinforcing the “sideways drift” that’s been in place for several years. While the report found several nodes reporting improved occupancy, this was offset by a weakening in other sectors of the market.

By the end of the second quarter of 2019, the national office vacancy rate in South Africa was recorded at 11.3% - a 30bp weakening compared with the previous quarter. At the same time, the asking rental growth improved slightly to 2.8% year on year – although it’s worth noting that rental growth tends to lag movements in occupancy rate.

<img class="alignnone wp-image-25201 size-large" src="https://res.cloudinary.com/black-pepper/image/upload/h_344,w_640/v1570539425/Graph1_bphbjx.png" alt="" width="640" height="344" />

External factors dampening the sector’s hopes of a recovery including muted employment growth, along with a negative business confidence within the country. As a result of these factors, the current vacancy cycle is very different to the previous two quarters, in that the recovery phase is much longer.

Within the different segments of the market, vacancy rates softened within the B and C-Grade segments but improved within the P-Grade and A-Grade segments.

<img class="alignnone wp-image-25202 size-large" src="https://res.cloudinary.com/black-pepper/image/upload/h_324,w_640/v1570539420/Graph2_cdn9wz.png" alt="" width="640" height="324" />

Looking at the five largest metropolitan areas within the country, The City of Cape Town still has the lowest overall office vacancy rate at 7.6%, following a 10bp improvement from the last quarter. The highest overall vacancy rate among these five metros was for eThekwini municipality, which recorded a 13.5% vacancy rate. Johannesburg narrowly followed this, with 12.9%.

<img class="alignnone wp-image-25203 size-large" src="https://res.cloudinary.com/black-pepper/image/upload/h_333,w_640/v1570539415/Graph3_l5oaac.png" alt="" width="640" height="333" />

Within Johannesburg, Sandton’s increasing (and high) vacancy rate is a concern on the broader context of Johannesburg: as of Q2, 9 out of every 100 buildings were completely empty. Development in the node has outstripped demand over the last few years, which has been dominated by large, single tenanted buildings that have seen occupiers consolidate real estate operations in a quest for greater efficiently. This has often lead to multiple, older buildings remaining vacant for an extended period, as landlords seek to mitigate the backfill risk. However, in a challenging operating environment, this is easier said than done: the amount of available space in Sandton has steadily increased to an all-time high of 341k sqm.

The report found that while the overall development has been slowing, the pre-let rate of current developments remained below 50% during Q2. Because of the slowing in development activity, continued weakness in the pre-let rate will weigh in on asking rental growth.

In terms of available space, development activity has slowed to 2005 levels, and is mirroring the previous top of the vacancy cycle in around 2003. Given the current vacancy rate of 11.3%, this slowdown can be seen as a positive occurrence.

During Q2, there was 20sqm of office space under development for every 100sqm of vacant space. In contrast, during March 2008, there was 120sqm of space under development for every 100sqm already available.

In summary, there is little to suggest an immediate turnaround in the industry, especially given the recent increase in vacancy rate. The longer that the recovery draws out, the longer it will take for occupancy rates to get back to equilibrium. In fact, SAPOA estimates that it is unlikely that the national office vacancy rate will return to mid-single digits within the next three years.

<img class="alignnone wp-image-25204 size-large" src="https://res.cloudinary.com/black-pepper/image/upload/h_328,w_640/v1570539411/Graph4_tgj3qi.png" alt="" width="640" height="328" />

That said, if business optimism and foreign direct investment improves amid a slowly changing political landscape, this could be a catalyst that unlocks capital investment. This, in turn, will help to drive employment growth which would then positively affect the demand for office space.

SAPOA Update: Q2, 2019

The South African Property Owners’ Association (SAPOA) held its annual conference in Cape Town in June, where a panel of experts told the audience that there were still plenty of long-term property investment opportunities in South Africa.

Evan Robins, a listed property manager for Old Mutual Investment Group’s MacroSolutions fund emphasised the fact that property is a long-term investment in any country – not just South Africa. “The economy may be weak now, but things will improve, and growth will return," he said.

Barnaby Fletcher, a senior analyst at Control Risks, said the major risk to investing in South African property was still policy uncertainty relating to the politics of the country. “We are hopeful that Cyril Ramaphosa and his new government can quickly publicise and then implement clear policies,” he said.

Panel member Preston Mendenhall is the Executive Vice President at Rendeavour, Africa’s largest urban land developer in cities such as Kenya, Ghana, Nigeria, Zambia and the DRC. Giving a broader African perspective, Mendenhall said that these locations gave higher potential returns partly because these cities were grown from low bases, in addition to the fact that there was strong employment growth and associated infrastructure development. In comparison, he explained that South Africa simply doesn’t have projects of similar sizes.

Then, of course, there’s the network of players already in the South African property development industry including Growthpoint and Redefine, who are difficult to compete with due to their established presence.

Locally, we believe that the SARB will most likely be keeping interest rates steady due to a volatile exchange rate the on the 19th of September 19 after a .25% cut in July’s meeting. SA’s economy is expected to escape recession in the second quarter however did contract by in the first quarter of the year.

So, while the commercial real estate sector still leads the African continent, developers are having to be increasingly savvy to generate attractive returns. While the market’s maturity and sophistication compares with any developed market, investors still need to be discerning about which opportunities they take on in order to make their interests worthwhile.

SAPOA Conference: 'Plenty of long-term investment opportunities'

<a href="http://www.sapoa.org.za/media/press-releases/sapoa-disturbed-by-adoption-of-inclusionary-housing-policy/" target="_blank" rel="noopener noreferrer">The South African Property Owners’ Association (SAPOA) recently issued a press release</a> raising concerns about the <a href="https://www.joburg.org.za/documents_/Pages/Key%20Documents/policies/Draft-inclusionary-housing-policy.aspx" target="_blank" rel="noopener noreferrer">City of Johannesburg’s draft Inclusionary Housing Policy</a> that is currently being circulated for public comment.

The draft policy, which stipulates that 30% of new residential developments should be available for affordable housing, is seen by executive mayor Herman Mashaba as being an important move to address the spatial inequality associated with apartheid-era development planning.

An unworkable solution

However, SAPOA CEO Neil Gopal says that it is unworkable, and that concerns of property developments around this proposed requirement were not taken into account. “The commercial property industry is not likely to focus on housing developments in the City of Joburg as this is a very onerous policy that was not as extensively distributed for comment as the City eludes to,” he says.

According to Mashaba, the policy is meant to be financially sustainable and profitable to residential property developers, while at the same time creating affordable low-cost housing for residents. This is laid out by proposing that for every new development of ten dwelling units or more, 20% of it should consist of inclusionary housing.

Inflexible to economic conditions in South Africa

SAPOA’s concerns are that these requirements are inflexible to the underlying economic conditions and strength of the South African property market and may negatively affect the feasibility of residential developments. It’s also less than appealing for private developers looking to maximise returns on already-declining profit margins. “The revised policy is likely to have a detrimental effect on market-related housing provision in the City of Johannesburg,” says Gopal.

The draft also proposes a fixed income range for the whole city, which doesn’t take into account differing land costs across Johannesburg. “With the implementation of inclusionary housing, fixed affordability income threshold may open private developers in certain areas to revenue loss and risk,” he adds.

SAPOA's recommendations

Instead, SAPOA recommends that the city negotiate inclusionary housing provisions and incentives, rather than a mandatory approach. It also feels that the policy should be limited to selected developments, which are of a big enough scale to support inclusionary housing. The target affordability threshold should also vary according to location, and incorporate a broader income range. This, says SAPOA, will ensure smaller income differences between affordable and market units – which should minimise potential losses in revenue for private residential developers.

What we think

At Black Pepper Properties, we’re seeing that being able to successfully raise funding for any residential or commercial development projects locally is becoming increasingly challenging. Without the right policy incentives or having land certainty in place, we are going to score “own goals” when it comes to generating much-needed economic growth, jobs and redressing inequalities of the past.

Perhaps making secured, mortgage loans readily available to lower-income households should rather be a priority for policymakers, and should form part of the land reform debate? Such a policy could be highly progressive and go a long way to redistribute land and assets to previously disadvantaged South Africans.

Draft Inclusionary Housing Policy

SAPOA is concerned over the lack of feedback from the City of Johannesburg on the latest General Valuation (GV) Process. In correspondence to the City Manager, SAPOA has highlighted the legal position on three key factors affecting the valuation roll:
<ul>
 	<li>Ratepayers are not liable to pay disputed rates pending the outcome of objections or appeals.</li>
 	<li>The City is not entitled to cut off services such as electricity if ratepayers fail to pay that portion of their rates which they are disputing,&nbsp; nor may it threaten to do so.</li>
 	<li>The City is not entitled to claim interest on any shortfall on rates payable by ratepayers on finalisation of objections or appeals.</li>
</ul>
<div>On the question of ratepayers not being liable to pay disputed rates the City refers on its website to Section 50(6) of the LOCAL GOVERNMENT: MUNICIPAL PROPERTY RATES ACT 6 OF 2004 (“MPRA”) and concludes as follows :&nbsp;“Therefore the account must still be paid until the objection process has been finalised.”&nbsp; The City in fact insists that the full amount of rates billed must be paid, including any disputed amount.&nbsp; SAPOA has pointed out that this interpretation is incorrect.&nbsp; In addition it is significant to note that the City of Cape Town reached a different conclusion. In a circular released as part of its GV 2015, it posed the following frequently asked question: "Do I still need to pay the new rates if I disagree with the value and my objection is still unresolved?"&nbsp;It then supplied the following answer:&nbsp;"You will need to pay rates until the objection is resolved. The rates need not be based on the new valuation but must at least resemble the amount you are currently paying. "</div>
<div></div>
<div>On the question of the City being entitled to cut off services such as electricity if ratepayers fail to pay disputed rates,&nbsp; Section 102(2) of the Systems Act clearly states that municipalities are prohibited from terminating municipal services in relation to amounts under dispute.</div>
<div></div>
<div>On the question of the City being entitled to claim interest on any shortfall on rates payable by ratepayers on finalisation of objections or appeals, the City misquotes the relevant provision of the MPRA, namely section 55(2). That section, in fact, provides in 55(2)(b)(i) that where there is a shortfall payable by the ratepayer, the municipality “must” recover the shortfall from the ratepayer “without&nbsp;adding interest” thereon. It is only when the municipality is required to refund surplus rates paid by the ratepayer that interest must be added.</div>
<div></div>
<div>It is SAPOA’s understanding that, in previous valuation exercises, the City did not follow the correct practices and the indications are that the City does not intend to do so with the current valuation process.&nbsp; SAPOA has asked the City to provide it with an assurance that it will ensure its practices pertaining to the 2018 GV will in fact align with the legal requirements set out above. To date there has been no feedback from the City of Joburg.</div>
<div></div>
<div>

Should the City transgress the MPRA, SAPOA intends approaching the courts.&nbsp;Johannesburg property owners have until today (Friday 6 April) at 15:00 to object their property valuations and can supply comments on until 22 April 2018.&nbsp; The new values and tariffs will be introduced from 1 July 2018.

</div>

CoJ's General Valuation Process for Objections and Appeals

EXCLUSIVITY CLAUSES - COMPLAINT BY MASSMART

On 11 June 2015, Massmart referred its complaint against Shoprite, Pick 'n Pay and Spar to the Competition Tribunal following the Commission's decision to 'non-refer' the matter due to the Grocery Retail Sector Market Inquiry. SAPOA has been cited as fourth respondent in the proceedings. Massmart states that SAPOA is cited in the complaint merely for the 'interest' that it and its members have in the matter. Importantly, no relief is sought against SAPOA or any of its members. However, if Massmart is successful in its complaint, SAPOA’s members may well be affected in respect of new lease agreements which are to be negotiated or concluded and existing lease agreements which contain exclusivity provisions.

[row][/row]

Interlocutory procedural applications 

Exception Applications – Shoprite, Spar and Pick ‘n Pay During August 2015, Shoprite, Spar and Pick ‘n Pay each filed a pleading known as an ‘exception’ to the Massmart complaint. The exceptions set out argument as to why the substance of the complaint referral to the Tribunal by Massmart does not meet the strict procedural and content requirements to allow the respondents to deal with the complaint. In summary, Shoprite, Spar and Pick ‘n Pay have asked that the Tribunal throw out the complaint, alternatively to direct that the points raised of defective pleading must be remedied by Massmart before the matter proceeds further. In a combined answer to all three exceptions, filed on 16 September 2015, Massmart contends that the exceptions are in respect of matters of particularity and detail, and it is not required or appropriate to decide these issues at this stage of the proceedings. The Tribunal will ultimately decide whether the complaint referral meets the requirements of particularity and detail required by the Competition Act, and/or stipulate what further is required in order for the respondents to answer the case before them.

Stay Application – Spar 

On 21 December 2015, Spar filed an application to stay proceedings. The relief sought by Spar is to stay (suspend) the Massmart complaint proceedings pending finalisation of the Grocery Retail Sector Market Inquiry. Spar argues that allowing the Massmart complaint to proceed will result in parallel investigations into the same substantial issues by the Competition Tribunal and the Commission’s assigned Market Inquiry team. This, Spar suggests, is not in the interests of the principle of institutional comity between the Tribunal and the Commission – this principle can be described as a restraint exercised by one institution out of respect for the role of another.

Spar also suggests that there is no indication that the Massmart complaint will be finally resolved before the Market Inquiry is due to be completed – by May 2017. Although the Tribunal has not previously been asked to stay proceedings pending conclusion of a market inquiry, it has accepted that it has the power to stay complaint referrals before it.

The Tribunal has and will exercise a general discretion in deciding whether or not to grant this application. If the complaint is stayed pending the Market Inquiry, Massmart’s rights to proceed will simply be postponed pending the outcome of the Market Inquiry in the same way as SAPOA has agreed to suspend its rights in terms of the SAPOA complaint.

SAPOA’s role in proceedings. 

For now, SAPOA has elected to simply take a passive role in the proceedings. It may later choose to make a submission to assist the Tribunal and it may be called upon by the parties to provide information and possibly give evidence on these issues. Fasken Martineau's brief is to monitor proceedings and communicate developments which may have an impact upon SAPOA and its members.

The hearings are set down for the 26th and the 27th July 2016.

Copyright © 2016 SAPOA, All rights reserved. SAPOA

Massmart Complaint

The Sandton Central Business District (CBD) will become Africa’s only car-free CBD for the month of October as large sections of the roads will be closed off and focused on cycling and pedestrian activities such as pop-up restaurants, entertainment stands and food stalls.
The City of Joburg is the host of the EcoMobility World festival 2015, which aims to showcase that the urban eco mobile lifestyle can be implemented in cities across the world. The festival, which takes place over South Africa’s Transport Month, is the City of Joburg’s endeavour to encourage the use of public transport, cycling and walking as alternative modes of transport.

Activities to encourage healthy living like aerobics and daily walks will also take place in selected areas.&nbsp;City of Joburg Executive Mayor, Parks Tau outlined the concept behind the festival at the Sandton Sun Hotel in Sandton during a breakfast event held in conjunction with the South African Property Owners Association (SAPOA) on 28 May 2015. The Sandton Central Business District (CBD), the second busiest in the City of Joburg, is the host of the international event which will temporarily transform the CBD into an urban EcoMobility neighbourhood featuring selected road closures, park and ride facilities, increased pedestrian activity as well as a more intense usage of public transport.
Neil Gopal, Chief Executive Officer of SAPOA supports the City in its efforts as he recognises the gridlocking and traffic congestion in Sandton. “Whilst we are concerned about the operational issues of the functioning of retail facilities in Sandton and the resultant impact on shopping centres, we are working with the City on these issues,” says Gopal. “I call on other CEO’s to join the mayor in this important endeavour to change people’s behavioural patterns.”The first EcoMobility festival was organised in 2013 by the City of Suwon, South Korea and it attracted over one million visitors and this year’s event is also expected to attract a large number of visitors. The primary objective of the festival is to enable behavioural change from private car use towards other transport and as such drivers visiting and working in the CBD will be provided with park and ride facilities.In this year’s instalment of the festival will showcase the Rea Vaya Rapid Bus Transit system and Metro buses as alternative modes of transport, promote Joburg as a cycle friendly city, show and promote non-motorised and alternatively powered vehicles, promote walking and show the benefits of reduced congestion on productivity, quality of life and emission standards.
The month long festival will have different components such as legacy projects, EcoMobility dialogues as well as street festivals and events.A transport management plan has been adopted by the City of Joburg to encourage the CBD’s users to participate in the festival. During the period of the festival, additional public transport in the form of the Gautrain which will be travelling at 10 minute frequencies, increased availability of Metro busses, providing accredited mini bus taxis, tuk tuks, pedi cabs and electric vehicles will be accessible to commuters.
The festival is not only expected to gear vehicle users’ minds closer to considering alternative means of commuting but to also significantly alter the travelling routine of the daily Sandton CBD commuter.

Sandton CBD Car Free Zone

Commercial property rates and taxes – a comparison across South Africa’s eight metropolitan municipalities.&nbsp;The South African Property Owners Association’s (SAPOA) comparison of the level of rates and taxes levied in each of the eight metropolitan municipalities reveals some variance in the cents in the rand rate across the main property types.

The latest rates and taxes research from SAPOA highlights the huge disparity between the country’s major cities in terms of the resources available to deal effectively with ongoing urbanisation, poverty, unemployment and inequality. Within the context of the National Development Plan’s emphasis on the major cities being the engines of economic growth, these disparities and the shortcomings they reveal, need to be addressed as a matter of urgency.

The research also confirms that over the last decade, rates and taxes have consistently increased at a rate higher than inflation with a rates and taxes annualised rate of inflation of +8.2% over the period of 2005 – 2014.&nbsp;Although prior to this, the increase in rates and taxes exceeded inflation, the acceleration in growth rate has been more noticeable since 2005.

From solely a rates randage perspective, for the fiscal year of 2014/2015, the highest level of commercial property rate randage was levied in the eThekwini Municipality where a rate of 3.053 cents in the rand applied to industrial property. Commercial and business property saw a slightly lower tariff of 2.36 cents in the rand being applied.

The City of Tshwane reported the second highest cents in the rand rate with industrial and business property both taxed at 2.71. The lowest rates applied to the City of Cape Town with both industrial and commercial property taxed at 1.25 cents in the rand.

The largest municipality in terms of revenue, the City of Joburg, applied a rate of 1.73 cents in the rand while Nelson Mandela Bay, Buffalo City and Mangaung, the three smaller metros had comparatively high commercial property rate randages.

It is noted however that the rate randages do not necessarily result in higher property rates as this is predominantly affected by the actual property value. The case of the eThekwini Municipality is therefore instructive.

Whilst the eThekwini Municipality’s rate randages come out as the highest, the number of rateable properties is more than 60% less than both Cape Town and Johannesburg and the value of commercial and industrial properties is more than half that of Johannesburg and nearly half that of Cape Town.

This can be seen with eThekwini having the least quantum of rates revenue of the 3 major cities. Furthermore, within eThekwini, more than 90% of the total rateable property is residential resulting in a major challenge for the municipality.

The nett effect is therefore a higher rate randage than in the other major cities, but not necessarily higher property rates. Certainly however, within every municipality, rates revenue is a critical source of revenue and within eThekwini, its huge challenges force it to rely heavily on such revenue.

Presenting the highlights of the city’s budget, eThekwini Municipality Mayor, James Nxumalo, said a large portion of the Municipality’s R6.1 billion capital budget will be pumped into low-cost housing and infrastructure development throughout the City towards creating an enabling environment for new investments and other activities that lead to job creation.

Mayor Nxumalo confirmed the city’s commitment to building a sustainable City for future generations based on infrastructure-led growth, unlocking investment, economic development and job creation. Investments include more than 65 flagship projects across the city ranging from manufacturing, construction, real estate, tourism, information communication technology, agriculture, maritime and logistics. The projects are expected to create about 680 000 permanent jobs in the long-term and the potential revenue of about R 9 billion for the city.

The Municipality has established a project management office whose main role is the facilitation of the implementation of catalytic projects such as the inner city renewal in addition building capacity.
Nxumalo said that in drafting the tariff increases, the City took cognisance of economic conditions, input costs and the affordability of services to ensure the financial sustainability of the city.

Rates and taxes form a significant percentage of overall municipal revenues with the eight metro municipalities collecting R29bn in rates and taxes, 17.9% of total revenue.
During the 2013/2014 fiscal, commercial and industrial property rates billings amounted to 54.5% of overall rates revenue in the country’s metropolitan municipalities with significantly lower levels of arrears than commercial clients.

Of the 8 metro municipalities, 6 reported increases of 30% + in the value of commercial and industrial properties. Mangaung reported the largest increase with the valuation of its commercial property almost increasing while eThekwini reported a municipal valuation increase of 50%. Tshwane and Buffalo city were the only municipalities with a valuation increase close to inflation with 5.6% and 4.7 respectively.

In conclusion, the increase in rates and taxes comes at a much tougher macroeconomic environment with economic growth currently at levels of around half of that of the period 2004-2007. As a result of this tougher trading environment, it is becoming increasingly challenging for landlords to deal with the additional tax burden.

Commercial Property Rates & Taxes

ANVA PROPERTIES CC V END STREET ENTERTAINMENT ENTERPRISES CC
Landlords are always looking for legal ways to disconnect the electricity supply to the tenant not paying for electricity consumption charges.
On 14 April 2015, the Western Cape High Court in&nbsp; Anva Properties CC v End Street Entertainment Enterprises CC (Anva), granted a judgment in favour of Anva Properties CC (Landlord) and held that the Landlord was authorised to terminate the supply of the electricity to the premises occupied by End Street Entertainment&nbsp; Enterprises CC (Tenant).

In brief, the facts&nbsp; of the Anva case are as follows:
The Landlord owned a building in Riebeeck Street, Cape Town and the Tenant was one of the tenants in occupation of the building. The Landlord paid its electricity consumption charges for the building to the City of Cape Town (City) and recovered the costs from the tenants. The Tenant had occupied the basement of the building since 2012, from where it conducted its business as a bar and nightclub.&nbsp; The Tenant used electricity for its air-conditioning, refrigeration and lighting facilities and the Tenant had not paid its electricity bill since September 2014 and was in arrears in excess of R300 000. The Landlord was required to pay the City for all services rendered in the building including electricity and if the Landlord did not pay the City for its electricity, the City would cut the supply to the building, which would cause other tenants in the building to be without electricity. The effect of this was that the Landlord was subsidizing the Tenant’s business.
The Judge held that the&nbsp; Landlord was authorised to terminate the supply of electricity to the premises that the Tenant occupied and granted an order that the Tenant must give the electrician, appointed by the Landlord, access to the premises in order to disconnect the electricity supply to the premises.
&nbsp;The Anva case&nbsp; is of particular interest to landlords as landlords are always seeking ways to lawfully terminate the supply of electricity to non-paying tenants. On reading this case, the first impression that is created is that this case may be ground breaking. However, on closer consideration of this case, it is clear that this case does not allow the landlord to terminate the supply of electricity without a court order. The principle emanating from this case is that if a landlord is supplying electricity to a non-paying tenant, the landlord may apply to court for an order to disconnect the supply. In the Anva case, it was an easy decision for the court to make as it was common cause that the Tenant had not paid for the electricity charges and the Tenant did not dispute the charges.&nbsp;
The Anva case does not give landlords the right to take the law into their own hands and to terminate the supply of electricity to non-paying tenants without a court order.

Tenant not paying for electricity consumption charges

In light of the recent call from the African National Congress(ANC) for land ownership restrictions, the South African Property Owners Association ( SAPOA) has raised concerns, particularly in relation to food security, the importance of foreign investments, instability and restrictions relating to ownership.

Following its policy Lekgotla, the ANC said that foreign nationals should not be allowed to own land in South Africa. Furthermore, it also decided that there should be a ceiling on the amount of land any one person or company should be allowed to own.
ANC Secretary General Gwede Mantashe commented, “The Lekgotla has resolved that there should be a ceiling on land ownership and that is a maximum of 12,000 hectares of land or two farms for all legal persons.”
Mantashe added that they want government to speed up land reform programmes and that the proposal will have to be tested to see if it can pass constitutional muster.&nbsp;As the representative body and official voice of the commercial and industrial property industry in South Africa, SAPOA poses several concerns regarding the government’s proposed land reforms.
The Head of Policy Research at the Institute for Race Relations, Anthea Jeffrey, recently provided comment on some proposed unintended consequences of the ANC’s land proposals, highlighting that the ANC’s claims overlook three crucial considerations: most people don’t want land to farm; land reform projects have failed in the past and that the proposal undermines property rights.
SAPOA agrees with some of the sentiments expressed&nbsp;by Jeffrey, most notably with her third consideration: property rights.
According to Jeffrey, property rights are the key to individual prosperity as well as to political and economic independence from the state. Without secure property rights, South Africa cannot generate the investment or the economic growth needed to overcome the jobless crisis.
“SAPOA supports a land reform process that is a "win-win" scenario, in which the rights of present and future landowners are protected,” says Neil Gopal, Chief Executive Officer of SAPOA.
“A key challenge facing South Africa is how to reverse the racial inequalities in land resulting from our colonial past and the violent dispossession of indigenous people off their land. We need more clarity and debate on the factors responsible for the slow pace of land reform,” he adds.
“Are there fundamental contradictions between the protection of private property, the willing-buyer-willing-seller principle and the property clause in the South African Constitution?” queries Gopal.
“We understand that the country cannot afford to protect private property with such zeal that it entrenches privilege. This is a recipe for instability. The guarantee of private ownership as well as addressing the ills of the past (with regards to property) is fundamental to a stable democracy,” he concludes.

Concern over the ANC’s land reform proposals

SAPOA has obtained a legal opinion pertaining to the rights of a landlord in the event that a commercial tenant is placed in business rescue. These rights are based on the inherent common law rights&nbsp;and obligations that are enhanced or replaced in one form or another by the terms of a lease agreement.&nbsp; The recommendations&nbsp; flowing from the legal opinion indicate that landlords need to re-structure their lease agreements in order to enable landlords to &nbsp;take measures to safeguard against the&nbsp; negative consequences of business rescue provisions contained in Chapter 6 of the Companies Act No. 71 of 2008 (“Act”).
These recommendations are as follows:

1.Rights under a Lease

The most important thing about a lease in the context of business rescue is that it is a bilateral contract. Each party’s obligation to make performance is undertaken in return for the other party’s performance. As such, this bilateral contract gives the landlord the defence known as the exceptio non adimpleti contractus. This means that the tenant is not entitled to demand performance by the landlord unless the tenant has performed its reciprocal obligations.

Accordingly, all leases must be drafted on the basis of reciprocal obligations. The right of the tenant to occupy premises and to receive services from the landlord must be unequivocally conditional on the payment of rent, utilities and services.

2. Termination

2.1 There is nothing in the Act and in law that prohibits a landlord from including a provision in the lease that it automatically terminates if the tenant places itself under voluntary business rescue proceedings by way of a company resolution. When the resolution is passed by the board, the business rescue process has not yet begun and termination at the time is not prohibited by Chapter 6.
2.2 The commercial property industry is well aware that when a landlord terminates a lease it is a drastic step and it has certain legal consequences as on termination, the landlord is entitled to a claim for eviction and a claim for damages for the unexpired portion of the lease. Accordingly, every landlord must assess at the time that the tenant is placed under business rescue if it is in the landlord’s best interest to terminate the lease.
2.3 The wording contained in s134 (1) (c) of the Act is probably wide enough to cover a landlord’s right to cancel and to evict a non-paying tenant from the premises.
2.4 As soon as a tenant goes into business rescue and a practitioner is appointed, the landlord should pursue the right to terminate the lease if the practitioner will not pay rent.
3. Rescue Plan
3.1&nbsp;There is no reasonable basis upon which a tenant may continue to occupy leased premises without paying rent.
3.2 As the obligations of the landlord and tenant are reciprocal, the business rescue plan cannot ignore the tenant’s obligation to pay rent whilst preserving the obligations of the landlord under the lease. There is nothing under s150 of the Act which allows the tenant the right to remain in the leased premises without paying rent. If the tenant cannot afford the rent, the tenant must vacate the premises and find alternative premises which it can afford.
3.3 However, this is not an absolute rule. Where the tenant is paying rent, which rent is above market value, and it would be difficult for the landlord to find a replacement tenant at the same or higher rent, the landlord would be wise to negotiate a lower rent provided that the tenant undertakes to pay the full rent whilst it continues to remain in the premises.
4. Suretyships
4.1 Any suretyship obtained by the landlord from a surety in respect of an agreement of lease must provide that the suretyship can be enforced against the surety even if the tenant is placed under business rescue.
4.2 In the recent SCA case of New Port Finance Company (Pty) Ltd vs Nedbank Ltd, the SCA held that if a judgment against sureties had been obtained prior to the adoption of a business rescue plan or if the suretyship contains clauses often found in suretyships that allow the creditor to pursue the sureties notwithstanding any compromise reached regarding the scope and extent of the principal debtor’s indebtedness, the sureties are not relieved from liability because of the adoption and implementation of a business rescue plan.
5. Deposit
5.1 In regards to the deposit, the best way to ensure that the landlord has the right to the deposit is to ensure that the deposit is the property of the landlord and that it has the right to set-off the deposit against any rent due at the time that the tenant goes into business rescue.
5.2 The lease must provide that set-off operates automatically against the deposit if the tenant goes into business rescue. With set-off, the deposit will be the money of the landlord the moment that the tenant falls into arrears. If the terms of the lease allow the landlord to do so, the landlord can then ask the tenant for a replacement of the deposit.
6. Acceleration Clause
It will be expedient for all landlords to insert an acceleration clause in the lease if the tenant breaches the lease or is placed under business rescue. The acceleration clause causes the full value of the lease to become due and payable as soon as the tenant is in breach of the lease or is placed under into business rescue.
7. Conclusion
7.1 Where the tenant is placed under business rescue, the landlord is not without rights.
7.2 The difficulty is that the landlord may need to enforce these rights either by negotiating with the practitioner or through the courts.
7.3&nbsp;If the tenant goes into business rescue, any unpaid rent must be demanded immediately from the practitioner. If the practitioner fails to pay the rent and the landlord is easily able to re-let the premises, the landlord must do its best to negotiate an early termination of the lease. If the landlord is unable to negotiate an early termination, the landlord must consider approaching the courts for relief.
7.4 What is stated in this letter does not adequately solve the existing problems for landlords in relation to the business rescue provisions of Chapter 6 of the Act.
7.5 In order to address this situation, we confirm that SAPOA has made written representation to Professor Michael Katz, the chair of the Commission that has been appointed to investigate the business rescue provisions of Chapter 6. SAPOA has addressed the challenges and problems faced by landlords in relation to Chapter 6 and we eagerly await the Commission’s response to SAPOA’s representations and recommendations.
The abovementioned recommendations are mere guidelines and only for the purposes of assisting landlords in situations relating to business rescue. Each lease is unique and the user must seek legal advice for the user’s specific circumstances. This legal opinion is only to be used as a guide and should not be merely copied with the expectation that it will serve each party's individual circumstances. Most of the above recommendations have not been tested in our courts and SAPOA doesn’t guarantee any success in any court if any of the above recommendations are put into use.

Commercial Tenants & Business Rescue

Municipal rates and taxes an ever-increasing burden&nbsp;on property owners
Latest research into municipal rates and taxes confirms what landlords already know: municipal rates and taxes cost twice as much as they did a decade ago, and represent an ever-increasing slice of operating costs. It’s an issue fostering considerable concern, as the growth in rates and taxes has tracked at 2.5 times the inflation rate.

The Rates and Taxes Report prepared for the SA Property Owners Association (SAPOA) by analysts Investment Property Databank (IPD) examines commercial property rates and taxes in SA’s eight largest municipalities and was released this week. “Rising operating costs threaten the sustainability of net returns across the spectrum of commercial and industrial property investment,” says SAPOA CEO Neil Gopal.
“Since the sustainability of the property sector is a key focus for SAPOA, we have been vocal in challenging the basis and consistency of municipal rates charged to our members.” To put some numbers around the issue, consider that total operating costs for commercial properties in 2014 averaged R47/m², of which R11.60/m² went to municipal rates and taxes. That means municipal rates and taxes effectively doubled in real terms since 2000, when rates and taxes accounted for R4.93/m².
As Gopal points out, the report concludes that rates and taxes are the second fastest-growing operating cost item for property owners and investors. Indeed, only electricity costs have risen at a higher pace.
“Real increases in rates and taxes have been especially pronounced in the retail sector. Since 2007, retail property rates and taxes have grown by inflation plus 11.6%,” says Gopal.
The report pinpoints other trends that raise red flags for the property sector. While municipal rates and taxes largely moved in line with commercial property values during the early 2000s, before the global recession, the opposite has been the case ever since.
In recent years, rates and taxes in SA have increased at a significantly higher rate than commercial property values.
“By June 2014, that growth had resulted in an over-recovery of commercial rates and taxes of about 12%, and there is little likelihood the gap will close in the foreseeable future,” explains Gopal.
The analysis further finds a weak relationship between a property’s market value and the level of rates and taxes levied. The largest mis-pricing is in the office and industrial sectors of the market – typically sectors where properties have unique characteristics that could impact their value.
The report notes that some smaller municipalities could change their rates policies to attract more built investment. Nelson Mandela Bay, Buffalo City and Mangaung all charge commercial property rates over two cents in the rand, a position that is not considered pro-business.
“A lower “cents in the rand” rate could act as a catalyst for increase investment flows,” comments Gopal.
This is echoed by SAPOA’s regional Chairman for Kwazulu-Natal Ed van Niekerk, who believes that municipalities would do well to expand the rates base rather than simply increasing the burden on existing landlords.
“Rates and the cost of doing business are a key consideration in corporate location decisions. It’s a balancing act that cities get wrong at their peril,” he adds.
Still, as he underscores, it’s important to consider the context of individual municipalities.
“Consider the case of Ethekweni, which has large areas of previously-disadvantaged communities and a significant need for infrastructure development,” he elaborates. “It’s not realistic to compare that with a municipality which is almost fully developed.”
The challenge is that property rates and taxes are a key generator of revenue for municipalities. This year, property rates and taxes brought in 17% of total municipal revenue for the eight municipalities included in the study.

Increasing municipal rates & taxes

SAPOA asks Competition Commission to make definitive ruling on the anti-competitive effects of exclusivity clauses
South Africa’s large grocery retailers stand accused of anti-competitive behaviour. The South African Property Owners Association (SAPOA) has officially asked the Competition Commission to investigate the broader prohibitive practice of long-term exclusive leases in shopping malls. SAPOA, the voice of the country’s commercial and industrial property sector, has levelled a formal complaint that names Pick n Pay Group, Shoprite Group and Spar Group, but notes these are only some of a wider number of retailers that are parties to the conduct, which SAPOA asserts is anti-competitive.

Exclusivity clauses are usually requested by larger tenants as a condition for entering into long-term lease agreements, specifically in large retail centres. Supermarket chains and property developers enter into and enforce long-term exclusive leases through so-called 'anchor tenancy'. Typically, these leases are of a minimum period of ten years with renewal options up to 40 years. This means competing retail chains are excluded from particular shopping centres by ‘Use and Exclusiveness’ clauses in lease agreements. But it isn’t only competing chains that are excluded. Specialist stores like fruit and vegetable sellers, liquor stores, as well as full-line grocery stores are excluded in shopping malls where any one of the main supermarket chains is the anchor tenant. The retailers named in the complaint are among those that have concluded and continue to seek to enforce the exclusivity clauses and thus exclude competitors.
Neil Gopal, CEO of SAPOA, comments: “Exclusivity clauses harm competition to the clear detriment of consumers. They restrict entry into the market by competing retailers, especially when a retailer’s entry strategy requires scale of activity and buying, distribution and selling networks.”He adds: “Besides excluding potential new market entrants, including independent and small retailers, long-term exclusive leases also reduce competition between supermarkets and broader competitors. The anti-competitive effects and outcomes, including higher prices, are to the detriment of consumers.”
This will not be the first time the Competition Commission has turned its attention to long-term exclusive leases in shopping malls. SAPOA’s complaint notes that in January 2011, the Competition Commission concluded part of its investigation against the four major supermarkets and found exclusive lease arrangements are of great concern and could result in anti-competitive effects in circumstances where supermarket chains have market power within the relevant local markets, and its analysis to date indicates that they may amount to a contravention of the Competition Act, particularly where supermarkets have market power.
Gopal notes: “In several recent merger applications before the Competition Tribunal involving commercial or retail property, the Tribunal has imposed a condition to the merger approval that the parties to exclusivity clauses in leases negotiate in good faith to seek an end to the relevant exclusivity clauses.”But, the pervasive nature of the practice in the retail sector shows that asking parties to negotiate to drop exclusivity clauses is insufficient. “Instead it is perpetuating anti-competitive behaviour,” says Gopal. And, SAPOA contests the issue cannot be resolved on a case-by-case basis. “It is impractical, expensive and wasteful of resources to have to bring complaint proceedings in respect of each lease agreement,” stresses Gopal.
Gopal explains the anti-competitive effects may be much broader than immediately evident. “A shopping centre where an anchor retailer has an exclusivity clause in its lease will prevent new market entrants, on a regional and national level. It will stifle competition and prejudice the consumer.” In addition, should a supermarket seek a ruling from the Competition Commission regarding the anti-competitive nature of an exclusivity clause in a lease, resources required for references to the Tribunal are extensive. SAPOA has urged the Competition Commission to make a definitive ruling on the anti-competitive effects of exclusivity clauses.
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