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Avoid these 9 commercial property mistakes

06 May 2015

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.

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

This is according to Brett Webb, Head of Specialised Lending: Specialised Sales and Commercial Markets at Standard Bank, who says with economic conditions remaining tough, risks remain high in the commercial property space due to the long-term nature of the investments.

However, he says there are a number of steps landlords can take to avoid being tripped up.

Webb gives the following tips for commercial landlords:

1. Filling up space

A major problem is that many landlords rush in to “fill up the spaces” by taking on tenants that do not 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.”

2. Over-exposure to one geography

Getting over-exposed to only one geography, which also implies incorrect positioning, is well worth avoiding, says Webb.

“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, he says.

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.”

He says 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 only puts undue pressure on them and “eats into their reserves, says Webb.

3. Contracts

Webb says if, for example, the tenant mix is 60% 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.

Webb says potential investors need to be cognisant of the rental rates and the escalations clauses of properties they are looking to purchase.

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 there is a risk that when the contract is renegotiated, the rentals may be lower and this would affect both value and cash flow, he says.

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

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

4. Insurance

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

5. Centre’s identity

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

For example, he says you need to know what type of restaurants you should 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% 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.

6. Design

Another risk is the design of the centre itself. “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.

7. Inadequate parking

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.

“There is nothing more frustrating than waiting for long periods to find parking. It’s also no good having overflow parking out into the street, “says Webb.

Landlords should be well placed 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 the likes of a Postnet, getting groceries or going to the hairdresser.”

8. Maintenance

Maintenance is key, but too often not done well. “The shopping experience must be pleasant to attract people, or 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,” he says.

9. Absent landlord

“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.

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