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Growth point, South Africa’s largest real estate investment trust (REIT), stated in an investor update for the three months ended 30 September that it is having to accept lower rentals when renewing tenants’ commercial property lease agreements.
This is because, by the time a lease agreement comes to a conclusion and must be renewed, rental escalations included in lease agreements to safeguard landlords against inflation end up being higher than market-related prices.
Renewal growth has slowed as a result of contractual escalations in rental contracts that have risen above market norms.
Negative reversion, according to property economist Erwin Rode, indicates that when a lease agreement needs to be renewed, the growing rental indicated in the previous contract has likely ended up much over current market levels.
In order to be in line with market level rental, the landlord is compelled to lower the rate while signing a new lease agreement.
This is currently the case, particularly in office and retail mall leases. In South Africa, it is customary to include annual rental escalation clauses in lease agreements to protect the landlord by bringing rents up to date with inflation.
Currently, escalations are often between 7% and 8%, which means they are greater than inflation. “Over the past number of years, the rental escalation rate has exceeded the growth in market- related rentals.
So, by the time a lease expires in about three to five years’ time, typically one will find the escalated contractual rental is significantly higher than the market-related rental,” explains Rode.
Story by : Norvisi Mawunyegah