I was sent this newsletter yesterday and thought it may be of interest to those of you in the property game basically what its saying is; consider all of the costs both fixed and variable – now and with escalations – before you make your decision to rent or buy. If the deal sounds too good to be true it usually is.

The squeeze on property investment income continues:

According to the SAPOA and IPD Operating Costs report 2011, the basket of goods comprising property operating costs differs quite significantly from general inflation but nevertheless it is of relevance to note that property operating costs are escalating at a higher level than inflation. Perhaps of greater relevance within CPI, administered annual pricing inflation (which includes products and services such as assessment rates, sanitary fees, refuse removal, water, electricity, paraffin, petrol, etc), is running at around 12% at present. Looking at the CPI for electricity and fuels, which is growing at some 17%, this bears some resemblance to the 22% electricity increase recorded by IPD. Turning to Statistics SA’s official Producer Price Index (PPI) for domestic output, an annual rate of change of over 9% is being recorded at present, with the cost growth of electricity as a contributor to PPI running at over 25%.

Not only is the contribution of electricity to overall operating costs the highest, but indeed the growth experienced is also significantly higher than any other cost category. Across All Property, over 50% of operating costs occur within the ‘big three’ (electricity 29%, Rates and taxes 21% and Management 9%). Tenant Installation (TI) cost growth was interestingly enough the second highest; this perhaps speaks to the competitiveness of the market at the coalface of the tenant attraction and retention business. In a similar vein letting fees and commission (LFC) costs grew year-on-year by 3% and this makes for a significant change on both the previous year and two years when LFC costs represented the single sharpest annual decline in all operating cost categories.

Reflecting on the figure below, the impact on net income which is down 1.93% on the first half of 2011 vs. the first half of 2010 will be of some concern to investors, although there are certainly a number of market segments where strong growth was recorded. By comparison, a year earlier net income grew by 10.67%. Base rentals have grown by only 0.31%. The increased contribution of variable cost recoveries (up 10.76% on H1 2010) as compared with fixed cost recoveries which have come down by 6.09% appears to be an ongoing trend. Total operating costs have increased by 6.75% in the first 6 months of 2011.

– Eprop Newsletter October 27th 2011www.eprop.co.za