GENERAL NEWS
The changing face of
property development
By Brett Marlin
A few weeks ago, I was asked to assist one of my project managers
with a new development proposal for an office building, Prime
Plaza 2, in the new CBD that we are currently tendering for
on behalf of listed property fund PrimeTime Property Holdings
Limited. It was very similar to one that we did in the Main Mall
a number of years ago, the joint venture with BHC for the new
Bank Gaborone Head Office. I found the proposal that I did
all the way back in January 2006 and thought it would be an
interesting exercise to compare the two developments in terms of
cost per m², return on investment and rental per m².
The office buildings are reasonably similar in size with the Bank Gaborone
building being 3 372m² and the Prime Plaza building being 2 633m².
To try and compare the two developments one clearly has to escalate cost
and rental, so in an attempt to do this I have looked at the inflation rate as
published by Statistics Botswana from January 2006 until today’s date.
Building cost per m²
We will deal with the building costs only as most other costs flow directly
from this except the land value. The building costs in January 2006 were
P5 465/m². When we escalated the costs by the inflation rate there is
a cumulative increase of 238% over the 14 ¾ years to P12 0473/m².
The current estimated cost per m² of Prime Plaza 2 is P13 128/m² (after
adjustment for specification changes and green building costs have been
made). There is only a 5.25% difference.
It’s clear that the construction cost has followed the normal escalation of
costs and is what would be expected when one compares like with like.
However, in today’s market where the expectation of prospective tenants is
to have a P-grade building with green building certification as well as solar,
the cost per m² increases to P15 347/m². This is not unreasonable as one
is getting a higher quality building with health and ecological benefits to the
tenants so they would be prepared to pay for the added benefits, right?
Rental
Below is a schedule that shows the rental in 2006 (column A), this rental
escalated in terms of inflation (column B) and the current achievable
rental (column C).
4
Rent/m²
in 2006
Escalated from
2006 to 2020
Current
rental
A B C
Ground floor rental per m² P85.00 P202.34 P130.00
Upper floors rental per m² P65.00 P154.73 P130.00
Basement parking rental per bay P250.00 P595.12 P450.00
Open parking rental per bay P75.00 P178.54 P350.00
The total rental on the Prime Plaza building would be P516 338 per month
if we used the 2006 rental escalated to 2020. Now to the current situation,
tenants are pushing for lower rentals and we are hoping to achieve rental
as indicated in column C. The recalculated rental we would achieve based
on the current rentals is P407 680 per month or 26.6% less rental for a
building that cost P2 875/m² more, even though it is a higher quality
building and has all the advantages of a green building and solar electricity
generation. There is something very wrong with this scenario.
What does this all mean?
Property development has become more and more difficult over the
past 15 – 20 years with the developer having to take more risk and
providing a better product with diminishing returns. Over this period
returns have dropped from 12% – 15% to 7% – 8.5%. Yes, interest rates
have dropped but sadly not sufficiently to compensate for this drop and
in this time of Covid-19, banks are increasing their lending rate and
tenants are looking for reductions in rental, this is unsustainable.
How are we going to overcome this?
Tenants need to understand that they need to pay for what they are
getting. Property developers need to do a better job in selling their
product and in explaining the benefits of green buildings as well as
the cost benefits that are being achieved in these new age buildings.
The architect needs to rationalise their design and make sure that there
is no wasted space in the building and the efficiency of the building
(construction area vs lettable area) is well above 90%.
The way forward
Unless we all, developers, tenants, consultants and contractors can
stop the widening gap between cost and rental, less and less property
development with take place and the existing second-hand building
rentals are going to climb beyond reasonable levels.
ISSUE 43 - AUGUST 2020