Is commercial subleasing still a trend in South Africa?

Source: Supplied. Justin Thom, director at Galetti Corporate Real Estate.

Justin Thom, director at Galetti Corporate Real Estate believes that much of the sector’s renewed strength can be attributed to reinvention. “Major landlords are working hard to improve spaces and change the way that we look at space in general.”

He adds that subdued demand during Covid-19 pandemic helped restore the connection between landlords and tenants. “Perhaps two of the biggest game-changers of the pandemic would have to be the enhanced flexibility and collaboration between landlords, brokers and tenants.”

As a result of reduced demand and financial strain on businesses and landlords alike, subletting has emerged as a lifeline in the commercial property sector: a trend that Thom believes will continue to gain ground.

“And while interest-rate cuts and an improved GDP are paving the way to recovery, some tenants tend to take a more cautious approach.”

Subleasing unpacked

In subletting, Thom explains that the original tenant becomes the sublessor or a sublandlord of the sublet space.

“Some tenants, who can no longer afford or may not have the need for a large floorplan, are turning to subleasing to help cover the monthly bills associated with leasing commercial properties.

"And in the spirit of collaboration, landlords are open to this because they want to keep their anchor tenants, cover their overheads and fill up the space.”

In addition, deploying a subleasing strategy minimises risk. “Spreading a lease repayment across several companies may prove to be a sound strategy in a tough economic climate.”

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Thom adds that subleasing provides smaller companies who might not have otherwise had access to prime office space with the opportunity to position themselves in some of the country’s most sought-after locations and spaces.

“Smaller companies and agencies can now work among some of the country’s largest tech, financial and legal companies, as some examples,” he says. “It also provides them with the opportunity to lease real estate in central business hubs like Rosebank, Sandton, Waterfall, Umhlanga and Cape Town CBD, areas where they may not have otherwise had access to.”

In addition, prominent office REITs like Redefine are finding innovative ways of deriving income from alternative subleasing platforms.

“As much as 95% of Redefine’s portfolio consists of P- and A-grade office spaces. In recent years, the company has also generated alternative income from its non-GLA (Gross Lettable Area) assets—a strategy that has proven to be highly successful.”

In an interview with John Jack, chief executive officer of Galetti Corporate Real Estate, Dylan Koning, national alternative income manager for Redefine spoke to the success of this strategy.

“We don’t have restrictions on where we can operate,” he explains. “Common non-GLA areas in our retail portfolio includes rooftops, parking areas, parking lots, basements and undeveloped land.

“Other income generators include media, kiosk space, venue hire, promotional spaces and rooftop leases to Mobile Network Operators (MNOs),” adds Koning. “If there is an opportunity, I can guarantee you that 99% of the time that opportunity is already in play.”

The results of this have paid off with Redefine highlighting a net operating income level increase of 4.1% in its office portfolio. “This result has in fact outperformed its industrial portfolio – one of the country’s most stable asset classes,” comments Thom.

The legalities of subleasing

Thom does note that while subleasing may be a viable option, it can become a complex matter.

“The sublessee’s obligations are to the tenant, and not the landlord, which leaves the landlord with little control in the case of damaged property and late payments.”

However, he does add that most tenant contracts support and protect the landlord’s interests when it comes to subleasing. “The tenant has to bring the sublease agreement to the landlord for approval prior to signing and the landlord has the right to refuse the sublease request on reasonable grounds such as a lack of affordability.”

In a case where the sublessee defaults on payments, Thom says that it is still the responsibility of the tenant to cover the payment to the landlord – on time.

Thom adds that hot desks or co-working spaces must be handled by the landlord directly, and not via the tenant. “This is a more complex matter that would require detailed consultation prior to conclusion.”

Will landlords embrace short-term leases?

“There is another school of thought centered around short-term leases to stimulate demand,” says Thom. “As it stands, most commercials' leases span periods of anywhere from three to 10 years. However, this is a major stumbling block for tenants who are looking for flexibility in the current climate – particularly SMMEs.

“This may work in the B-Grade stable for instance where the tenants are still finding their feet rather than A-Grade or P-Grade where offices are designed around the tenant for the most part. This could be looked at as a small business incubator as such.”

Thom concludes saying that regardless, the collaboration taking place will pave the way to accelerated recovery by the sector. “Against all odds, the commercial property sector continues to fight back and as the environment improves, so does the sector’s outlook.

"Regardless of what trend emerges next, there is longevity in the commercial property.”