It's good business for big (property) business to support small business development
The South African government created the ministry of small business development in 2014 in recognition of the fact that small, medium and micro enterprises (SMMEs) “represent an important vehicle to address the challenges of job creation, economic growth and equity in South Africa … in the belief that SMMEs should be seen as part of an integrated strategy aimed at diversifying the economy, enhancing productivity, stimulating investment and encouraging entrepreneurship”.
That’s all very well — we now have a government department that is supposed to protect the interests of small businesses. But surely one of the ways that South Africans can help one another is for big companies (on whose products and services the smaller businesses depend) to help create a supportive environment that recognises their emerging status, while still doing good business?
One the sectors that can do this is the commercial property environment, with “big brother” commercial property owners and listed property funds coming to the party to support emerging companies.
They would rightly argue that they are businesses that are in the business of making money — they are not charities. But there are some things that big property companies could do to help smaller businesses, according to one small business owner — and they’re likely to enjoy loyalty and growth as they invest in their customers.
Cian Mac Eochaidh is the co-owner of a public relations agency that he started with his business partner 10 years ago. In that time, the company has grown to 20 people, and its office space has expanded from 50 square metres, to 100, then to 250 — and is about to move into a 400 square metre space — and his last three leases have been with the same landlord.
“Big property companies need to remember that today’s garage-based start-up is tomorrow’s Microsoft or Apple, and that their preference for only leasing out large spaces could be very short-sighted,” he says. “A good business — even if it is a small business when it first starts looking for premises that aren’t a home office — is likely to grow into a big business that looks for big offices.”
One of the obstacles he encountered as a small business was that his landlord presented the same lease offer and associated terms and conditions — and the same complex contract — that they would have presented to a big company leasing the whole building.
“Big companies have in-house lawyers to review these contracts, with the insights on where they can push back or negotiate. Small companies don’t have that resource, and could be compromised if they don’t have the money to invest in attorneys — or if the contract is not in the plain language now required by law,” he says.
He offers some advice to small businesses entering negotiations with landlords. “Push back on issues that don’t make sense for your business. For example, many landlords stick to the municipal standards for parking bay allocations, which make sense for big businesses that have loads of open spaces (like reception areas, passages and pause areas). Small businesses use every inch of space carefully, and tend to put more people into the space that they rent — which means that they need more parking bays for their staff.”
He does note, however, that once a small company has successfully negotiated the lease process with a big commercial property company, they tend to benefit from the same level of service that a big company would. “We get the same level of attention from our landlords, who rent us 400 square metres, that they would give to someone who rented a whole building from them.”
While the negotiating process may be an onerous one, it provides both parties with a good opportunity to learn about one another, and how they each do business. While cumbersome legal documentation may be intimidating, a good contract will protect the tenant as much as it protects the landlord, providing both with peace of mind going into the future.
And here’s an opportunity for big property companies, many of whom own buildings that are suitable for “carving” up into smaller sections: if they make it simpler for small businesses to become tenants, and they maintain the same level of service that they would give to large tenants, they are likely to see the beginning — and evolution — of a relationship that grows and is profitable in the long term.
New tenants do have a bargaining chip to their advantage: according to the Rode’s Report published by Rode Property Consultants, rentals for Grade A multi-tenanted office space only recorded a growth of 3%, year on year, in the third quarter of last year.
“With in-contract escalation rates at about 8%, many a landlord is already experiencing downward rental revisions on the expiry of leases, and this is set to continue unabated,” the report says. This trend is particularly true in Johannesburg, while Cape Town, Pretoria and Durban have shown an increase in market rentals.
Indeed, the South African Property Owner’s Association set the average office vacancy rate for 2014 at 11.1%.
This means that new tenants (or existing tenants renewing their leases) may be able to push back on rental increases — although in the interests of maintaining a good relationship with your landlord, it’s wise to focus on your mutual sustainability.
It costs a landlord to “onboard” a new tenant, with many offering a Tenant Installation (TI) allowance to entice new relationships. Small businesses would do well to shop around to look for the best deal too. For example, Growthpoint is currently offering a “Smart Moves” promotion on seven of its buildings or office parks in Johannesburg. This offers 50% free rental in the first year of occupation, 42% of the value of the first year’s rental in TI costs, and 8% of the value of the first year’s rental towards relocation costs, on signing a five-year lease.
This deal would be of interest to small businesses, as many of the buildings on the list can be leased out in small sections.
Landlords face a different set of challenges with small businesses than what they can expect from a bigger corporate or juristic person (a juristic person is an entity recognised by law as having certain rights and duties). Many small businesses are not yet juristic persons when they are launched, which means that lease agreements are entered into in the business owner’s personal capacity, rather than by the business in its capacity as a juristic person.
This means that tenants would be protected by the Consumer Protection Act (CPA) — something that may make landlords wary of contracting with start-ups that have not yet been registered as juristic persons.
Michelle Corbett of Werksmans Attorneys recently wrote: “One of the most serious challenges to the security of tenancy normally created by long term leases is that according to the CPA, tenants may provide 20 days’ notice of cancellation, despite any provision in the lease to the contrary.”
She adds that while the tenant will still be liable for any cancellation penalties and outstanding rentals, the fact that tenants could do this causes uncertainty on the landlord’s part, and may impact on how the terms of the lease are negotiated.
Michelle Dickens, managing director of Tenant Profile Network, a registered credit bureau, notes that 2014 was a tough year for commercial rent collection, particularly during the third quarter, which saw a significant deterioration across all the provinces and rental price brackets, with the Western Cape remaining the top performer in rental payments.
“Consistently, the best performing tenants are those paying above R50 000 per month in rent, and the worst performers are those paying less than R10 000 per month. These are the smaller businesses that are probably struggling the most with cash flow,” she says.
This is supported by statistics from the department of small business development, which state that small businesses have an exceedingly high failure rate. Only 37% stand a chance of surviving the first four years, and only 9% are expected to maintain 10 years in business.
It’s clear that at present, landlords are under pressure with higher than desirable vacancy rates, and SMMEs — named as one of the biggest hopes for our economic future — have the odds stacked against them.
Perhaps thinking in new ways to establish shared commercial spaces, or at least increasing the number of shared buildings in order to boost tenancy rates and make commercial spaces more affordable is a way that these two sectors can partner to their mutual benefit.
Disclosure: The Mail & Guardian’s Johannesburg offices are in a building that is managed by Growthpoint