Commercial property finance funding

08 May 2013

Financiers believe the current environment continues to provide opportunities to acquire commercial property investments offering reasonable returns.

According to Gerrie van Biljon, executive director of Business Partners Limited, they plan to invest predominantly in neighbourhood retail and industrial properties, as well as select office space valued from about R5 million up to R85 million per investment.

It is for this reason that Business Partners Limited announced that it has allocated R500 million of its annual investment budget to investment in commercial property.

According to Gerrie van Biljon, executive director of Business Partners Limited, they plan to invest predominantly in neighbourhood retail and industrial properties, as well as select office space valued from about R5 million up to R85 million per investment.

Speaking to Property24.com, Van Biljon explains that Business Partners has always invested in properties and funded property investments, however there is a greater focus to invest in real assets.

“This is part of an overall strategy to ensure long term sustainability, an enhanced development impact and improved returns.”

He points out that Business Partners have increased the investment allocation into real assets from about 35 to 50 percent with other investments going into Small and Medium Enterprises (SME) lifestyle businesses (40 percent) and venture capital deals (10 percent) respectively.

“The R500 million is for all property investment being purchased, joint ventures and financing of owner occupied properties.”  

Asked about the company’s loan book, he says, their portfolio of financing to SMEs is R2.2 billion.

Of this, R910 million will finance properties and the property portfolio of Business Partners, where a 100 percent ownership is applicable and amounts to R750 million.

Asked about commercial property yields, he says it is very difficult to source good property investments at yields above 10 percent at present. 

“We have managed to source some very good smaller investments valued between R20 million and R45 million at up to 10.5 percent in the last year being a mix of retail and commercial and industrial.”

He says they have also secured offers on some smaller, new investments at returns from 9 percent and up to about 10.5 percent for this financial year. 

Calculations show that, by purchasing a property or properties for their own use, SME owners can save up to 50 percent on premises costs over a 10 year period, without compromising the business’s own cash resources, he adds.

On locations, he says good quality stock is scarce but there are still some buying opportunities in well located and tenanted neighbourhood retail complexes and commercial and industrial complexes. 

There seems to be continued growth in the rural shopping centre market and industrial prime space for logistics in metropolitan areas.

Van Biljon points out that the Jones Lang LaSalle research reveals a shortage of assets within the South African commercial property investment market because mature funds were holding onto prime assets.

Business Partners do not actively invest in office complexes even though stock is presently more readily available in this sector because quality stock remains in short supply.

Financing deals

Van Biljon says SMEs are Business Partners Limited’s exclusive and only focus and, as such, they are able to offer products and services specifically tailored to meet their unique needs.

“We invest in quality properties and finance viable entrepreneurs who purchase the properties which they occupy at the lower value end of the market.” 

He explains that they purchase property investments at values of up to R85 million, which is the lower end of the stock values held by the property funds and more in line with the values purchased by private property investors.

They also invest in joint ventures with private property investors at this level in the market place.

The joint venture property funding is usually based on Business Partners contributing towards the equity required in the form of a shareholders loan account and a commercial bank will then usually do the primary bond of about 50 percent of the investment value.

When funding entrepreneurs to purchase the property from which they operate, we offer 100 percent of the purchase price of the property depending on the parameters of the application with the main objective being that they can then invest the deposit that would have been required to contribute by a commercial bank into working capital and use it more effectively to grow the business rather than tying it up in property funding, he says.

“When evaluating the applications, our focus is on evaluating the underlying operating business to assess whether they can afford the debt.”

On locations, he says good quality stock is scarce but there are still some buying opportunities in well located and tenanted neighbourhood retail complexes and commercial and industrial complexes.

Van Biljon says investing in commercial property as a long term investment strategy offers attractive risk adjusted returns in comparison to other investment or asset classes.

“Money market and capital market returns offer low yields for investors in comparison to properties.”

Business Partners believe commercial and industrial property remains an attractive investment for entrepreneurs, either as a sound long-term investment or to secure tenure for their own business operations.

Renting versus buying

He says if a business is doing well in a prime retail location and the location is important for the future viability of the business, buying should be considered.

The final decision should not be an emotional one and should be made with all the facts considered.

Additional cash flow pressure due to the deposit requirements and additional payments obligations must be determined.

A common mistake made by entrepreneurs is to compare the instalment that will be paid with the rental payments, points out Van Biljon.

 “Property costs such as rates, maintenance and insurance can be material.

“If a business owner buys wisely and pays a 30 percent deposit, the cash flow requirements of buying will usually match the rental payments after the first two years, provided interest rates remain stable.”

Property ownership offers not only security of tenure, but also enables entrepreneurs to grow their equity.

Calculations show that, by purchasing a property or properties for their own use, SME owners can save up to 50 percent on premises costs over a 10 year period, without compromising the business’s own cash resources, he adds. –Denise Mhlanga

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