Tips on buying commercial property

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03 Apr 2013

According to many economists, the outlook for the local commercial property sector for 2013 seems to be dim.

For example, having a long-term lease with a national company in place will push the value of the property up, whereas multi tenanted units in rural areas with a lesser profile and no anchor tenant is a less attractive option for investors, he points out.

However, according to Gerrie van Biljon, executive director of Business Partners Limited, on the back of these dismal views, the current environment in fact provides a good opportunity to purchase commercial property, due to the market still offering reasonable returns.

He says that some analysts are talking about rental renewal rate increases of very low percentages or even no escalations for commercial property.

“Well-known property economist Erwin Rode predicts a real drop in office rentals of between 7 and 14 percent throughout South Africa.

“However, even with low escalations investing in commercial property should be considered - it is after all a long-term investment”.

Van Biljon says that investing in commercial property as a long-term strategic investment decision may offer the long-term results other investment instruments do not.

“Cash for example offers very low yields for investors.”

However, he stresses that several factors specific to a business owner’s situation should matter much more than the general condition of the market.

“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 the facts in mind.

Additional cash flow pressure due to the deposit requirements and additional payments should also be considered, he explains.

He says that a common mistake made by entrepreneurs is to compare the instalment that will be paid with the rental payments.

“Property costs such as rates, maintenance and insurance should be considered.

“If a business owner buys wisely and pays a 30 percent deposit, the cash flow will usually break even within the first two years.”

Van Biljon says that when it comes to commercial property, such as industrial parks and shopping centres, different rules apply.

When it comes to this type of property the focus is on the value and strength of the leases involved.

These factors also form a direct correlation with the price the buyer is prepared to pay.

For example, having a long-term lease with a national company in place will push the value of the property up, whereas multi tenanted units in rural areas with a lesser profile and no anchor tenant is a less attractive option for investors, he points out.

He explains that the property market has changed significantly over the past five years.

“The property boom came to a halt in 2008 and this affected the residential market mostly - property prices hardened and the call for new units reduced dramatically.

The commercial market did not experience the same trend.

The capitalisation rates, used in the market to determine the value, did not negatively change to the same extent as residential prices changed.

This resulted in commercial properties holding their value better than most of the residential market segments, he notes.

Van Biljon says that in the current situation there are still sound investments available within the market.

“When purchasing commercial property much research into the area as well as the structure needs to be conducted by a business owner to ensure that they will reap the benefits of ownership.       

“Whatever you buy, always do a careful due diligence,” he adds.

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