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A good time to buy commercial property

10 Jul 2013

According to Quagga Property Brokers director, Len Pears, now is the best time to invest in commercial and industrial properties.

"Now is the best time to invest in commercial and industrial properties."

“People are concerned about the economy, similarly to how it was in 1994, but now is the time to buy as prices are still on the low side, compared with when the economy was in its prime.”

He explains that those who invested in 1994, when many felt uncertain about the future, have enjoyed exceptional growth in their property investments.

“Now is the time to do this again before the property market turns significantly and booms again, and it surely will,” he says.

He notes that they have experienced phenomenal growth in sales in 2012 ranging from investors looking for new stock along with owner occupiers looking for new properties, and this is still the same trend they are seeing.

“We are currently running out of investment stock for our investors – proving the economy is definitely nudging towards an upturn.”

Commercial property trends

Org Geldenhuys, managing director of Abacus Divisions, notes that vacancies in the office sector are slowly coming down, in some places at least although still far from where they would like to see them down to.

“We’ve seen vacancies come down to acceptable levels in office parks where landlords are prepared to make deals with tenants and where there is value added – such as secure office parks or those with backup power, for example,” he says.

He says deals with tenants include tenant installation allowances that are above the norm – rent free periods, dropping rates with the hope to attract tenants.

For rest of the year, he says vacancies will be reduced and rentals will stabilise.

Escalations are now more in line with inflation and tenants will be in the driving seat for as long as vacancy levels are high and this is expected to change over the next 12 to 18 months, explains Geldenhuys.

In Pretoria Gauteng, he says they are seeing demand for smaller spaces measuring 150 to 300 square metres in decentralised areas and areas located close to Gautrain Stations or highly secure office parks such as Route 21 Corporate Park.

However, he points out that rentals have come down from their all time highs in these areas of above R120 per square metre to about R95 per square metre, pointing out that they don’t expect rentals in these areas to rise this year.

Well maintained, stand-alone building, Durbanville Office property opposite Tyger Valley Shopping Centre is selling for R9 million through Quagga Property Brokers: It measures approximately 660 square metres over three floors and is suitable for corporate headquarters, legal chambers, medical suites or general business.

“Escalations are inflation linked and we have seen up to 8 percent,” he says

Geldenhuys notes that another trend they are seeing in Pretoria is that smart tenants are signing longer leases to lock-in current low rental rates and escalations, as low rentals will be over as soon as vacancy levels lower. 

Industrial property market

An annual survey by Baker Street Properties reveals that in Cape Town in the past 12 months, the market remains tenant driven with slight improvement in rentals.

The average gross rental for existing space has marginally grown to R32 per square metre from R30 per square metre since 2009, points out Andy Beddow, a director at Baker Street Properties.

“Our current records reflect an overall vacancy of ± 611 500 square metres in the greater Cape Town area, 69 percent of which is in industrial buildings over 1 000 square metres in size (or 418 000 square metres).”

Beddow explains that development of new facilities for larger users, although limited, is being driven by redundancy of existing space and a lack of available modern A Grade facilities. 

“With the drivers of the Cape Town industrial market being predominantly the retailers and third party logistics – their requirement is for high volume distribution centres with raised loading and extensive yard areas to accommodate large commercial vehicles,” he says.

However, new development gross rentals average R60 per square metre plus, double the existing property rentals.

He says tenant driven new development continues in Airport City, at Sheffield Park (bordering Lansdowne Road and the N7) and Brackengate off the R300, while Improvon have been successful developing large warehousing on risk in Montague Industrial Park (bordering Plattekloof and Koeberg Roads).

He notes interest from developers wanting to take positions in the older central industrial areas, such as Epping, Parow and Bellville, where prices are reasonable for older almost redundant properties that can be held until it becomes viable to redevelop the site for a large tenant.

The survey also revealed that annual escalations remain 7.5 percent to 9 percent, although the latter only for shorter term leases.

According to Pears, when comparing industrial properties to residential properties – residential properties can expect a 4 or 5 percent nett return on investment, whereas industrial properties can expect between 8 and 9 percent.

Longer term leases attract more favourable escalations while average land values have shown a marginal increase to around R1 050 per square metre excluding VAT, he points out.

Popular locations include Airport City, Brackengate and Sheffield Park, with renewed interest at Capricorn Park in the Southern Suburbs.

“Despite the vacancies in the market we have minimal industrial buildings for sale and reasonably priced buildings tend to sell quickly.”

Geldenhuys says in Pretoria, demand for warehouse facilities is on the rise as are rental rates driven mainly by owner occupiers and single tenant occupation. 

“This points to organic growth based on the economy growing and companies prepared to spend some of its cash and not speculators driving demand,” he says.

According to Pears, when comparing industrial properties to residential properties – residential properties can expect a 4 or 5 percent nett return on investment, whereas industrial properties can expect between 8 and 9 percent.

Asked to share insights on what is happening in the industrial property space, he says lease periods are generally between 3 to 5years, whereas in the residential market most leases are renewed on an annual basis.

“There are generally less emotions involved in buying or renting out industrial properties as opposed to residential properties, as the property will be used for business purposes and not family.”

Unlike the residential market, which has endured hard times, the industrial market has been the least affected sector in the property market over the past few years.

Compared to the commercial and residential market, it has definitely held its value better, and in most areas, prices have taken a knock with the knock in the economy, however, unlike the commercial and residential markets, some sought-after industrial areas have seen a large increase in property prices, he points out.

“What makes industrial property a better buy, is that when buying a residential property you pay VAT on the transfer duty but cannot claim this back, whereas with industrial and commercial property, you are able to claim back on the VAT on your transfer duty if you are a registered VAT Vendor, therefore the purchase price of the property is its true purchase price.”

Asked where in Cape Town one can find good industrial property buys, he says Capricorn Business Park in the Southern Suburbs is very popular among tenants.

“We have found that in Capricorn we are able to still build new premises custom designed for clients for R5 500 per square metre excluding VAT.”

Other locations where investors can get value for money include Black Heath in the Northern Suburbs, Killarney Gardens in the West Coast/ Milnerton area and Parow in the Northern Suburbs.

Investors on pricing

Pears explains that investors look at property simply for the nett return they can expect on their investment (the bottom line) and they also tend to look at new emerging markets where prices have not yet reached capacity, so as to achieve the most for their investment.

Whereas owner occupiers look at the property from a size and workability point of view for their specific business, and are not solely focused on the returns they could achieve for the property.

They are often willing to spend more for a property than a pure investor would, he says.

“We have investors on our books looking to spend between R1.5 million and over R300 million, so the values vary greatly depending on the investor and his or her requirements.”

He urges owner occupiers to seriously look at buying their properties as a way of creating their own future pensions.

In years to come they could potentially sell their business and rent out the property as a form of income, or sell both the business and the building to secure income, he adds. – Denise Mhlanga

About the Author
Denise Mhlanga

Denise Mhlanga

Property journalist at property24.com

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