Significant upswing in Owner-Occupied Commercial Property deals

Many companies have proven that owning commercial real estate used by their closely held businesses can provide them the advantages of stable rents for their businesses and appreciation for themselves.

Other benefits accrue to the owner of single-tenant commercial real estate, including the ability to employ advantageous tax strategies, an income stream in perpetuity, asset diversification, and control of the property’s tenancy.

According to Standard Bank, Africa’s largest lender by assets, it experienced 44% year on year growth in owner-occupied commercial property deals for the period 2012/ 2013.

One of the primary reasons for this is that more businesses have been looking to purchase buildings for their own use rather than opting to rent their business premises.

Standard Bank Head of Business Lending, Busisiwe Silwanyana says the main reason for the increased owner-occupied commercial property deals is that businesses are seeking to shield themselves against annual rental increases which typically escalate at 8% per annum on average.

While the owner-occupied model does expose commercial property buyers to potential interest rate increases, Ms Silwanyana says they can hedge against this risk by opting for fixed-rate loans.

“The advantage of going the owner-occupied route is that you are not at the mercy of a landlord’s annual rental increases,” says Ms Silwanyana. “That’s particularly relevant for businesses that have built up a considerable amount of goodwill with their clients due to the location of their premises. Certain landlords can use that as leverage to negotiate a far higher rent when your lease expires since they know that moving premises would erode a considerable amount of goodwill with clients or customers.”

Commercial property loans are typically granted over periods of 10 years with buyers usually financing between 70% and 75% of the property’s value. While the majority of owner-occupied commercial property transactions are from businesses looking to purchase an existing building, Ms Silwanyana says that firms that are experiencing significant growth are increasingly looking at building their own bespoke premises.

“When a business looks to build its own premises it is usually a vote of confidence in their long-term future. This is a crucial aspect for us as our model is to look at the quality of the client as well as the building before extending a loan,” says Ms Silwanyana. “It is also a potentially good omen for the South African economy, as it might be a leading indicator that confidence is building post-recession, with businesses looking to invest rather than sit on cash piles.”

Standard Bank has also seen a considerable increase in small commercial property transactions of between R5 million and R10 million in non-metropolitan locations. Ms Silwanyana says this is largely being driven by businessmen, legal or medical professionals and farmers in small towns who are purchasing small retail centres in order to diversify their income streams.

“There’s a fairly limited commercial property stock available in non-metro locations, so often the investors in these areas are able to achieve fairly attractive rentals on a square metre basis. We are predominantly seeing this investment being channelled towards the retail space but there are some pockets of interest in industrial and manufacturing premises as well,” says Ms Silwanyana.

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