Commercial Property remains an attractive Investment for Entrepreneurs

Despite South Africa’s economic challenges, the local commercial property market continues to offer value for potential investors, according to Business Partners executive director Gerrie van Biljon.

Speaking at the Business Partners serminar held today at the Hyatt Regency Johannesburg Hotel, discussing how to unlock wealth through commercial property investment in South Africa, Van Biljon announced that the company has allocated R500 million of its annual investment budget to commercial property.

The investment allocation to properties will de-risk the company’s investment portfolio.

“The current environment continues to provide opportunities to acquire commercial property investments offering reasonable returns,” says Mr van Biljon. The company plans 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.

Business Partners, also invest in joint venture deals with other property investors in the same property categories and continue to finance SMEs with up to 100% of the purchase price for owner occupied properties valued up to R30 million.

Keynote speaker, Marius Muller, CEO of retail investment property company Pareto, said that government spending provided an opportunity for the property sector. This expenditure would "assist the property sector in terms of filling vacancies, stimulating new development and activity".

"We are starting to see, on the industrial side, there’s significant movement already."

Mr Muller said prime logistics space in metropolitan centres would likely remain in strong demand and locations close to markets would become increasingly attractive with rising transport costs. There was increased demand for industrial property, while more support services would potentially grow the need for office space.

Infrastructure and services investments in rural areas would also "unlock" smaller markets.

Van Biljon says that 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.

“We therefore believe that 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.”

Van Biljon says that New York-listed global commercial property firm Jones Lang LaSalle recently released research that supports this view. “Their research shows that there is a shortage of assets within the South African commercial property investment market because mature funds were holding onto prime assets.”

He says that SME owners often believe that renting premises offer greater flexibility than ownership. “However, long-term tenancy may not be secured and the investment made in improving rented premises may be lost if the lease cannot be renewed.”

Nevertheless, Van Biljon stresses that 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 all the facts considered. Additional cash flow pressure due to the deposit requirements and additional payments obligations must be determined.”

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 can be material. If a business owner purchases wisely and pays a 30% deposit, the cash flow requirements of purchasing 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% on premises costs over a 10-year period, without compromising the business’s own cash resources.”

There are still sound investments available in the current market. “When purchasing commercial property, research into the location as well as the funding structure is required for a business owner to reap the benefits of ownership,” concludes van Biljon.

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