1. Why invest in commercial property?
Commercial property is an essential asset class in any well-balanced investment portfolio.
Returns generated by SA Listed Property, dominated by commercial property owning Real Estate Investment Trusts (REITs), outperformed the All Share Index 3 to 1 over the 20 years to date, as depicted in the graph below.
Commercial property displays resilience in tough economic conditions and offers strong cash flows during retirement. Revenue generation, the lifeblood of property investment, is underpinned by a commercial property specific lease agreement which, unlike its lenient and heavily legislated residential counterpart, grants Landlords carte blanche provided it is correctly formulated.
2. Why select directly owned commercial property?
The illiquidity of directly owned property is a safeguard against kneejerk reactions to market shocks, which can see investors offloading liquid assets at an inopportune time. Directly owned property values are shielded, to a large extent, from the effects of market sentiment resulting in smoother, more consistent returns and reduced investor anxiety.
An owner is able to raise finance against the fixed asset to facilitate further investments as well as leverage the returns. While it is possible to raise finance against equities, the danger exists that the loan is called up if covenants are breached, viz. a decline in share price. Gearing, the effect of capital growth on the total value of an asset despite an investor having only contributed a fraction thereof, serves to amplify returns. Finance is typically structured over 10 years, as opposed to 20 or 30 years in respect to residential property, which can be advantageous to investors nearing retirement.
Since 2007 the first owner of a commercial property, purchased directly from the developer for investment purposes, can claim a Section 13quin tax allowance equivalent to 55% of the purchase price over 11 years.
3. How much do I need to spend?
Diversification, a valuable ally when investing, can be achieved more readily by investing in multiple sectional title units. Assuming three average sized offices of 150m2, a market related purchase price in a primary Cape Town business node of approximately R20,000/m2 plus parking and costs and bank finance of 70% loan to value, an investor can expect to spend in the region of R4-5m.
4. What are the risks and rewards?
An investor can expect to receive an ungeared return of between 8% and 9% on a top-quality, well located, Cape Town based commercial property. This compares favourably to the equivalent residential property investment with returns of 4% to 5% both in addition to similar growth in asset values.
As property is an immovable asset, the chief risk lies at the point of purchase. An investment in the wrong location, of an uncommon size and shape, with an inadequate parking ratio or poor accessibility, amongst other things, can lead to protracted vacancies, poor quality tenants, high tenant turnover, weak rental escalations and elevated repairs & maintenance costs.
5. Why do I need a commercial property specialist?
A good investment is a de-risked investment. Through their expert knowledge of the market, and proactive management, a commercial property specialist will mitigate the risks within an owners’ control.
The due diligence phase of a property acquisition is vital to risk mitigation as it enables the property specialist to gain important insights into the suitability. For example, the specialist will see through a seemingly impressive yield to the hidden costs, overinflated rentals, understated expenses, inadequate allowances, etc. They will identify upside opportunities unbeknown to a seller and other investors.
Carefully selected and managed commercial property investments ensure reduced risk and optimum returns regardless of economic conditions. Horizon Capital has achieved a vacancy rate of between 0% and 1.5% across its managed portfolio over the last two years, when Cape Town’s vacancy rate fluctuated between 7% and 8%.
6. When is the right time to invest?
There is no better time than the present. Uncertainty spells opportunity. Yields are at all-time highs. During tough economic times there is a tendency to find attractive properties at discounted prices.
Furthermore, it is speculated that if President Ramaphosa is successful in reigniting growth and confidence in the country, the subsequent inflow of investment with strengthen the Rand and cause interest rates to come off. This will have a positive effect on yields and capital values as depicted in the graph below.
7. How do I get started?
Should you be interested in investing in commercial property, please contact us to discuss how Horizon Capital Commercial Property can assist in building and managing a personalised portfolio.