Commercial property tips for 2012

South African prime commercial properties are expected to perform better this year when compared to the not-so prime properties, according to FNB.

The FNB Property Barometer report on commercial property aspects for the third quarter of 2011 saw a rise in all commercial property average price growth.

The same quarter also saw a very slight rise in the average capitalisation rate but more significantly the FNB All Commercial Vacancy Rate Index rose from 93.6 as at the Q1 2011 to 97.7 by Q3 2011, the highest vacancy index reading since the fourth quarter of 2005.

Writing in the report, FNB property strategist John Loos says should this rising vacancy rate trend continue, it could be expected to dampen rental income prospects.

“This would also lead to a more noticeable rise in capitalisation rates, which in turn could be expected to exert downward pressure on price growth.”

He explains that 2012 looks set to be a weaker global economic growth year than 2011 and the weak economic growth is expected to exert upward pressure on commercial property vacancies.

Higher vacancies will lead to anticipation of an increase in capitalisation rates which in turn could exert downward pressure on real commercial property values, he says.

“We believe that a further sign of possible looming commercial property price weakness is the slowing in year-on-year price growth in the residential market in recent months.”

Loos says while commercial property is not believed to be as over-priced as residential and its yields are estimated to be higher than residential, it is subject to the same interest rate and economic trends as residential.

This generally tracks the direction of residential price growth trends with something of a lag.

“Economic indications are that commercial property could be in for a challenging year in 2012.”

After a mini-recovery in 2010, the Investment Property Databank (IPD) reported declining commercial property returns in the first half of 2011.

During this expected period of weakness, if one could generalise, it would appear that prime properties/areas look set to hold up better than the less illustrious ones, he says.

The IPD report indicated a significantly more rapid rise in office vacancies of Central Business Districts (18.1 percent in the first half of 2011) compared to de-centralised nodes (10.4 percent).

In the case of retail, it has been the smaller community (8.1 percent) and neighbourhood (10.2 percent) shopping centres that have seen more noticeable rises in vacancy rates, while regional (3.2 percent) and super-regional (2.4 percent) shopping centres remained at far lower vacancy rates in the 1st half of this year.

Despite gloom statistics on commercial property, there is seemingly a growing interest from investors wishing to buy commercial property rather than residential property.

According to Jason Lee, national manager of  Commercial this interest is understandable because in most cases, returns on commercial are far higher and often double that of residential property of approximately the same price.

“Commercial tenants are also far easier to evict than residential tenants if they default,” he says.

If you are interested in investing in commercial property this year, Lee has the following tips:

- look for residential property located near other residential homes and already rezoned for commercial purposes.

Also check out properties on a busy road where a conversion to commercial property would be in the interests of the community and likely to achieve council’s approval.

- when making an offer for such a building, it should be subject to the departure application being successful.

This might involve buying the unit and waiting for a few months, if several units in the area have already been granted departures the wait is usually short. The buyer cannot afford to risk the application being turned down.

- an advantage of this type of building is that should it then prove difficult to secure a commercial tenant, it will usually be possible to find a residential one.

As the building would have been originally zoned for residential use, banks will, whatever the outcome, in most cases give the bond on a 20 year basis whereas on commercial property, it is likely to be for no more than 10 years.

- another option is to look for newly developed sectional title units in an industrial park or office complex.

New or upgraded parks and complexes are particularly popular currently and recent bank data suggest that they have weathered the storm better than second grade properties.

- the so-called strip or convenience centres are fast becoming attractive to investors.

This is where it is sometimes possible to secure two or three retail outlets all of which may be benefiting from the presence in the centre of a draw card anchor tenant such as a popular supermarket.

Such centres must have adequate parking as experience has shown that they never perform satisfactorily if this is lacking.

- when the new owner starts looking for a tenant, it is important that the tenant is thoroughly checked and get references from at least three previous landlords.

- when a lease agreement is drawn up, it is essential to get two to three months rental upfront as a deposit against damages or sudden desertion as well as for unpaid municipal services.

The wording of leases has to be watertight in terms of the new Companies and Consumer Protection Acts.

Lee says owners should not be put off by the tenant who haggles over every clause in the contract.

This tenant is likely to be a good payer, the tenant one should be wary of is the one who signs every clause without carefully reading through.

He adds that experience has shown that such people are likely to be equally slack about paying their rent.

Please contact us if you require any further information or would like to apply for finance:

Complete this short form online

011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za

Commercial Property Finance and Asset-backed Funding

Commercial Finance that Meets Your Needs!

Mortgage Plus Commercial don’t only offer a broad range of home loans, our brokers also provide a full range of ainvestment property and commercial finance options and offer a truly professional service that puts your needs at the fore.

The most appropriate commercial property mortgage finance loans will take into account your individual circumstances and factors including the nature of your business, any other debts outstanding to your business, the financial standing of your business, why you need to borrow the loan and the businesses ability to make timely repayments.

We are located in Johannesburg and we are more than able to assist you through out South Africa.

We will discuss your needs with you, drawing out all necessary information, then present to you a range of financial solutions that meet your business needs, whether that is taking out a loan for a new commercial venture or to assist in expanding your business, to buy new property or premises, access the equity in your business to manage your debts and cash flow or any other of a range of business finance needs.

Some needs for a commercial mortgage can also be time sensitive, therefore, we work with you efficiently to gain loan approval or feedback quickly and meet all achievable deadlines. We also work to source the most practical interest and capital repayments that work in with your financial situation.

With access to hundreds of loans from leading bank and non bank lenders, your Mortgage consultant can assist you in finding the best finance solution for your business investment or commercial finance needs.

Option 1: Finance to invest in your own business property

Commercial and industrial property remains a secure investment for entrepreneurs – either to provide long-term premises for their own businesses or as high-return capital investments.

For the individual small or medium enterprise, renting premises may seem to offer greater flexibility than ownership. However, long-term tenancy may not be guaranteed and the investment made in improving rental premises may be lost if a lease cannot be renewed. Property ownership offers not only security of tenure, but also enables entrepreneurs to grow the overall equity of their businesses. Calculations show that, by purchasing a property or properties for own use, small and medium enterprises can save up to 50% on premises costs over a period of 10 years without compromising the business’s own cash resources.

For entrepreneurs seeking a property component for their investment portfolios, multi-tenant properties are a very attractive and viable option, as these can provide both capital appreciation and rental income.

Mortgage Plus Commercial division offers investment financing for a wide range of commercial and industrial premises and the expertise to match the needs of each individual business and/or entrepreneurial investor with the right property.

Mortgage Plus Commercial provides up to 100% finance to SMEs to buy their own business properties.

When considering to buy a property, think about the following:

• Is the business potentially able to generate sufficient cash flow to afford the regular repayments required?
• Is this the right property? ? consider location, facilities, size and condition
• Is the purchase price in line with the market value of the property?

-       Availability of finance for properties

Mortgage Plus Commercial caters for the needs of the entrepreneur with a viable business who wants to purchase his or her own premises, but who has limited capital or security to contribute or who does not want to compromise the business’s cash resources for the deposit. In most cases, financiers require a cash deposit before considering financing a deal. The deposit amount depends on the risk appetite of the financier and deposits up to 50% may be asked for. However, this could be lower given the economic condition, the price and the profile of the entrepreneur.

Mortgage Plus Commercial allows the entrepreneur a choice of different financing options and can structure the deal by advancing up to 100% of the financing required.

-       Financing criteria

• The operating business must be proven to be viable, able to afford the property and must have been in business for at least two to three years
• The property will be evaluated in terms of location, price, purpose build, facilities, size and condition
• The maximum repayment period for any property investment is ten years

Mortgage Plus Commercial will not only evaluate the property, but will also focus on the operating business. This means evaluating affordability, profitability, record of accomplishment, and the entrepreneurs behind the business.

-       Structuring the deal

The deal, however, must be seen in context of the risk to be understood to be fair. If Mortgage Plus Commercial finance the full amount, the company does take some risk. This risk is hedged by a cash deposit where such a deposit is paid, as is the case with commercial financiers. Therefore, Mortgage Plus Commercial needs to be rewarded for the risk taken. This means that the finance will be offered at prime rate (plus or less some percentage, depending on the deal) for a period of up to ten years, but will also request incentives for taking the risk.

Mortgage Plus Commercial, shares in the appreciated value of the property over a period of time. The result of this transaction for the entrepreneur is the following:

• The entrepreneur secures the property and obtains an asset that may appreciate over a period of time
• The instalment will probably be in excess of the rental payable in the short term, but the entrepreneur has no rent escalation concerns afterwards
• The entrepreneur can upgrade the property thereby increasing the value
• There are long term cash flow advantages

Option 2: Joint Venture Options

Mortgage Plus Commercial, co-invests in multi tenanted property projects. This arrangement is applicable where the investor is not able to or not keen to invest the full deposit (equity) required by a commercial lending institution. Here Mortgage Plus Commercial will consider co-investing and offer other property related services. The criteria and financing arrangements can be summarised as follows:

• The investor identify a multi tenanted property and do basic due diligence
• Mortgage Plus Commercial investigates the proposal and do a detailed due diligence as co-investor
• Both new developments and existing properties will be considered
• A commercial lender will be invited to offer first bond finance. The balance needs to be contributed by the investors. The shareholding depends on the contribution towards the equity portion. (If the equity required is R4 million, then R2 million contribution provides 50% shareholding.)
• Mortgage Plus Commercial manages the process (oversees the building process, legal implementation, and provides property management services, which include placement of tenants, maintenance, property administration and financial management.)
• The investor can be a passive investor or may play an active role during this process
• Regular shareholders meetings are held
• The parties may decide when to expand or sell the property in question
• Typical projects are suburban or regional shopping centres, industrial parks and in some instances office units

Option 3: Asset-backed funding

Mortgage Plus Commercial fills a void in the market for clients who require funding for working capital, need to reduce their bank exposure or need to meet other short term requirements. This product has been designed to meet the requirements of clients who are asset-rich but in need of short-term liquidity. Mortgage Plus Commercial does not lend against vacant land, but rather against residential, office, industrial and retail properties.

Minimum Requirements:

The borrower must be a juristic person in terms of the National Credit Act

• Maximum transaction value not to exceed 60% of valuation
• Valuation of property to be done at client’s expense
• Minimum advance of R 1 500 000 (no maximum)
• A first bond is to be registered over the property
• Maximum loan term of 12 months

Please contact us if you require any further information or would like to apply for finance:

Complete this short form online

011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za