Real Estate Investor Magazine South Africa August 2013 | Page 40

STRATEGIES

BY MARK BRADFORD

What’s The Secret
To commercial investment success?

O

n the face of it, commercial property
is an easy and attractive asset class,
guaranteeing returns for the duration
of the tenant’s lease. Unlike equities, property
is a tangible asset against which finance can be
raised and which should yield capital growth in
addition to rental yield. The world’s population
continues to urbanise and consequently, cities
to grow. People need spaces from which to
work, places in which to shop, and clearly
occupier demand for commercial property
will predictably increase. And with increased
demand, property values can only rise, so how
can any prudent investor forgo an opportunity
to acquire commercial property?
Biomimicry is one of this centuries most
innovative and relevant engineering disciplines,
utilising natural strategies to evolve sustainable
solutions to complex problems. The most
attractive of natural creatures are inevitably the
most dangerous, particularly in the hands of
novices. Property investment the world over has
evolved in its complexity, and as a result, despite
its obvious visual attraction, can have disastrous
consequences for the undercapitalised and
inexperienced.
The gap bet ween prime and secondar y
proper t y ma rkets is w idening. Broad ly
speaking, the requirements for property to
be regarded as prime are focused around
locational superiority, design efficiency and
technological relevance. Tenants are targeting
reduced occupation costs and increased facility
efficiencies. Premium rentals will continue
to be paid for modern buildings where high
staff occupancy ratios can be accommodated,
where consumer traffic is high or the latest
distribution technologies employed. Owners
of older buildings where current occupier
demands cannot be accommodated without
compromise are increasingly being faced with a
choice of either having to reduce rentals or face
vacancy. As tenant requirements are unlikely to
ever revert to past inefficiencies, owners of older
buildings can reliably predict an ever widening
gap between prime rentals and those which
they are capable of achieving.

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August 2013 SA Real Estate Investor

W h i lst bu i ld ing s ca n be ref u rbished
with varying degrees of success, shifting
demographic changes are brought about by
factors beyond the scope and control of the
property owner. Tenants remain relatively
f lexible in their ability to move from one
location to another, conversely the property
owner’s only prudent response to declining
demand for location is to disinvest.
With limited supply of prime investment
opportunity and intense rivalry between cash
rich investors for these relatively expensive
assets, it is natural to turn to new or secondary
markets for opportunity. There are indeed
rich pickings to be had in these markets
though the unreported stories of sometimes
dramatic failure are equally prevalent. Success
in these more liquid and affordable markets is
only possible with a clear understanding and
mitigation of risk. Entry into secondary markets
is arguably cheaper and consequently tends
to attract a broader class of investor including
private individuals. It is also a market where
investors irrationally look to “self-perform”,
without clear strategy or local knowledge, to
save costs by not employing advisors, and in so
doing to add to an already loaded balance of risk
weighing against their success.

Against this background, what advice
for property investors?
Strateg y - The development of a clear
investment strateg y is imperative. Given
that investment in property seldom produces

yield and capital growth in equal measure,
particularly within a short - to medium - term
time frame, grade opportunities in line with
anticipated expectations. Secondary property
may well return higher initial yields and prime
property stronger capital growth.
Active Management - Investment in the
property sector, whether direct property
ownership or via the listed sector requires active
management. Knowledge of local conditions,
market trends, competitive offerings, tenant
requirements and operating expenditure trends
are imperative to proactive risk management. In
the South African context, increasing municipal
and utility charges are combining to form a
cocktail of above-inf lation costs which are
having a toxic impact on achievable net rentals,
particularly in non-prime assets. Increasing costs
above thresholds affordable to tenants, will result
in downward pressure on rentals; lower rentals
translate directly into lower yields and adversely
affect the income valuation of property assets.
Prudent and informed investors may under these
circumstances wish to divest of their directly held
property or of their investment in listed entities
with substantial exposure to secondary markets.
Tenancy - All too often, the importance of
the tenant’s contribution to the success of any
property investment is overlooked. With the
absence of rental income, property is in most
cases not an asset but a liability as operational
costs continue to be incurred without the
benefit of revenue. Tenancy is a critical cog
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