Real Estate Investor Magazine South Africa February 2015

cover story Go big! Investing in commercial property The four strategies described earlier all apply to the commercial sector too, but the numbers have far more zeros. The risks are therefore higher, but so are the rewards. And there are numerous reasons why commercial property is preferred over residential property by many investors. WHY COMMERCIAL? • The right commercial property can produce greater returns than any residential property. • Commercial property has long-term lease contracts, unlike residential lease contracts that can only be signed for 12 months. • Commercial lease terms have fixed escalation rates, which directly influences the escalation of the value of the property. • Commercial property is also financed based on the value and returns of the property and the lease contract, unlike residential property where you need to earn a salary, or have proof of income, to qualify for a bond. • Commercial property can be refinanced in the future to release equity in the property solely on the lease agreements that are in place. • The transfer and bond costs in obtaining commercial property are the same as in purchasing residential property. • Commercial property are built more ‘ruggedly’ than residential property, so maintenance costs could be lower compared to residential property. • Commercial property owners can negotiate triple net leases where the tenant will be responsible for all maintenance to the property. • The Consumer Protection Act does not apply to the letting of commercial property where the tenant is a Closed Corporation, Pty Ltd and or Trust. • The value escalation of well-positioned commercial properties far outweighs the capital appreciation of similar residential properties. • Commercial property has a 10-year bond period, which means the investment will come to maturity much earlier than a residential investment. Source: Just Property Group 18 February 2015 SA Real Estate Investor Commercial investing can range from super-large shopping complexes to corner stores, but can also include a wide range of other properties such as offices, shops, warehousing, hotels and more. TOP TIPS FOR INVESTING IN COMMERCIAL PROPERTY • As with any investment, you need to understand the market you are investing in. • Get expert advice on the benefits and risks involved in each property. • Vacancy risk is the single biggest risk in commercial property investment. Limit vacancy risk by looking for a property with multiple units as opposed to a single large unit that can accommodate only one tenant. • Don’t over extend yourself – if you have R3 million available as a deposit, don’t buy a R10 million property with 70% gearing as your first investment. Rather, for example, buy a smaller property for R2.5 million, putting down a larger deposit and keeping some capital in reserve for contingencies, such as a vacancy, leasing commission and new tenant fit out costs. • Investigate the general state of the economy in the cities you are considering, including the economic activity, population growth, infrastructure, service delivery and future development plans. • Speak to local property brokers and ask the right questions to understand the market dynamics for the specific area, including the demand and vacancy rates for the various types of properties. • Financiers will typically lend 50-70% of the purchase price or value of the property (whichever is less). To determine if a bond will be granted, financiers will look at security, repayment ability and the risk. Ask the same questions, so that you can make an informed decision and do a proper due diligence. • Work with a specialist to assess if there are expansion or redevelopment possibilities for the property. If there are possibilities, the project needs to be properly planned and market demand tested before the project commences. Source: Grove Properties www.reimag.co.za

Real Estate Investor Magazine South Africa February 2015 | Page 18