Real Estate Investor Magazine South Africa November 2013 | Page 44

GETTING STARTED

BY JOHN ROBERTS

The Right Information
Will lead you to the right investment!

I

NVESTING in property has always been
about location, whether the purchase is
commercial, industrial or residential.
However, getting value from the estate agent
or broker and thus securing the best return on
investment means also knowing and asking
the right questions - and pushing to get the
answers, particularly if that means digging for
information akin to seeking out diamonds.

in their deeds of sale that any outstanding
transportation development levies become the
seller’s responsibility.

Commercial real estate investments include
office buildings, strip malls, restaurants and
any other real estate in or on which people can
conduct business. Among them is found singleunit main street buildings in small towns to
skyscrapers in urban settings and landlords
usually charge rentals based on the square metre
of space rented.

Due consideration also needs to be given
to prospective developments within the area.
If an airport is going to be built within the
vicinity and the building under consideration
houses a spa and outdoor café, the value will
likely decrease because of the noise from the
new airport.

That calculation is substantially higher than
residential rentals on houses or apartments.
Investors seeking a commercial property
investment must principally establish the
rental income that can be received from
that property as well as the lease terms and
conditions, namely the expiry date, annual
escalation rate and the strength of the tenants
currently holding those leases.
Following closely behind are questions
relating to the expenses on the property,
because only then can potential investors
establish a market related purchase price
as well as the cap rate at which they become
prepared to sign on the dotted line. If the
property is part of a shopping centre, having a
cup of coffee in that centre to observe the foot
traffic may be the first step in getting a handle
on the potential investment.
The next question that needs raising is
zoning. Often the records reflect the property
is zoned for business, but the owner has failed
to pay over the transportation development
lev y to the municipa lit y. Consequently,
avoiding that pitfall means buyers should state
40

November 2013 SA Real Estate Investor

They also need to examine the municipal plans
and surveyor general’s diagrams of the property
to ensure there are no servitudes, while lease
agreements have to be scrutinised to ensure the
details provided are correct.

However, if the building has the potential for
warehousing and logistics, its location close to
the airport could prove to be the x-factor in
its value.
Many commercial buildings are leased
sometimes to more than one party. Potential
buyers should ask their broker for a rent roll
and copies of the current leases, particularly
if the purchase is for a building with multiple
store fronts.

generally those less than 10 years old; B-grade
ones would be between 10 and 20 years and
C-grade buildings are over 20 years old.
However, upgrading a C-grade building
could raise the rental levels to being roughly
in the bracket typical of a B+ grade one, while
allowing a B-grade building to deteriorate
could cost the owner in terms of rentals tenants
are prepared to pay.
Generally, A-grade industrial premises command
rentals of R45-55/m; B-grade industrial premises
are in the region of R25-35/m2 and C-grade
between R15 and R20/m2 - but every one of
these rates will depend on the yard availability
to the specific units, so these become further key
questions potential investors should enquire from
the broker.

The rent roll reflects the lessees; how much rent
they pay; whether they contribute to the common
area expenses; what the lease terms are and when
they expire. Also included is information on rental
increases with commercial leases usually spelling
out the increases either linked to the consumer
price index (CPI) or as a set percentage.

However, one key benef it to ow ning
commercial propert y, particularly as an
investment vehicle, remains the return on
investment. Typically these investments are
paid off more swiftly than residential property
investments - in a decade rather than 20 years
- and the commercial property market is more
stable than the homeownership one. Leases are
based on longer periods - three, five or 10 years
at a time - with steady escalations.

However, determining a realistic return on
investment is difficult and depends on the
strength of the tenant occupying the property,
the location (that word again) and the length
of the lease. A 'V?R?bF?V?"?2R&WGW&????fW7F?V?B?'WBF?W&R&R?v?2f&?F???2?W&6?6??r&?W'G???F?R&?v?B?6?F?????ffW'2??fW7F?'2v??B&WGW&?2f?"?V'2?@???6RF?R&?W'B??2&??B?g&VR?BgV???FV??FVB??B?6??6W2F?R?v?W"???6?F????F?7V?&R?FF?F????6???W&6??&?W'G??F?&?Vv??WfW&v??r?'B?bF?Rf&?F???6?&RGG&?'WFVBF?F?P?'V??F??rw&F??r??w&FR'V??F??w2&P??$U4?U$4U0??W7B&?W'G?w&?W??wwr?&V??r?6??????