Real Estate Investor Magazine South Africa October/ November 2019 | Page 43

Common deterrents to gearing
“There are three, main factors that tend to hold commercial
property investors back from gearing their purchases,” says
Leon Breytenbach, Head of the Business Growth Unit at
the Rawson Property Group. “The first is the time and effort
involved in securing a loan – a process that can take at least a
month in a best-case scenario.”
Time
While financing residential property is so commonplace
and streamlined that it can be completed within 24 hours,
Breytenbach says commercial properties have far more
variables to be considered. This makes the application process
more complex for the investor and accurate risk assessment
more complex for the lender, leading to processing times that
can extend to several months.
“To make matters worse, most bond originators don’t
handle commercial financing, which means investors need
to navigate the application process on their own,” says
Breytenbach. “This can be daunting as a first-timer, but does
get easier as you learn the system and the banks learn more
about your business and you.”
Pro tip: Always apply for financing at the seller’s bank (in
addition to a selection of others). They’ll be familiar with the
property, eager to hold on to an account with an existing risk
profile, and keen to gain a new client – great incentives for
them to offer you a favourable deal.
Cost
minimise your risk in other areas, like partnering with a good
commercial property rental manager to source, screen and
manage tenants.”
A balancing act
Getting the right balance of financing vs cash investment is
also a good way to mitigate risk. Breytenbach suggests aiming
for the ‘sweet spot’ of between 55% to 60% financing, which
generally enables investors to cover their costs – and any
unexpected expenses – with a realistic net rental yield of 10%.
“If you have a lower risk appetite, you can weigh your
investment more heavily on the cash side, giving you more
room in your rental income to accommodate interest rate hikes
or other unforeseen expenses,” he says. “Of course, the less you
finance, the fewer benefits you’ll reap as part of a gearing
strategy – and those benefits can be significant enough to
warrant a riskier posture.”
Pro tip: Always apply for financing at
the seller’s bank. They’ll be familiar with
the property, eager to hold on to an
account with an existing risk profile and
keen to gain a new client
While making money with someone else’s money is the
best-known benefit of gearing, Breytenbach says it’s far from
the only one commercial property investors can leverage.
The second major deterrent to commercial property financing
and the gearing benefits it brings is its relative expense when
compared to residential loans. “In commercial property, gearing often enables investors to
access more expensive, lower-risk properties, or invest in more
than one property in order to spread their risk,” he says.
“With no legislated cap on things like raising fees, things can
get expensive,” says Breytenbach. “Investors need to prepare
for between 1% and 1.5% of their loan amount plus VAT in
financing costs, and interest rates of at least prime plus one –
except in extraordinary circumstances.” There are also significant tax benefits to gearing a
commercial property, such as writing off the interest on your
loan to reduce your overall tax burden. The greater the loan,
the greater the write-off – a benefit that can be maximised by
leveraging opportunities like UDZ.
According to Breytenbach, 100% loans are extremely rare
for commercial properties, and tend to command exorbitant
interest rates when they are on offer. As a result, investors
typically need access to a sizeable deposit in addition to cash-
on-hand for the other transactional costs. “Commercial investments within Urban Development
Zones have their own tax benefits, which you can access
regardless of whether you finance your purchase or not,” says
Breytenbach. “They can, however, enable you to buy a bigger or
better property, thereby maximising both your development
and gearing write-offs.”
This large upfront investment, together with the expense
of financing and the risks of potential interest rate hikes and/
or defaulting tenants, can produce the third most common
deterrent to commercial property investment: fear.
Fear
“Fear is a very real deterrent, particularly for new commercial
property investors who aren’t necessarily familiar with all
the sector’s variables,” says Breytenbach. “While you can’t do
much about unexpected interest rate hikes, there are ways to
“Finding the right balance between all these variables is
where the art comes into commercial property investment,”
Breytenbach continues. “It’s not easy, but it’s also not quite
as difficult as it may seem. If you do your research, get sound
financial advice and partner with experienced commercial and
rental agents, the returns can be well worth the effort involved.”
For more information contact Rawson Commercial
SOURCE Rawson Commercial
SA Real Estate Investor Magazine OCTOBER/NOVEMBER 2019
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