Interest in commercial property has been fuelled by the all-time low rental stock vacancies and the profitability shown by listed funds, for example loan stocks and property unit trusts.  What the average property investor doesn’t grasp, is that these listed funds are investing in huge property projects, further affecting market conditions and price inflation, and not in individual sectional title units and warehouses, which remain very volatile to fluctuating market conditions.

There are advantages to purchasing your own premises, for example:

• You are your own landlord and can’t be evicted from your property
• Occupancy costs will be reduced as you repay your loan
• You’ll have an added tax benefit of deducting holding costs, such as rates and taxes, insurance, monthly interest and other maintenance costs.

However, the disadvantages could cripple many a profitable enterprise, the biggest of which is the upfront acquiring costs and the financial burden of repaying the relevant loan.

The Loan Amount

If you are thinking that you can obtain a 100% bond on your commercial property – think again!  Commercial property loans range from 60% to 75% of the banks valuation or the purchase price, whichever is the lowest and in most instances the banks valuation takes preference.  Perhaps, with substantial added security, the bank may consider up to a 90% bond, but this seldom happens.  The VAT portion of the purchase price is excluded, meaning that you have to be prepared to finance the VAT until SA Revenue Services refunds your claim – at the very least 3 months after transfer of the property.  Furthermore, very few banks finance bonds of less than R1.5 million and those that do are well aware that your options are limited.

The Term

Unlike with residential property where you can obtain finance over a period of 20 and even 30 years, a commercial property mortgage bond has to been repaid over a period of 10 years.  There are some financial institutions that will consider a 15-year repayment period, obviously with certain limitations and restrictions.  For example, you must avail yourself of a fixed interest rate over a period of 5 years, during which, you are authorized to repay only the interest portion of the loan.  Is this a profitable option?  Depends which side of the transaction you’re on.   Alternatively, they will consider extending the repayment period, if you are considered a “high profile client” and the commercial property is “owner occupied”.

The Interest Rate

Interest rates of prime less 2% normally expected from residential property loans are almost unheard of in the commercial property sector.  You can expect to pay prime, sometimes prime plus, at the very least prime less 1.5% and only a very few selected corporates, will enjoy prime less 2%.

The Valuation

Normally the latest purchase price depicts the market value of the property, right?  Not for commercial bond financiers, who determine the value of the property based on capitalization (Cap) rates and the average rental per square meter in the area.  As you can see, it has very little to do with the “bricks and mortar” and more with profitability.    A professional valuation will be done and other factors such as tenant profile, rental growth and the vacancy rate, will be taken into account when considering the loan.

The Security

Let’s talk about signing your life away!  Your loan will more than likely be conditional to:

• Where applicable, cession of all lease agreements
• Unlimited surety of all directors, shareholders or members
• Unlimited surety by the trading entity

Only with very strong, well-substantiated motivation will the banks consider waiving any of the above conditions.

The Fees

The banks charge an initiation / administration fee, which is normally 1% of the loan amount, but at times, this can be higher.  You will also be charged a valuation fee for a professional assessment of the property.

My opinion, albeit a conservative one, is that you should stick to what you know and leave commercial property to the experts.  Investing in this asset class requires a substantial amount of liquidity.  However, if you are interested in diversifying your investment portfolio, consider investing in listed funds, after all they are the ones controlling the market.  The individual investors are mere minnows in these shark-infested waters.

Contact information:
Tess Rodrigues
Property Factor CC
0861 106 306
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www.propertyfactor.co.za