Commercial property in South Africa remains a haven for cautious investors in 2014.
There is a glimmer of hope for the South African commercial property market as it continues to recover from a deep five-year global recession, says Gerrie van Biljon, executive director at Business Partners Limited (BPL), a specialist risk finance company for formal SMEs, which oversees a property portfolio of nearly R1 billion.
Van Biljon states he is optimistic about the property market as an investment haven in 2014, despite the possible risks to the sector. He believes that the South African property market is less exposed to shocks in the global economy, for example the stock markets where imminent setbacks to the global economy, such as the raising of the close-to-zero percent interest rates of the developed world that directly reflects in the JSE indices, but not necessarily in property values.
“Investing in property is a long-term investment and the returns should thus be considered on this basis. The investor is challenged with low returns on cash-related investments and although equities had a good run in 2013, investing now at a stage where the market is on an all-time high, poses an investment risk of its own.’’
He explains that the general elections in April, coupled with labour and political unrest, may influence the investor’s decision to invest in property in the short term, but adds that it should not cause anxiety as it is all about the risk appetite and the confidence levels of the investor. “More conservative investors prefer to move to more liquid investments, but that in itself opens doors for others to invest in alternative investment categories.
In an interview withLeadershipVan Biljon explains why commercial and industrial property in South Africa has proved to be a solid investment in difficult times, although there are fewer bargains to be found and many commercial properties have high tenant vacancies.
“Sound investment properties still offer acceptable returns and with a larger vacancy factor currently, property yields over a period of time will render acceptable returns. The fact that so few properties are on the market is an indication of the confidence levels in the asset class. Investors realise that although there are short-term challenges such as vacancies and lower escalation rates, property remains a sound long-term investment.”
Van Biljon adds that the combination of tenants finding economic conditions tough and the options of properties available to choose from, influences the escalation rates. But, he says this could also be seen as a market correction after a full run-up to 2008.
“Landlords and tenants opting for shorter rates will remain under pressure for 2014 and therefore selecting the right tenant going
forward is the key.”
We ask Van Biljon if he foresees any other financial risks to the commercial property sector that could hamper growth in 2014 and he highlights the direct correlation between economic conditions and the property industry. “As the economy grows, the call for rented space will increase, which will then lead to further property developments being erected. The property owner has one major risk and that is non-payment of rental or vacancies, and if the economy takes a further dip, this may negatively affect the property market.”
Despite there being few bargains to be had, Van Biljon says there are still many investment groups or funds that are continuously seeking sound investments, but advises that people who are not active buyers in the market refrain from ‘throwing caution to the wind’ and ensure they clearly identify what the investment criteria is before committing to a transaction.
The property agents’ maxim of ‘location, location, location’ still holds true and Van Biljon explains that the principle of buying right is the foundation for any sound property investment and one of these pillars is the location. “This important pillar should never be underplayed, but proper research will indicate the worth – or not – of a property in a specific location.”
Van Biljon says very few bargains actually end up on the open market, but brokers who are offered a mandate to offload a property normally have access to potential buyers and anything worthwhile gets sold quickly. “However, there are many properties with potential out there which may need some effort that may not seem so obvious at first – this could for mean, for instance, the redeveloping of the property before unlocking the true potential.”
He explains why there appears to be many aging shopping malls that have lost tenants and why timing is crucial in buying and selling.
”When demographics change and tenants move to, say, more modern and new properties, the question is what about the existing properties? Given past experience, property owners naturally have to change the focus. The profile tenant may now be different (to accommodate the changed demographics). The property value could be affected should the income generated after placing a new tenant be less. The timing in buying or selling a property remains crucial and to read trends and movements is part of it.”
Van Biljon adds that buying a property like a mall is only a bargain if the purchaser can secure the income stream and offload the property at a reasonable value.
We ask Van Biljon if there are any viable commercial properties to be had in or around the mining sector. Generalising, he points out that developments in a specific area are one of the considerations when deciding on a property investment. “In the case of mining developments taking place, or the establishment of large industrial concerns, such as at Burgersfort and Richards Bay some time ago, there will be a call for rented space. However, it is imperative in the investment decision-making process that investors stay informed of the latest developments.”
Labour unrest and the volatility around some mining operations is a risk factor for investors. “Property investors require stability, and an environment where there is uncertainty, such as labour or political unrest, leads to uncertainty and increases the investment risks. Property owners may decide that the position is too volatile and a disinvestment decision becomes a possibility. This may affect the price negatively unless the buyer has a different view on the situation.”
BPL’s subsidiary, Business Partners International (BPI), was established in 2004 and is a fund management company that applies BPL’s risk finance model that was refined in South Africa, to other countries in sub-Saharan Africa.
Van Biljon explains why BPL’s risk finance model is regarded as the most innovating in the world. “The common practice in financing a property is to expect the buyer to contribute a level of own contribution (deposit). From a financier’s point of view this makes sense, since this reduces the financial risk and should something happen and the property is sold under forced conditions, the debt will be settled.
“The BPL model is where 100% finance is offered to compensate for the risk and shareholding in this property company is negotiated. This means that the owner retains the deposit and uses it more productively operating the business, or it may be that they are in a position where they have no deposit at all.”
However, BPI only considers financing a business after it has been in operation for three years and has a track record in place. BPI has models that run in terms of cash flow implications and long-term benefits for the entrepreneur.
BPL is an active investor in multi-tenanted properties ranging from R10 million to R80 million. According to Van Biljon, the portfolio is ”fairly spread” between industrial and commercial properties and a small collection of office parks, such as suburban shopping centres or a motor town centre.
As a specialist risk financier for established SMEs, what leadership advice does Van Biljon have for an entrepreneur thinking of investing in commercial property?
“Entrepreneurs are normally very good in running their business, but are not necessary property experts. This is where the experts come in.
“It is advisable to make use of property experts to guide you through the process. These include issues such as estimating the value (how reasonable the price is), developments in the area and how to fund it. There is no compromise in doing proper due diligence.”
He advises against making emotional decisions when considering a property investment, as it is essentially about ‘rands and cents’, with an element of strategic positioning that may influence the decision. “Make sure the property will satisfy your needs today and tomorrow. To buy now, only to move again in three years, may be unwise.”
Van Biljon reiterates that optimism for the investment value of commercial and industrial property is reserved only for good-quality stock that is well-situated and well-managed, with adequate facilities. “Prospective buyers are better off worrying about these factors than the ups and downs of the economy.”