28 Sep Financial partnerships allows investors to capitalise on slow property market
Financial partnerships allows investors to capitalise on slow property market
While the property markets in many provinces are still in the doldrums, the more astute investors are leveraging the latent opportunities presenting themselves. The problem for investors, however is finding the finance to fully access the opportunities on offer.
Gary Palmer, CEO of Paragon Lending Solutions, looks at how working with a financing partner can leave property investors to do what they are good at – finding the opportunities.
Apart from Cape Town, which is still enjoying solid growth, residential property prices are expected to grow at a sub-inflation rate over the next five years or so. Many are preferring to rent, especially as the macro economic environment remains uncertain. Lower prices and a growing rental market creates opportunities for investors, however, the real value kicks in when investors can access multiple properties.
Many investors are making use of this time to build their portfolios, particularly looking to scale their investments. The problem, however, is that banks are shying away from risk and investors looking to move fast on opportunities need to get creative in how they structure their finance. In the past traditional lenders were much more willing to fund acquisitions. Now, we are seeing banks looking at only 65 to 70% of loan value or even declining deals which previously they would have certainly supported. This creates a funding gap and means investors will need to get creative in how they assemble their working capital.
Constructing a financial bouquet
When you buy multiple investment properties you take your net yields from between 4% to 7% of a single property investment to around 10% if you own and manage multiple properties due to the benefits of economies of scale. The appeal of these deals is abundantly clear.
Over the past few weeks, we have worked with a number of clients who have found golden opportunities.
One such example was an investor who found an opportunity in the buzzing Bo-Kaap in Cape Town. He has taken a mediocre property and constructed solid a business plan which turned it into a very interesting investment. The deal was worth R10 million. The client managed to raise R5 million from the banks. Working with him, Paragon found a partner and then structured the deal between them to deliver optimal value.
The second example was also in Cape Town. A very astute investor approached us saying she had R5 million to put down on a deal that was worth R50 million. Rather than spending many months sourcing the reminder herself, she turned to Paragon. We accessed R35 million from the banks and then found her an equity partner to secure the remainder. The investor was able to move quickly and snapped up a deal which might otherwise have been lost.
A client in Johannesburg approached us with an excellent opportunity in the fast growing student accommodation market. Paragon structured the deal by sourcing senior debt as well as bridging finance.
Lenders should be viewed at partners
It’s important to remember that no matter what kind of funding you secure, any organisation or individual who puts money into a deal has expectations. If you are a bank you and you have funded the venture by 70% you may not be an equity partner, where you can share in the revenue, but you still have certain expectations. Investors need to shift their mindset and view their investors as partners, rather than keeping them at arm’s length.
In this regard, we have a number of repeat clients who work with us to manage and build their property investment portfolios. Partnering with an organization which has access to an extensive network of both traditional and alternate lenders gives investors a significant edge. Not only in terms of actually securing the finance, but also in how financing deals can be structured to meet their unique requirements.