Five rules for investing in commercial property in any kind of market

Considering dipping into the commercial property market? Here are five rules to think about before you take the plunge

Despite challenging economic and socio-political environment, including negative growth for the first quarter, as well as increasing cost pressures, South Africans are still looking hard at commercial property as a long-term investment.

Do the research

Make sure you have access to the appropriate baseline finance. You will need at least 20-30% of the required equity before you even start the process of structuring your investment transaction. Take some time and speak to the banks to get a feel for what they are looking for. Once you have a solid understanding of what your bank is looking for in an investment, you can begin exploring your financing options.

People should also consider the correct level of gearing required for a specific property. If you have anything less than a blue-chip tenant, go for a lower level of gearing and look to increase it later. Gearing as much as possible can sound great, because your return on equity will be higher and the interest on those borrowings are tax deductible, which is attractive for those looking to reduce their taxable earning. However, if you gear it too high and your tenant defaults, you could be left with too little equity in the deal.

Tenants can make or break a deal

Make sure you have a rock-solid tenant with iron-clad leases in place. The quality of the leases, the length of the leases and their serviceability are all important considerations. A few years ago banks were only giving out 70% loans and focussing on loan to value, now they are lending at up to 90%, but focussing on serviceability. The quality of your tenant will influence this decision.

Don’t listen to your gut

Do your research and only respond to the fundamentals. If a property appears too cheap at an auction, then there’s a reason for it. Don’t be enticed by perceived discounts because you’ll lose money. If it’s an asset you don’t want at a price you can’t resist then don’t buy it!

Only fools rush in

Understand what you want to get out of the investment. Inexperienced people (some experts say as many as 10% of all buyers) rush into buying properties and haven’t done enough due diligence.

Now add some more

Understand that there are additional costs which you will need to factor in. You want to make sure the nett income from rent can service the bond plus an additional 25% to cover rates, taxes, maintenance etc.

Property is a long-term investment. You make money in property when you buy not when you sell. But as long as you stick to the current rules of the game, it’s still a good asset to have.