New property models create new investment opportunities

New property models create new investment opportunities

Gary Palmer, CEO at independent lender, Paragon Lending Solutions argues that new property business models call for lenders to cooperate more closely to keep deals flowing

Alternative use for assets is driving new business models for property investors. Shared offices, storage space, student accommodation and other non-traditional uses for properties are growing rapidly. Assessing, valuing and funding these properties deserves closer attention from property investors.

A seismic shift in how we do business

The rise of Uber and AirBnB are the result of people fundamentally changing their view about how they pay for services. Airlines no longer buy new airplane engines. Rather they pay the manufacturers a monthly fee based on how many miles the plane has flied. There is no reason why property would not see the same shift in business model.

An article by Alex Kopicki, CEO of co-working company, Kinglet states: “The number of co-working facilities across the globe has nearly doubled every year for the past five years. Small Business Labs projects that more than 12,000 global co-working spaces will exist by 2018 with over 1 million members”

The growing need for student accommodation across the country has also experienced a significant jump. Short-term storage facilities similarly fit into the trend.

Yet, traditional lenders are still forced to structure their loans based on traditional metrics and requirements.

New metrics for new business models

A big factor in how traditional financiers are granting loans is based on the valuation. A business running a short-term office rental business may be letting out space at R220 per square metre as opposed to the average R100 per square metre in the same block or building. When looking to finance this property, it would be fair for the buyer to value the deal based on the expected income. However, the bank valuer will cap the number based on what would happen should the property be sold for what it was intended – occupancy – rather than as a business.

Banks also have to apply strict equity requirements when looking at granting finance, something which is further constraining potential business growth and new entrants into the space.

Need to get our economy moving

Recent Reserve Bank data has pointed to a weakening in the Commercial Property Market, with its estimate for the value of New Commercial Property Mortgage Loans Granted declining by -16.44% year-on-year in the 2nd quarter of 2016, the second successive quarter of year-on-year decline.

This slowdown benefits no-one. In a shrinking economy, we should be finding ways to keep money flowing. Business models such as shared office space and AirBnB-type offerings are no longer high risk. The models have proven themselves to work and are providing much needed income for many entrepreneurs.

Alternative lenders are not bound by the same regulatory restrictions as traditional lenders. Until it becomes possible for financial institutions to adapt their lending requirements to accommodate this new paradigm in lending, there is value in collaborating with alternative lenders, which are best placed to fill the gap and keep deals in the commercial property space flowing.