Diversification makes the Renprop Difference

Typically in the commercial property space, there are two main types of buyers: fund or portfolio buyers, and entrepreneurs. Entrepreneurs are divided into two buyer profiles - those who either want to let the space out and use it to build their own property portfolio with the ultimate aim of becoming a property fund or portfolio in the future or those who are looking for commercial space to accommodate their own businesses.

Types of commercial properties purchased

The funds and large listed entities tend to purchase larger, tenanted premises that offer a good yield of 10% or more. These kinds of premises usually sell within the R50million price bracket.

The independents or entrepreneurs who require premises for their own businesses are looking for smaller sectional title office and warehouse space in the R5million to R20million price brackets. There is currently a shortage of this kind of space in the market.

The kinds of properties that entrepreneurs who are looking to build up their own property portfolio would purchase really depend on where they are in their growth cycle. These kinds of buyers would usually look to purchase high yielding properties first, which would typically offer a yield of anywhere between 12% and 13%. Once that element of the portfolio has been established, they would then look at buying lower yielding commercial properties (8%-9%) that offer good capital growth potential. These properties would also generally fall within the R5million – R25million price bracket, depending on their access to capital.

Availability in the current market

Currently there is a large amount of office space available on the market, making it an excellent time to invest. There is currently a 12,5% national average vacancy rate in the office space sector.

In the industrial sector of the commercial property market, there is a shortage of good warehouse space, with a national average vacancy rate of just 3,5%. Sectional title warehouse space is in high demand, and this is especially true for smaller business owners who want to be located close to corporate hubs or commercial nodes and residential areas. This is the main reason why sectional title industrial/warehouse space in areas of Johannesburg such as Strydom Park, Lazer Park, Linbro Park, Longmeadow and Greenstone and Founders Hill are so popular.

Factors that influence decisions

Entrepreneurial buyers are generally looking for sectional title office space within office parks or estates that have excellent safety and security features, especially if their staff tends to work late. Good access and exposure to main road networks is another major factor that influences buying decisions in this space, as well as secure, off-street parking. Office buildings equipped with generators to avoid loss of productivity during power outages are also highly sought-after.

Safety and security are also one of the main factors that smaller business buyers are looking for in sectional title warehouse space.

Entrepreneurial buyers in both the industrial and commercial space are generally looking for smaller properties that have the right positioning and appearance to suit their business needs as well as their budget. While buyers have become more environmentally conscious, green buildings are not a major criteria that influences purchasing decisions for entrepreneurial buyers. However if a building that meets their budgetary, positioning and appearance requirements  is already equipped with green features that will assist in lowering operating costs, it’s considered a bonus. Entrepreneurial buyers however are not generally prepared to lay out extra money for green features.

Challenges and opportunities in the commercial property market

The biggest challenges facing entrepreneurial commercial property buyers are the financial risks involved in committing to a 10-year finance term and coming up with a minimum of a 30% deposit in order to qualify for finance. Another financial consideration many commercial property buyers look at is the value of investing into a building as opposed to other investment options that could potentially deliver a higher return on investment.

Perhaps the biggest risk buyers’ face would be finding a suitable and reliable tenant if they are purchasing a vacant building that is not for their own use.

That said, in the commercial property sector, one of the biggest opportunities for buyers are vacant buildings – provided they have a reliable tenant to let the space to or will be occupying the building themselves. This is because the prices of vacant commercial buildings are not based on yield as there is no tenant and therefore no income, but are rather sold on a square metre basis which often presents a much more attractive opportunity.

Now is a great time for those who have built up residential property portfolios to make the natural progression into commercial real estate investment. While the numbers might be bigger in terms of pricing, the management and hassle factors are considerably less than residential properties. Added to this, leases in the commercial space are generally longer than residential ones. With commercial leases spanning over three to five year periods, which amounts to half of the finance period, commercial properties tend to only have one or two tenants in place over the term of the bond. In commercial property, there is also a higher chance of lease renewals than with residential properties. Commercial property owners also have a wider selection of managing companies to choose from.

Application, pricing and size

While in the residential property sphere the adage of location, location, location is a well known buying rule; in the commercial space it’s all about location, location and correct application. In other words, those looking to buy commercial space shouldn’t purchase a residential property, unless of course it has the correct zoning.

Pricing will always remain a key element of the purchasing decision for any buyer, and commercial property brokers should be able to provide a valuation, which will compare similar properties sold in the area and the prices they sold for.

Square metre valuations will also depend on the condition and age of the building, grading of the building, its facilities and replacement cost. Prices based on yield are based on the industry guidelines provided for determining the cap rate in a specific area. This is based on the quality of tenant, reputation and credit history of tenant, the term of lease as well as the condition, age and grading of the building.

Typically in the industrial warehouse space, older properties in not so great areas sell for around R2500/m2 while newer warehouse properties in good areas sell for around R7000/m2. Entrepreneurial buyers are looking to purchase warehouse space in the region of 350m2.

In the office space sector, B- or C-grade space sells for around R6500/m2, while A-grade space which is typically newer buildings with more features, will sell at around R28 500/m2. Entrepreneurial buyers are looking to purchase office space measuring between 200m2 and 500m2.