Buying a property
To buy or not to buy a property? Even a modern day Hamlet would wrestle with this question – especially at this time. So, what’s the answer? And, how do you make the right decision?
The first step in the business property purchase decision process is to really understand your business, its purpose, objectives and needs. This may read as if we are stating the obvious but it isn’t. Management consultants such as Deloitte, KPMG and the like make a fortune every year providing a service that does exactly that – helping big businesses understand their business, their purpose, objectives and needs. So, what is obvious is that small businesses need to do this as well. Why? To put it in a nutshell, it will save you a lot of frustration, wasted time and money. This is your bottom line.
If you are an investor, besides the compounding property value effect, you will want good tenants who will pay their rent every month and not trash the place. In fact, understanding your tenant’s business is all important too because, as the property owner, you will be held liable for any by-law infringements. Thus, screening your tenants, including their credit rating and business history, is a necessity. Does it pay to be picky and choosey? In a perfect world, yes! But reality being what is, you should mitigate your risk as best possible. For example, having financially stable tenants is all important, especially when the economy takes a dip, which it will, given the pattern of historical business cycles. You don’t want to find yourself without tenants and rental income. This is important for two reasons. Firstly, if you borrowed money to buy the property, you will need someone to pay the bond, especially if your cash flow is tight. Secondly, if you bought the property for cash, you will want regular income, which, depending on your situation, you live off or you invest.
So, where do you buy, and what do you buy? It all boils down to a matter of demand and supply. The greater the demand for a particular type of property the more interested you should be in buying such a property. Tenants pay premium rentals for properties that support their business objectives. And, given that location is all important for some businesses e.g. a retail shop that requires high traffic volumes, people, as in a shopping mall, you will want to consider carefully what you buy, why and where. Considerations such as the population density of the area, adequate parking facilities, who is the anchor tenant e.g. pick n Pay and so on, if you are looking at retail, are vitally important. If you wish to stay away from retail and invest in commercial or industrial, would you buy a complex of smaller premises or one big one?
Whatever your choice, an important consideration is price. As Christo Botes of Business Partners points out, the capitalisation rate (price) at which the property is acquired should be realistic, relative to the industry norm for the area in which you are interested, which will be based on a reliable property survey e.g. Rode. Also, as Botes suggests, you should establish the zoning of the property (business or residential), the size of the land, the allowable height and size (footprint) of the building as well as its access by small and large vehicles and physical location relative to highways. What is the official occupancy certificate for the building? Were the structures built constructed in accordance with approved building plans? Were any subsequent changes approved by the local authority? Nitty gritty stuff but finding out details like these up front is extremely important – given your bottom line. The last thing you want is to buy a property and have the municipality tell you the lovely face-brick columned carport has to be pulled down because no plans were submitted and passed. Frustration, time and money!
Nonetheless, the flexibility of the property, to accommodate modifications, from a tenant mix and configuration point of view can be very important in attracting tenants. Can the use of the property, with a limited capital outlay, be enhanced, using dry walling for example? If nothing is changed when you acquire a property, you will just buy the existing revenue streams that those occupying the premises provide. Flexibility could mean segmenting a large floor space into smaller office or factory units, to change the tenant mix so that they complement each other or to change the parking configuration to allow factory outlets to have a retail frontage. And so on.
Given that cash flow is all important, especially for an SME, and using the Return on Capital Employed (ROCE) financial model, which focuses on profit and liquidity, it would be better to rent than buy. More so because rent is tax deductible! Unless of course the nature of your business e.g. as a chemical manufacturer, will not enable you to rent.
Whether you are a landlord or a tenant, it is recommended that you should read, on the Internet, A guide to the rights, duties and obligations of tenant and landlord in South Africa by Sayed-Iqbal Mohamed, from the Organisation of Civic Rights.
In a nutshell and to sum it all up, think purpose, location, price, compliance and flexibility.
Written by Tony Stone