Property offers great opportunities, but tread carefully
Say “property portfolio” to a business owner who lived through the 2008 crash and chances are they would instinctively flinch. But Willem Bosch, COO of property management services of Business Partners, believes the property market offers great investment opportunities for entrepreneurs who need to squirrel away some surplus cash.
Even the office segment of the property market, which is currently the weakest sector with high vacancy rates, offers excellent opportunities. “Good office space is amazingly difficult to find,” says Bosch, implying that if you do find some, you’ve got a good investment opportunity. The other side of the coin, of course, is that in such a market you can easily buy a dud.
Bosch, an experienced property manager, acknowledges that entrepreneurs who reach the stage of their careers where they start looking for investments outside their businesses are not necessarily knowledgeable about the property industry. But he believes that armed with a number of basic guidelines and strategies, most business owners can build up sound property portfolios.
Bosch’s first guideline is to stay away from residential houses as investments. “In a country like South Africa where basic residential housing is scarce, evicting someone who can’t pay his rent is a difficult, gut-wrenching affair. Rather leave residential investments to the specialists, and look towards business property for returns – it’s colder, clearer and cleaner,” he says.
Often, a good place to start building your property portfolio is to buy the building your business operates from. Sometimes the argument for buying is compelling, for example when the cost of moving your equipment is prohibitively expensive; or if your business gains value because more and more clients know your address. This is most often the case with manufacturing concerns, which are usually better off in their own building.
Of course buying the building you are renting may not be such a good idea if you are going to outgrow it soon. “Of course, the exception is if you want to buy it purely as an investment – the advantage then is that you know the building intimately,” says Bosch. Nowadays the term “outgrowing” refers not only to space, but very often to the amount of electricity supply allocated to a building. Eskom’s capacity problems have made it very difficult to have the electricity supply increased to a site.
One of the key factors in the buy-or-rent dilemma that faces every business owner is the cost of repaying a property loan compared to paying rent. It is almost always the case that loan instalments will be higher than rentals in at least the first three years or so after purchase. Then, the loan instalments usually start getting cheaper than renting, depending on factors such as financing arrangements and interest rates. ”Consider very carefully whether your business can afford the higher initial payments taking into account possible increases in finance costs,” he says.
But what about property investments that have little to do with the location of your business? Bosch offers the following guidelines to business owners who want to start building a portfolio:
- Look for properties in growth nodes, and the more of the following boxes you can tick, the better: Good access, enough parking, proper security, close to transport hubs, sufficient electricity supply.
- Do a proper due diligence on the condition of the building, not just the shell, but possible hidden defects like plumbing and electricity infrastructure. If you do buy an old, run-down building in order to fix it up, bear in mind that it is very easy to underestimate the cost of upgrading, especially if you need to make the building more energy-efficient. Do your calculations carefully.
- Steer clear of buildings that are too specialised, because the rental market for it will be too small, and converting it to a more general-purpose use can be expensive. Look out for quirks such as too much office space in what is supposed to be an industrial building.
- Business owners tend to be do-it-yourselfers, and they sometimes baulk at the idea of handing over the running of things to someone else. But when it comes to a property portfolio, which is not your core business, give serious thought to the option of hiring a professional property management company to manage your assets.
- If you are going to manage the property yourself, it is probably a good idea to start with buildings that are not too far away from each other. But this cannot be a strict rule if you take into account that you may want to spread the risks of your property portfolio by investing into different areas, even different cities.
- If you are going to manage the properties yourself, make sure you have access to good legal and financial advice when you need it, as well as a good administrative system. At the very least, make sure a good lawyer and accountant have a look at the deal before you sign.
- A general rule of thumb is not to borrow more than 50% of the price of a property that you’re buying for investment. Even then, it is a good idea to do a sensitivity analysis of what would happen if interest rates were to go up suddenly, or if you property were to stand vacant for a while.
- Is it a good idea to buy investment properties with partners? Yes, subject to the usual requirements that your business partners should ideally share your values and vision. It helps a lot if one or more of your partners know the property industry, such as an architect, a quantity surveyor or a property lawyer. If you start clashing with your investment partners over differences in approach, you can always hand the property over to a professional management company to ensure neutral, level-headed management.