According to Jason Lee, Head of Rawson Properties’ new Commercial Franchise Division “this will be a change from the traditional pattern that follows downturns, which is for the residential sector to lead the recovery.  I think the residential sector is likely to take longer to emerge from the present stable, no-growth situation - but the prospects for commercial property are now looking good.”

The commercial sector, said Lee, has shown a greater degree of resilience in the downturn than residential property.  This, he said, is due, among other things, to the low current interest rates.  Not only have these made bonds more attractive but they have also encouraged cash-strong investors to look elsewhere for yields greater than those available from the financial institutions.

“For many investors,” said Lee, “commercial property was always a first choice because, whereas residential property can almost never give yields above single digit levels, double digit returns have been the norm in the commercial sector.”

Over the last two years, he said, the JSE listed property companies that are heavily committed to commercial portfolios have outperformed almost every other class other than precious metals and raw materials such as iron ore. 

Asked if, in the current near-recessionary conditions commercial property is not likely to see more defaulting tenants than other sectors, Lee said that if one examines the Sheriff Auctions lists, it becomes clear that commercial properties do not feature greatly in them.

“The number of commercial properties repossessed in the last year has been almost insignificant, especially in relation to the massive inflow of this type of property on the residential side.  This, I believe, is partly due to landlords in today’s markets learning to be far more sympathetic and understanding about tenant problems and rent increases.  By-and-large they have been able to assist and help their tenants through the last difficult year and will continue to do so in future.”

South Africa’s banks, said Lee, have traditionally been keen to partner commercial landlords because they can very often manage a 20% to 30% deposit and because the bank can deal directly with them, not through bond originators.  What is more, he said, bonds are usually spread over relatively short periods.  Banks, he added, usually stand to lose large sums if commercial property is sold as distressed stock on auction.  They prefer to look at interest only facilities and even repayment holiday periods to assist the landlord rather than pull the plug. 

Since the launch of Rawson Commercial two months ago, said Lee, he and his team have sold 12 franchise licences.  These are in the Western Cape, KwaZulu Natal and Gauteng.  This puts them already well ahead of their declared target of establishing 35 franchises in the first two years.

“Those buying our commercial franchises,” said Lee, “are often highly experienced property investors and are by no means speculators:  they are hard-headed business people who, with interest rates and prices at current levels, can see the potential for good returns in the property sector.”

Lee added that the comparisons that he had drawn between commercial and residential property should not be taken to mean that he disparages residential property investment.

“Here too,” he said, “I agree whole heartedly with Bill Rawson, our Chairman, and Tony Clarke, our Managing Director, both of whom see the present as a very good time to build up residential portfolios - and, in fact, both are doing just this.”