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Small investors and businesses consider commercial property

Posted On Saturday, 14 July 2012 16:46 Published by
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As confidence wavers in the ability of financial institutions to provide an adequate haven for the investment capital of average South Africans, so the need to find strong viable alternatives for one’s savings becomes more urgent. And it might not be the most obvious forms of conventional investment where opportunity lies:


"One turns again to the tried and tested receptacles for our savings – and property remains one of the most reliable investments, particularly in South Africa where security of ownership is specifically enshrined in our constitution," says Jonty de la Porte, Principal at Cape Town-based DLP property brokers and managers. "But, whereas residential property is the default investment for many middle-income South Africans, there’s a case for exploring commercial, industrial or business property."

De la Porte said that smaller investors often believed that the cost of investing in commercial/industrial/business property was too high. "But it isn’t. An investor can get a foot in the door for as little as R 700 000 excluding VAT - which is reclaimable by VAT registered vendors - for a 100m2 business unit, and expect a yield on the rental income starting at a minimum of 7%. This, when added to capital growth, gives a very decent return on investment, generally higher than one can expect for a similar residential property."

Leases are usually more secure than in residential property, and a commercial property landlord doesn’t have to deal with the onerous terms of the Rental Act and the Consumer Affairs Act by which a residential tenant can give as little as 20 days notice to cancel his lease. According to De la Porte, leases between corporate entities are not affected in this way, but investors must be wary to check exactly what the state of play is regarding this aspect of legislation. Where necessary, tenants can be evicted more straightforwardly and by and large do not cause a lot of damage to a property. All that is needed before a change of tenancy in the case of a small industrial unit, is a paint touch up.

Most of the small units are in Sectional Title complexes mixed-use business parks and office parks. This means that the Body Corporate looks after the management of the complex and takes care of the maintenance of the exterior, which makes management of the investment quite easy.

"The one downside is that generally a deposit of around 30% of the purchase price of the property is required and the bond is over 10 years which makes the repayment of the bond slightly higher than residential. That said, this means that one can pay the bond off quite quickly using the tenant’s rental as income," says De La Porte.

In addition, these properties are also very popular with small business owner-occupiers who use their business to help pay their bonds and create an investment for the future - and they get to cap their rentals against the current annual rental escalation around 9% at the moment.

In Cape Town, "areas such as Milnerton and Montague Gardens are doing well despite the economic times and vacancy rates are low. There is also almost no land for future expansion and development so one does not face the risk of a competing development next door.

"Small business is recognised as the driver of growth going into the future and small units will be in demand and especially ones in good established areas that are located close to major transport routes, public transport and retail areas such as Century City."

That being said, some would debate whether the impact of technology and traffic related consideration will not drive greater propensity for home based offices which in turn speaks to the residential investment market - at least for micro businesses - but perhaps reality lies somewhere in the middle.

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