Presenter: Lindsay Williams  Guest(s): Erwin Rode 

If you are a corporation should you build or buy your own corporate headquarters, or rent? With Erwin Rode, property economist

LINDSAY WILLIAMS: Low interest rates, booming property prices and a shortage of office space - what is the best way to go for a medium to large-size corporation that’s becoming a little bit too big for its present premises?

ERWIN RODE: It’s the age-old question of whether to rent, or to buy - not so? The short answer is: "It all depends on the timing." If there is a reasonable prospect that the total return on your investment in an office block, say, would exceed the so-called cost of capital of your own company - then, of course, you should invest in property. I hasten to add that cost of capital is not the cost of loan capital, but the weighted cost of equity, plus loan capital - so it really is the target total return of your company.

LINDSAY WILLIAMS: What trend have you picked up, though, in the last year or so since we’ve experienced the extraordinary buoyancy in the market? Have people been putting up their own buildings, or are they still looking to the rental market?

ERWIN RODE: No, at the moment demand for office space is growing - the stats show this very clearly. But it’s mostly renting, at this stage.

LINDSAY WILLIAMS: What are the pitfalls of building - apart from the fact that you have to wait so long, and it’s so costly, and it might be difficult to pass on that property to somebody else because of the changing needs of the modern office?

ERWIN RODE: Yes, you are less flexible when you own your own property. So that’s a distinct disadvantage. Of course, your risks are also higher - because you are now an investment type, and it’s not really your specialty. You are supposed to make widgets - you are not supposed to be managing a property portfolio.

LINDSAY WILLIAMS: Surely somebody does that for you - some kind of specialist property company will say: "We’ll take over the management of this, we’ll be your consultants. You give us your specifications - here’s the design, you are going to be moving in 18-months"? Isn’t there a market for that kind of service?

ERWIN RODE: Correct, and there are people out there who do it very well. They are called facilities managers, property managers. I was thinking, also, of the investment decision itself - there’s a time to invest in an asset, and there’s a time to disinvest. When you are in your own premises then you do run the danger that you are, maybe, not taking objective decisions in this regard.

LINDSAY WILLIAMS: There is that emotional factor - isn’t there? There’s also the ego factor - the chairman might say: "I want to have Erwin Rode Towers written up there!" You can have the naming rights - whether you rent or buy - but the fact is that it is a nice feeling to have your own property! There is also the danger that market cycles change - if someone decides tomorrow to build an office block, in 18 months time when it is ready interest rates might be starting to go up. Is that also a factor that must be taken into account?

ERWIN RODE: Correct - that’s the risk factor I mentioned. You are now in a different ball game, and the risks are property related.

LINDSAY WILLIAMS: Let’s have a look at the cycle in your view - a lot of people are telling me that the residential property cycle has reached its peak, and is already turning down. What about the commercial market?

ERWIN RODE: Fortunately, this time around, the commercial market is a mirror image of the residential market - which is another way of saying that the commercial and industrial property markets are getting ready for a very nice boom.

LINDSAY WILLIAMS: So you think in 2005 we are going to be seeing the same story as 2004?

ERWIN RODE: It seems we are going to see a tapering off of the growth rate in the residential market - so in this respect it is going to be different from 2004, and we are going to see - in some sectors of the non-residential market - a very nice boom, thank you!