An important question often confronting many entrepreneurs is as follows: Should I continue renting my business premises or should I buy property from which I would be able to conduct my business? The answer is more complicated than a mere calculation of pure affordability.
Current buoyant property market conditions have prompted entrepreneurs to consider property as part of the investment portfolios. In considering this bold step, the entrepreneur is forced to take a view on the future and to answer pertinent questions, including the following: What is the growth in value expectations of the property in question? Will it satisfy the needs of the business over the next few years? Is it well located in terms of the market, resources and access routes? Can the business afford the monthly instalments?
The current relatively low interest rate environment has stimulated the thought of owning own premises rather than paying rent to a landlord. Part of the considerations should be whether the business will be able to afford these premises should the interest rate increase to 15% or even 25%, a rate which was experienced as recently as 1998.
When should small or medium sized enterprises (SME) consider owning a property? "We believe that a SME should first have successfully progressed through its start-up and early growth phase before entering the property market. Property ownership is one of the final stages of development that an entrepreneur should consider. It is often seen and referred to as the ‘pension fund’ of the entrepreneur who, over the years, invested most of his or her capital in the business itself", says Nazeem Martin, executive director of Business Partners in Cape Town.
Financing costs associated with owning property can be demanding on the cash resources of the business. In general, financial institutions are prepared to finance the risk free portion of the purchase price. This means that the business will be required to offer a deposit ranging from 30% to 50% of the property purchase price. The question is whether the business can afford to withdraw this deposit from its normal cash flow without negatively affecting its future working capital position. A 30% deposit on a R2.5 million property, for example, equates to R750 000. Can a business withdraw a R750 000 deposit from its working capital requirement without landing itself in a cash squeeze?
There are, however, financial institutions who offer commercial property finance solutions without requiring an onerous deposit which often places undue strain on SMEs working capital. For example, Business Partners, a leading financier in the SME market has developed financial product which allows them to finance 100% of the purchase price and associated transaction costs (legal fees, transfer duty or VAT and bond registration costs) for commercial properties. "We spend much time during our due diligence to ensure that, in our view, the entrepreneur is making the right decision. The business must be viable, it must be able to afford the repayments and the investment must be done for the right reasons. In addition, we seek to add value by working with entrepreneurs to ensure that the property is not over-priced and that all the legal documentation is in place", says Martin.
As part of the number crunching exercise, the entrepreneur should consider the ‘rent vs instalment’ exercise. The rent escalates from year to year and in stable interest rate conditions, the instalment remains constant. A common mistake in this exercise is the omission of the property related costs associated with the transaction. As a property owner, the entrepreneur will now be responsible for rates, insurance, maintenance and property administration costs. If the property is reasonably priced, the instalment (with property costs), is often higher than the rental. Can the business afford this since, based on many case studies, breakeven (where the rental payable equals the instalment with costs) is often only reached within 2 to 4 years?
There are often other factors which entrepreneurs consider in their quest to own a property. The location is important for the future viability and hence it may make sense to secure tenure at a suitable or desirable location. In instances where it is costly to move (heavy equipment, built in plant, special custom made facilities), entrepreneurs should seriously consider acquiring their own property. For many others, it simply makes them feel good to be owner and have control of the property.
Business Partners Ltd, is a specialist investment group which, apart from financing property investments, provides customised and integrated business investment, mentorship and property management services for SMEs. It tailors its products and services to meet the individual needs of independent entrepreneurs, from single-owner private practices to multi-owner buy-outs or buy-ins. The group invests between R250 000 and R15 million per transaction or deal in the commercial, manufacturing and services sectors of the economy. The investment portfolio spans over a range of sectors, encompassing manufacturing, travel and tourism, leisure, professional services, and marine fishing facilities.