In these tough economic times, business owners can mitigate costs and risks by purchasing their commercial property outright.
Times are tough. According to a recent article released by Ryan van Niekerk, the South African private sector is “in deep trouble”. Notes Van Niekerk: “The “perpetual decline in economic activity over the past few years has eroded the profitability of the average local business to such an extent that business owners would earn more on their capital putting their money in a bank than continuing fighting the entrepreneurial battle.” Red tape, regulation, operational costs, sinking commodity prices and policy uncertainty are compounding the situation.
That said, it’s not all doom and gloom and there are businesses which are ticking over nicely. Inevitably, those that are (and even those that are struggling somewhat) require property in one form or another. Of course it goes without saying that in such times it’s prudent to try and mitigate risks and costs as far as possible.
One way businesses might try to do so is through purchasing a commercial property outright. Over the years many businesses have chosen to go this route given the perceived advantages. These include, amongst others, the fact that rental payments are replaced by loan repayments which works towards outright eventual ownership, capital appreciation, advantageous tax benefits, an income stream in perpetuity, asset diversification as well as direct control of the property’s tenancy, operations and maintenance.
It’s also worth pointing out that generally speaking, commercial property loan applications for owner occupied commercial buildings are viewed quite favourably as they are perceived to be less risky. The primary reason for this is that because the owner will be the major occupant in the building, it gives long term stability to the investment. Another reason why such loans are typically viewed quite favourably is that most businesses have a commercial banking history and business relationship that will help get the loan ball rolling. Such loans also typically attract favourable interest rates and lower repayments.
As beneficial as such a proposition sounds there are issues which need to be carefully considered before committing to investing in commercial property. These include, amongst others:
- Short and long term needs: Will the property meet your short and long term needs? If you are planning on expanding your business in the future the property you have your eye on might not be able to accommodate your future needs.
- Location: This is vitally important. Owning a commercial building represents a fairly fixed arrangement, hence the location has to be right. Although you may gain from sidestepping increasing rentals, you will not be able to easily relocate if the character of the neighbourhood declines. Another important aspect to consider under this banner is whether or not the location is appropriate for your business both from a logistic and aesthetic point of view.
- Large initial capital outlay: Although not a ‘risk’ per se, acquiring a commercial property typically requires a large amount of capital upfront which needs to be budgeted for. Needless to say you won’t get very far if you don’t have a lump sum available.
- Building rights: Are you really prepared to manage all of the elements relating to owning a building such as parking and maintenance rights? Such issues can become cumbersome and detract from your core business.
- Economic conditions: Should economic or business conditions deteriorate, will you be able to meet the financial commitments relating to property ownership?
Should you choose to take the plunge there are of course ways to offset the risks associated with purchasing a commercial property. According to the experts, these include budgeting for interest rate hikes (which obviously eats into capital), stabilising your cash flow, sub-leasing a portion of the property to maximise your income stream and restructuring your debt in such a way that it favours you as far as possible. Lastly, before embarking on such a venture, it’s wise to seek professional advice.