Property owners need buffers against interest rate hikes

Property owners need buffers against interest rate hikes

Despite the tough economic conditions, there is still business to be done when it comes to commercial properties of below R40m.

This is according to Brett Webb, head of Specialised Lending, Business and Commercial Banking at Standard Bank.

The International Monetary Fund recently cut South Africa’s growth projection to the lowest on record of just 0.7%, with expectations also dropping to 1.8% next year from a previous expectation of 2.1%. Higher borrowing costs were cited as one of the key negatives for the economy.

“The economy will be tough, but it also comes back to gearing at the right level in order for the property to be self-sustainable. This means there need to be buffers against a certain level of vacancies and interest rate increases, rather than just trying to borrow as much as possible,” says Webb.

A problem is that buyers of these properties often get blinded by cash flow. They see healthy cash flow based on current rental income, but don’t consider that a lease could be near its end and the most recent rent may have been way above market rates. Then, when it comes to renegotiation, those rentals could be a lot lower.

Impact on property value

“You see this, where two years into a deal a lease comes to an end and rentals drop. It impacts the value of the property and you can see an investment losing 10-20% if the lease in question makes up the bulk of the property’s income. It is a risk that simply must be factored in early,” says Webb.

The correct fundamentals are as important today as they ever were. The centres that are holding their own have kept the right recipe across area, accessibility and tenant profiles and are still trading well.

Many problems often boil down to the smaller owner-managers assuming they can do everything. “Always factor in having a managing agent and a team in such a way that it will not affect the investment. It therefore needs to be factored in early because often once someone is working and running the venture, only then do they realise they can’t do it all - but by then the investment strategy is in trouble,” says Webb.

It’s often the small things, like an easier access point or better parking that can make all the difference. “You can have a successful centre within just two kilometres from an unsuccessful one, despite both having the same anchor tenant. The only difference being, for example, that parking is on a slope and the access point to the surrounding suburbs is not as good,” he explains.

Identify risks

Spotting potential risks and problems early is one of the most important things any landlord can do.

Landlords need to identify trends or challenges and this could simply relate to noticing that a tenant has regular problems with staff, or it is constantly running out of stock. These are the types of automatic red flag that could signal financial problems or stress in the business.

Some of these signs may not be of actual stress, but that a tenant is close to it. Once red flags are evident, it is then possible to start looking at a succession plan - the need for a new tenant - but more importantly to begin the discussion with a struggling tenant.

Businesses go through ebbs and flows and a good strategy can often help a company through the tough times. Sometimes the problems could simply be that the space they occupy is too large and the rent therefore too steep. This can often be put right by moving the tenant to a smaller premise.

Source of information

“It may be less ideally positioned, but the tenant can be retained,” says Webb. A great source of information is often the humble shop assistant. “They will often tell you exactly what’s happening, which is why it is important for landlords to be around in order to have these conversations and to walk around the property regularly.”

The risk is that if solutions are not found when businesses 'go bad' a landlord will be standing in a queue along with many other creditors.

“There have definitely been successes where tenants were moved to smaller premises and someone more appropriate was found to occupy the vacated space - the danger is doing nothing,” he says.

Opening the discussions with banks early is important to future-proof an investment. “What we tell clients is rather talk to us sooner than later so we can look at the options - whether it is refinancing or a moratorium for a period. It is in our interest just as much as the owner to ensure the business is sustainable, as we both have a vested interest in the centre being successful,” concludes Webb.

Article from bizcommunity

25th Feb 2016