Investing In Commercial Property an Attractive Option

With building costs increasing as a result of inflation and development costs in the commercial market rising year-on-year, property investors are realising that replacement costs can be as much as double that of existing buildings, which makes buying the latter very appealing.

Raad says mixed-use developments are increasingly emerging as viable projects for investor and tenant, offering an ideal solution to individuals and families looking to rent a home and avoid the high cost of transportation.

This is according to Norman Raad, CEO of Broll Auctions and Sales, who says looking at the year in review, auction activity has been brisk with the company’s most recent auction well-attended by some 50 registered bidders and the office sector alone seeing a total of 12,092sqm sold in Durban, 3,453sqm in Ermelo, 675sqm of office space in Pretoria and 748sqm of commercial space in Pretoria acquired for use by a religious group.

“Encouragingly, in 2015 sellers have realised that their expectations need to be aligned with buyers. Over the last quarter, in particular, we’ve seen sellers adjust to the current market and the year ahead promises to be an active period for commercial auctions.”

“The market is extremely active, with many investors looking for opportunity and value and we expect a lot more property coming to market in 2016.”

“Despite the likelihood of interest rate hikes, we believe a safe place to park capital is in bricks and mortar, as has always been the case, so we expect that the interest rate will not deter buyers – they will simply adjust their pricing.”

Raad says the market features a number of key highlights. “Over the last year, there has been huge growth in the listed sector, which has outperformed the equity market. Although there could potentially be a slowdown on this side, the private market could and should remain buoyant, with a great deal more players in this space.”

“There remains a huge demand for retail centres, while residential blocks are in demand for the buy-to-let model and being snapped up by eager investors.”

“We are upbeat regarding the year ahead, as we perceive a number of opportunities in the market, which others may view as challenges.”

Raad says while there has been a major drive for the big corporates, legal and accounting firms to consolidate and build new commercial head offices, this has obviously left huge potential vacancies in the older buildings. “While this may on the surface appear negative news for the brokers, therein lies the movement in the market for deals to be done. Brokers who are on the ground, in touch with the market and understand the tenants’ requirements will be ahead of the game.”

He says while vacancies are never good, they will always exist in an evolving economy and city. “Change is positive, but the problem the South African property market faces is that the new buildings being developed are more of a consolidation of larger companies into one building and under one roof.”

“These new builds may offer more space efficiency and at a reduced operating expense, but the vacant building space created in their wake will increase over time.”

“However, the bulk of these buildings are owned by listed funds which can afford the short-term vacancy factor and may hold out to achieve a market rental or they may decide to redevelop the older properties. Alternatively, for those funds who cannot afford the luxury of a building which stands vacant, a below-market rental can be negotiated. An over-supply of commercial space will always create opportunities and also provide tenants with bargaining power.

Raad says mixed-use developments are increasingly emerging as viable projects for investor and tenant, offering an ideal solution to individuals and families looking to rent a home and avoid the high cost of transportation.

“These have been well received as staff and employers who historically were forced to travel hours to get to work now rather choose to save on these costs and pay a little more for rent in convenient locations closer to business centres. This has seen a move away from outlying towns which lack not only easy access to the workplace but also all the amenities of the cities. The commercial or retail component of such developments can provide a solid income stream for landlords and attractive options for businesses.”

He adds that now more than ever, commercial brokers need to know every square meter in the market or area in which they operate.  “In the current market companies are looking for brokers who can add value and they will choose the best and most cost-effective way to do deals. This is where expert advice from a broker who fully understands the market and can identify the next demand for space has every opportunity to become valuable to a client, whether a corporate or a listed fund.

“A recent trend has seen a move by many large organisations to appoint corporate real estate advisors whose responsibility is to advise and consult to these companies, contracted to make decisions regarding rentals, sales and property management.”

This article “Investing In Commercial Property an Attractive Option” was issued by Broll Auctions and Sales –

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