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 Thinking of redeveloping? Do your calculations carefully

 

 On the face of it, an older commercial building can look like a juicy opportunity for any business person with an entrepreneurial eye and some surplus cash to invest. A lick of paint, a bit of fixing, and the tenants will be queuing up to sign long, easy leases, right?

Not quite, says Owen Holland, the property investment general manager at Business Partners. Buying to redevelop is a tricky business even for those experienced in the game.

One of the most common mistakes that inexperienced property investors make is to underestimate the cost of redevelopment or refurbishment, says Holland. Wanting to save costs, they avoid using professional contractors and service providers. Hiring the bakkie brigade seems cheap at the start, but can turn out to be much more expensive when the paint peels to reveal shoddy work.

The use of reputable professionals must start right at the beginning, says Holland. A professional architect should check not only the building itself for structural defects, but should also help determine whether the structure had been built with all the necessary planning permissions. A sudden order from the local authorities to fix the non-compliance of the original builder can be ruinously expensive.

When it comes to your own redevelopment plans, strict compliance with the local regulations is advised. Holland reckons flouting building regulations is like not paying your tax. “You can avoid it for a while, but in the end it always comes back to bite you.”

Another aspect to consider carefully is the existing tenants in the building. If their leases do not have a redevelopment clause which obliges them to cooperate with your renewal of the building and to sign new leases afterwards, you may end up being beholden to a tenant who simply refuses to budge.

A meticulous inward look at the building is crucial, but it is not enough. A redeveloper also needs to look outwards towards the market in which the building is situated. Only if demand for space is strong, should the addition of new lettable units be considered.

Holland says another very common mistake that redevelopers make is to over-expand the building, assuming that all the new “gross lettable area” will be fully occupied.

“People pull out their Excel spreadsheets, and then they calculate their rental rate per extra gross lettable area versus the cost, and the returns look fantastic. But then they never fill up that extra space, and they end up paying through their nose for it,” he says.

Over-optimistic redevelopers also tend to make the mistake of calculating the revenue potential of a building at the maximum rental rates for the area. It pays to be more conservative.

Holland advises strongly against going up more than one floor, “unless you have an incredible demand for it. In many instances, the building of second third and fourth floors actually kills the project”. He explains that demand for space in upper storeys drops precipitously. Even office-type businesses prefer office parks to being on top of a retail centre, because they need good parking facilities, security and a quiet working environment. Only if you do excellent market research, or if you manage to pre-let your redevelopment, should you consider going up more than one storey, says Holland.

Any redevelopment of a shopping complex must maintain a good balance between the anchor tenant and smaller shops. If you try to build too many units for smaller stores, which tend to be less reliable and stable than the anchor anyway, some of them will “end up in dead corners”.

A redevelopment is a good opportunity to give a centre or a building a competitive edge in the rental market, so that it is fully let at the higher end of the rental rates for the area. Consider features such as fibre-optics, a facility for electricity generators and security infrastructure, but be careful not to over-capitalise.

Making a building attractive does not have to be expensive, says Holland. A simple thing like tiling the toilets of an industrial building can give your building an edge.

First-time developers would do well to consider teaming up with an experienced joint-venture partner such as Business Partners, which manages a property portfolio of more than R1 billion. Many of its property projects are joint-venture redevelopments with local entrepreneurs and investors who not only make use of the Business Partners’ finance, but also of its years of experience in the redevelopment game.

Contact Holland on 031 240 7700 or email propertyenquiries@businesspartners.co.za.


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