13 April 2023: Investing in commercial property has long been regarded as one of the ways that entrepreneurs can boost revenue and expand their portfolios as a buffer against economic uncertainty. With small business owners renewing their drive to recover lost profits during the pandemic years, commercial property presents a viable opportunity to reap positive returns in the near- to long-term future.
Weighing in on the benefits of investing in commercial property is Kevan Govender, Regional Investment Manager at small- and medium-sized enterprises (SME) financier, Business Partners Limited. As he explains: “Small business owners can benefit immensely from purchasing their office or operational premises and owning an asset, rather than renting the space and losing money in the form of rental expenses and maintenance costs.”
The state of South Africa’s commercial property market
Although the commercial property market took a hit in 2020 due to the onset of COVID-19, slow but steady progress has been reported, with South Africa’s real estate sector expected to grow by 5% in the lead up to 2027. In the wake of the pandemic and with the advent of remote working, office demand dynamics have softened but substantial gains have been made on the industrial segment front, with many small- and large-scale retailers needing industrial storage and distribution space for products bought via their e-commerce platforms.
Many assumed that the shift to remote working would render commercial property all but obsolete. However, an increasing number of South African companies have downscaled their operational spaces to allow for hot desks and hybrid working models, rather than doing away with the need for property altogether.
As various industries adapt to the needs of an evolving working world, small business owners stand to gain a foothold in the property sector by either purchasing their business premises or purchasing the space to lease it out to other small businesses and retailers.
Longer leases as the grounds for better financial stability
Commenting on the potential advantages of owning commercial property versus residential spaces, Govender advises that the former usually involves longer term lease contracts of between three to five years (compared to one year for residential property).
As he asserts: “Owning commercial property requires a long-term mindset. Securing a tenant or multiple tenants for a few years at a time will allow entrepreneurs to factor this monthly rental income into their budgeting and forecasting exercises.
In light of this, owning commercial property provides for a better sense of financial security and certainty in terms of your income stream. SMEs therefore stand to benefit from more sustained and healthier cashflow – a factor that is crucial to the longevity of a small business.”
Portfolio diversification as a risk management strategy
Generally, commercial properties fetch higher yields and appreciate more in the long term than residential spaces. Several experts also agree that investing property involves a lower level of risk than other forms of investment such as investing into stocks and bonds.
Expanding on the benefits of this type of investment for small businesses, Govender emphasises the importance of building a diversified investment portfolio. The risk that comes with certain financial vehicles can be balanced out by an investment into property across a range of categories, such as retail, factory space, hospitality and wholesale.
In diversifying your portfolio as an SME owner, you can position assets like property as a buffer in times of economic turbulence, which as Govender asserts, has become increasingly important within the current geopolitical and economic context.
Income now, capital later
The financial benefits of investing in commercial property includes positive implications for both the “now” (in the form of rental income) and the “later” (in terms of capital growth).
As Govender explains: “The fact that owning an asset whose worth will grow over time is what makes this class of investment attractive to entrepreneurs, especially those who align their business growth strategies with the potential to sell the commercial property in the future and realise a profit which can be plugged back into the business’ operations.
Larger capital could also allow small business owners to access a wider range of refinancing options on future loans for more properties or business growth strategies. In these cases, having a commercial property as collateral may work in the favour of SME owners who are looking to win the confidence of financiers.
The business case for investing in commercial property
Business Partners Limited offers 100% finance to entrepreneurs who wish to purchase property which they currently occupy, as well as multi-tenant complexes that can help them service the loan repayments on their bond.
Govender urges small business owners to ensure that “their own house is in order” before applying for finance for a property. “Before approaching a financier, small business owners need to ensure that they have an airtight business plan backed by a strong financial proposal, a healthy credit record, a solid track record of consistent performance and a convincing case for how the investment will translate into better cashflow management in the long term.”