Commercial real estate is beneficial

Posted On Wednesday, 30 July 2014 13:18 Published by
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For business owners, buying a commercial property is an investment in their future, without being one in their core business, says Mike Walters Renprop Commercial divisional head.

Commercial property investors

Purchasing the premises at which they operated could provide a number of wealth creation opportunities and benefits. Commercial property is a "great" investment avenue as it provides an inflation hedge, meaning that it would either match or outstrip inflation in the long term.

"The rental is a tax-deductible expense in the core business," Mr Walters says. "The risk of an unknown tenant not paying rent on time or not looking after the property is taken out of the equation if the investor's core business is the tenant."

He says gearing (getting a commercial bond) means the investor fixes the price in today's terms and ends up paying it off over 10 years with before-tax money, as the interest paid on the bond is tax-deductible.

"Entrepreneurs create wealth or their own retirement plan through putting properties into separate entities like trusts or private companies with the same or other shareholders." The principle of this investment is that after a 10-year period, the money spent on rent could have rather been put towards ownership of a commercial building, which over time would become an asset. "As the capital value of the property increases, so will the investment and asset base," Mr Walters says.

He points to one of Renprop Commercial's latest projects as a case in point. Rental amounts at 110 Conrad Corporate Office Park, where Renprop Commercial has units available for sale, would be in the region of R110/m² a month. Capital growth for commercial space in the area at present sits at about 10% annually, according to the Rode Report 2014 for the second quarter.

"If you had to take an 8% escalation on the rental amount of Unit 1, which has an area of 140m² , over the same time frame as the bond term, businesses could expect to pay R3m in rental fees by year 10. "Businesses that purchased the same unit for R2.1m would have paid off their bond and would have the benefit of owning an asset outright, without 10 years of continual annual escalations."

Mr Walters says that the many companies that are feeling the uncertainty because of the prevailing economic climate, but have the capital available, should consider an investment in a business property.

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