How is industrial property different to residential property?

Locations of industrial properties usually have different criteria to residential properties (for example an industrialist wants to be as close to busy roads as possible. The opposite for residential users)

Users/ tenants of industrial property evaluate premises in a more businesslike, emotionless manner, following market rental and Rand/ Square metre norms.

Leases of Industrial property are structured differently to residential leases (usually longer than two years and have fixed escalations each year.  Escalations are typically in the 8% to 10% per annum compounded range.

Financing of industrial property usually requires a larger initial capital commitment than residential property.

Valuation of industrial property is primarily linked to the net income the property can generate (after all expenses).

Industrial property yields a far higher income return than residential property.

Is financing an industrial property the same as financing a home?

Generally a bank will require at least 35% of the pre-VAT purchase price as a capital down-payment on the date of transfer.  

The lending rate will not be as low as residential loans.  Prime less 1% is usually a magnificent offer from a bank, but this could be as high as prime plus 1%.

Loans are paid off over ten years.  (Residential is usually 20 years or more).

Is the industrial property market likely to remain as active in the foreseeable future?

There is no doubt that the current depressed global economy and the strong Rand are having a dampening effect on the industrial sector.  

Tenants are more likely to seek less expensive premises as the squeeze on growth in the SA economy gathers a grip.  However, the industrial sector should merely slow down from its frantic pace during the last three years to a reasonable speed. 

Rental growth should still outpace inflation.. While one needs to keep a close watch on the economy and consequently one’s industrial investments, the outlook for the next three years remains stable at this stage.

Why should I invest in industrial property?

Industrial property offers the investor the opportunity to buy property in a prime industrial node at a lower cost per square metre relative to commercial, retail or residential investments, and enjoy an income from a relatively low maintenance tenant for a longer term.

I currently lease, why should I buy?

Commercial real estate is a long-term asset that stores its value fairly well. For this reason and more, many business owners are interested in investing in an owner-occupied commercial real estate space. The benefits of owning your own commercial real estate property are as follows:

  • Equity Upside - The beauty of buying commercial real estate is that your monthly loan payments help you build equity. When you eventually sell or refinance your property, you can extract the difference between the remaining loan amount and the current fair market value as equity for your business. This is in contrast to leasing commercial real estate since lease payments go to the landlord and no principal is paid down. Buying commercial real estate gives you more upside when compared to leasing commercial real estate.
  • Asset Appreciation - When you own commercial real estate you can also take advantage of asset appreciation. This appreciation represents the increase in the value of your property over time
  • Rental Potential - Businesses that buy industrial property typically occupy more than 51% of the commercial space. The remaining space can be rented out to tenants. This means that there is a lot of rental income potential when buying commercial real e Control Your Property - When you buy commercial real estate you control your property. When leasing, landlords have certain rights built into the lease. For example, many landlords negotiate rental increases, giving them the legal right to raise the rent on a tenant’s lease at least once a year.

This means that when you lease a commercial space you might be at the whim of your landlord. If average rental increases are around 8% a year, and if you have a 36-month lease, your rent can increase as much as 24% over the life of the lease, if not more. This can create instability for a lessee.

Situations like these won’t arise when you own your own property. Instead, you’ll have peace of mind that you have a fixed monthly payment for as long as you stay in the space. This means that your monthly payment will not be tied to the commercial rental market.