Smart money is buying commercial property

If you've got the capital, investing in commercial property may be the way forward, advises property investment expert, John Witter of Horizon Capital. Entrepreneurial investors who understand the economic cycle and have the vision to see the opportunities offered by decreasing interest rates should use the current phase to acquire the cherries that become available during difficult times.

As interest rates continue to drop, interest earning investments will become less attractive particularly when scrutinising after-tax return. Analysts believe that there is a strong possibility that the current stock exchange bear market will continue to worsen, while investment in the stock market is uncertain given the daily fluctuations in prices.

For those that have the capital, there are great opportunities in the commercial property market where yields on A-grade properties are still obtainable in excess of 10%, with 10% lease escalations giving additional capital growth to this type of investment. In addition, with interest rates still expected to drop fairly dramatically commercial property capitalisation rates should drop over the next year giving further capital growth. The expected drop in interest rates will also reduce the cost structure of owning commercial property as most of these new investments are geared at around the 50 to 70% level.

The acquisition of commercial property is far more technical than residential property where a good position is the most important factor. "With commercial property, if one ensures that a good buying decision is made and good quality leases are in place, the investment is more like owning a gilt with an escalating coupon," Witter explains.

Given these factors, Cape Town based Corporate Finance and Commercial Property company Horizon Capital specialises in acquiring and managing directly owned and diversified commercial property portfolios for its high net worth clients. Witter elaborates on the company's services: "We offer a full service from the acquisition of properties, refurbishment where required, ongoing letting and tenant management, bi-monthly management accounts and the organisation of audited annual financial statements of the owners' entities."

Horizon Capital's Commercial Property Division has a diverse range of skills with graduates from the accounting, quantity surveying and property fields ensuring that the correct acquisition and management decisions are made. The focus is on properties falling in the range below the size required by the listed property companies.

"The economic cycle for each type of investment is different, with the bottom of the market being determined in each case by a set of factors unique to that investment," says Witter. The current initial phase of the down trend in the interest rate cycle is providing a unique opportunity to invest in carefully selected commercial property with huge capital gain upside and yield growth. Any decrease in interest rates results in an increase in spending which affects the tenant base positively.

In addition, building costs have escalated quite dramatically over the last few years and when the construction cycle starts responding to an increase in demand for commercial property; replacement costs will be far more expensive pulling up rentals and the value of existing commercial property.