While returns on listed property are expected to slow in 2013, following stellar performance of 36% in total returns for the year in 2012, the pressure on non-listed commercial property is set to increase during the year ahead.
This is according to Gary Palmer, CEO of Paragon Lending Solutions, a leading asset-backed lender, who says that listed property returns were expected to yield lower total returns than last year but these will continue to produce solid positive returns. However, non-listed commercial property owners could struggle due to tenants’ various rising costs.
“A fair amount of traction is expected in the commercial listed property sector, with retail and industrial sectors likely to produce positive returns. However, the office sector is likely to remain sluggish with vacancy rates putting strain on growth. Similarly, non-listed commercial property and residential owners may begin to feel the pressure as a result of vacancies and late payments from their tenants, who begin to feel the squeeze from the rising costs of living,” says Palmer.
He adds that, “The listed sector normally focuses on blue chip tenants. However, non-listed commercial property owners have, in most cases, smaller businesses as their tenants and it is this part of the market where tenants are feeling the pinch as a result of slower GDP growth and an increase in costs.”
He cites rising expenses such as the recent fuel price hikes, the increasing costs of basic food and lifestyle expenses, home and business insurance fee increases, as well as higher rent and general day-to-day costs as key driving factors that the average consumer, and smaller businesses, will feel in their back pocket.
“With the cost of living increasing annually, these smaller tenants may battle to meet their rental payments. The smaller office sector and residential building property owners could subsequently feel the effects as their tenants try to source more affordable office space and reduce their expenditure or fall behind in their payments and into arrears.”
Palmer warns that property owners must keep up to speed with their repayment schedules as failing to meet these obligations will affect their repayment ability over the medium to long-term. “If a tenant is not meeting their rent payment, the owner must still cover their monthly instalment with the bank.”
He further advises property owners to keep a good relationship with their funder. “It is imperative that owners liaise with their banks and keep them informed of their situation. A bank is more likely to be forthcoming if there is transparency. It is also a good idea for owners to try and build some form of a cash buffer to accommodate late payments and arrears so that they can meet their monthly instalments if such a situation were to occur.”
Palmer warns that many investors looking to invest in commercial property will find it difficult to obtain funding from the banks unless they put down a substantial deposit and commit to long-term leases. He advises investors to seek alternative funding from non-bank lenders who can provide funding against commercial property, even though the leases may be short-term and may not be considered as ‘blue chip’ by the bank.
“For example, a building that has not had its entire lease agreements tied up will often be deemed unserviceable by the banks. However, an asset-backed lender will examine the profile of the potential tenants of the building and take a view on it based on the assessment. This can provide very valuable insight to the investment potential of the building, which is useful to both the lender and the investor when it comes to generating future returns from the building,” says Palmer.