Commercial property lending is critical to stimulating the development of infrastructure in South Africa, one of the key pillars in the South African National Development Plan (NDP). According to Gary Palmer, CEO of Paragon Lending Solutions, there is a growing need for small-to-medium-sized businesses to continue to invest in commercial property as it is vital for economic growth.
Economists have forecasted 2.8% economic growth for South Africa in 2014. However, Palmer says that the key to meeting and enhancing long-term economic growth is for businesses to invest in infrastructure development projects. “The improvement of roads, railways and transport nodes, as well as meeting the demands for better operational facilities, such as the upgrading of existing industrial commercial property, will have a positive impact on the development of property and economic growth in South Africa.”
Of the R827 billion allocated to South Africa’s infrastructure over the next three years, Government has allocated R430 billion to schools, hospitals, clinics, dams, water and electricity distribution networks, as well as improving bus, commuter rail and road links. Finance Minister Pravin Gordhan also notes that infrastructure transfers have risen sharply from R4.8 billion in 2005-06 to R39.7 billion in 2012.
Palmer says that while Government works towards transforming the country’s infrastructure, commercial property investors play an important role in developing property off the back of the NDP’s infrastructure programme. “While the NDP aims to develop South Africa’s economy, the knock-on effect of developing infrastructure allows businesses access to key transport nodes and unlocks their potential for increased revenue for supplying goods and services to new and wider markets.”
“Commercial businesses are constantly in need of essential networks to enable their business to thrive and recent media reports indicate that businesses can achieve up to 40% in productivity gains from investments into adequate infrastructure.”
Palmer adds that the additional benefits of new developments give businesses greater impetus to grow and positively contribute to the country’s employment rate. “There also are longer-term benefits where businesses can attract investment, and can expand their business services and operations into new growing regions, where access to their services has been lacking, such as in rural areas where retailers are taking root and providing much needed supplies and consumables to these regions.”
Palmer, however, cautions investors and business owners to take heed of the risks associated in developing commercial property. “There are a number of factors which businesses and commercial property investors need to be aware of. While the development costs for commercial property can run into the millions, there are longer operational costs that businesses and investors need to consider.”
He adds that there are also legal issues to contend with, while unintended and unexpected situational events can delay development and the operational success of that business. “Commercial banks can then hinder operations and the necessary finance if the client is unable to finance these long-term costs.
“Non-bank lenders like Paragon provide property developers with access to short-term finance, when funding is not available from commercial banks, or where the commercial banks are taking too long with the loan application. When considering the long-term costs, private lenders can also assist with a cost analysis and can work to secure long-term financing from a commercial bank once all the banks’ lending criteria have been fulfilled,” he concludes.