Short term small rate movements will most likely affect consumer spending patterns but there should be no material impact on commercial property investors. This is the view of Attie Anderson, Head of Business Lending at FNB Commercial Property Finance.
“Interest rate peaks have flattened significantly since 2008, with steady 25 basis point movements within a tight band of 2 percentage points. As a result the financial impact on commercial property investors has decreased substantially. However, investors could start feeling the impact should the South Africa Reserve Bank (SARB) decide to gradually increase rates for a sustainably longer term.”
Anderson says that some of the unintended factors which could negatively impact commercial property investors include the following:
- Adverse change in consumer spending patterns which impacts the financial health of retail tenants. This could lead to arrears and vacancies of retail spaces over time and may even force the commercial property owners to reduce the rent;
- Business owners who own their commercial property will follow the same pattern as their business cash flow is directly impacted by the spending levels of their customers;
- Capitalisation rates, which are used to convert the annual property income to a market related value of the property, will also track interest rate movements, influencing changes in the market valuation of commercial properties.
“It is important for property investors to remember that location and suitability for tenants could outweigh interest rate considerations, therefore, it is vital to strike a balance between these two aspects when deciding to invest in commercial property.
“There are many ways in which commercial property investors could minimise the impact of interest rates but success largely depends on managing income, property vacancies and optimising operational expenditure to be able to keep up with your repayments. It is important to be hands-on on all aspects of your commercial property investment and keep constant communication with your clients,” concludes Anderson.