Advice and Opinion

Key trends facing owner-occupied commercial property investors

Difficult economic conditions that continue to take their toll on the property sector are also posing risks to businesses that are tenants in their own premises, commonly referred to as commercial owner-occupiers.

Attie Anderson, Head of Commercial Property Finance for FNB, says owner-occupiers often make a long-term financial commitment when purchasing property, since their businesses will be run from the premises. There are numerous benefits to occupying your own commercial property, however, the drawback is that when the business goes through financial difficulties this may affect its ability to meet debt obligations on the property.

There are measures that owner-occupied commercial property owners can put in place to protect their investments in tough times, without neglecting their core business.

Anderson points out six trends that owner–occupiers should look out for this year:

Budget for expected interest rate hikes – the possibility of consecutive interest rate hikes due to the weakening rand and global market volatility will likely place strain on the cash flow of many businesses. The fact that consumers are under pressure will also have a negative impact on business cash flows. Therefore, it will be wise to do a proper budget for the year ahead, including stressing your projected cash flow with expected interest rates hikes.

Create cash flow stability – cash flow volatility can put a business and its management under a lot of pressure. Ways of creating cash flow stability include managing expenses tightly, having a good grip on debtors management, building up surpluses in strong months and considering fixed interest rates for debt. Fixing the rate on all or a portion of your commercial property finance loan won’t necessarily be ‘cheaper’ than a floating rate, but it does peg the repayment amount and makes planning a lot easier.

Unlock income potential of your property – businesses that are sole tenants in their premises should consider renting out some of the space to generate additional income, in times of difficulty. This is becoming a trend in the owner-occupier market. Look for unused space in your property and find ways of subleasing the space.

Restructure debt – where equity exists in your commercial bond facility, consider using this equity to capitalise your business through effective restructuring of your property loan. The interest rate will generally be more beneficial compared to normal business finance and the repayment terms are less punitive from a cash flow point of view.

Diversifying – not all owner-occupied commercial investors are going to struggle during tough economic conditions, as businesses operate in different sectors of the economy. Those businesses that are doing well should consider diversifying their investments, in order to generate higher returns. It may be worthwhile looking at alternative investment opportunities within the commercial property sector.

Caution on Insurance – business owners should under no circumstances cancel property insurance no matter how big the temptation. Consider the possibility of unforeseen events and the consequential capital outlay which will put additional pressure on your business’ cash flow.

“Regardless of the challenges faced by owner-occupiers, it is advisable for them to approach their financial institutions and banks before any drastic decisions are made,” concludes Anderson.