Commercial property investors often use bank funding to purchase property assets, which is referred to as gearing or leveraging. When done properly, using bank funding can have a strong positive impact on investment returns.

To illustrate how effective bank gearing can be, we compared a cash purchase with a transaction that uses a portion of bank funding:


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<td valign="top" width="426">CASH PURCHASE</td>
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<td valign="top" width="426">Purchase price: &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; R20,000,000-00</td>
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<td valign="top" width="426">Monthly income: &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;R200,000-00</td>
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<td valign="top" width="426">Annual Income: &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; R2,400,000-00</td>
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<td valign="top" width="426">Monthly expenses: &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; R58,000-00</td>
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<td valign="top" width="426">Annual expenses: &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;R696,000-00</td>
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<td valign="top" width="426">Net monthly Income: &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; R142,000-00</td>
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<td valign="top" width="426">Net yearly income (excl. inflation): &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; R1,704,000-00</td>
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<td valign="top" width="426">Return on Investment (Excl Capital Growth): &nbsp; 8,5%</td>
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<td valign="top" width="426">Annual Capital Appreciation (est. 10%): &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;R2,000,00-00</td>
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<td valign="top" width="426">Net Yearly Income (incl Capital Appreciation): R3,704,00-00</td>
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<td valign="top" width="426"></td>
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<td valign="top" width="426">Return on Investment &nbsp;(Incl Capital Growth): &nbsp; 18,5%</td>
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<td valign="top" width="426">BANK FUNDING</td>
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<td valign="top" width="426">Cash component: &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; R 6,000,000-00</td>
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<td valign="top" width="426">Borrowing (70% Loan to Value):&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; R 14,000,000-00</td>
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<td valign="top" width="426">Monthly Inst. (Prime rate 9% over 10yrs): &nbsp; &nbsp; &nbsp;R 253,352-00</td>
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<td valign="top" width="426">Net Monthly Income: &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;R 142,000-00</td>
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<td valign="top" width="426">Monthly Shortfall Payment: &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; R 111,352.00</td>
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<td valign="top" width="426">Total Yearly Shortfall Payment: &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; R 1,336,224-00</td>
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<td valign="top" width="426"></td>
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<td valign="top" width="426">Return on Investment (capital growth - upfront capital investment - rental income and excluding inflation): &nbsp;27%</td>
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From the tables above, it's clear that the Return on Investment using bank funding is 27%, while the Return on Investment in a purely cash purchase is 18,5%. So, gearing the purchase of the building has increased the Return on Investment by 8.5%.

Note that this calculation does not factor in any rental income for first 3 years, &nbsp;as rental income is used to cover bond re-payments.

Ultimately, using bank funding alleviates cash flow pressures, which makes it an extremely powerful means of wealth creation. Of course, this is provided that the ratios err on the conservative side coupled with sound investment analysis.

Commercial Property: Is Bank Funding A Good Idea?

Thinking of investing in commercial property? Whether your budget is big or small, here are five tips to help you on your way:

1. Gauge&nbsp;the quality or underlying value&nbsp;of a building when evaluating a commercial property investment.

2. Establish whether the rental levels being achieved are above or below market. This will determine whether current yields are sustainable or perhaps could be improved.

3. Evaluate the covenant and strength of each tenant occupying the asset with a view to extending leases with those tenants that pay on time.

4. Invest in a specific niche or sector. Alternatively, a strategy could be to diversify and invest across the various sectors i.e. office, retail or industrial.

5. Know when to hold on and know when to let go. Ultimately, building a successful commercial property portfolio requires that the investor holds onto good investments and disposes of the troublesome or inefficient ones.

In order to gain exposure to investment opportunities in your area, we recommend engaging with a reputable, qualified broker.

5 Commercial Property Investment Tips

“We just got the deal! Our client needs to be operational in enough space for 60 staff in three months time!”

These are words often&nbsp;heard around the world in the transaction room at a property company. Easier said than done. &nbsp;Making good decisions when it comes to an office move can be tough when it comes to future space requirements including expanding or contracting a business’s staff resources.



This challenge is more a management issue than bricks and mortar, but once you enter into that 5-year commercial property lease, it can be painful and expensive to get out of it early. A simple strategy when addressing space planning is to think, plan, and only then act afterwards. We often experience large companies engaging the market, and perhaps even get into lease negotiations without having completed any basic planning for the business case. We like to take an advisory role when assisting the appointed project team. We try to slow the process down by encouraging the team to think and build consensus prior to evaluating existing market options.

As a company or division grows in terms of revenue and success, what impact could this have on future headcount and facilities requirements? What is the volatility or risk of future headcount projections? Asking management what they need is a good start. Then filter down to reality. What organisational culture objectives does the new facility need to meet to best support future success principles?

I’ve walked hundreds of office spaces over the past six years. Some businesses take great pride in their brand and values by proudly showing off their space, while for others this is not a priority. Impressive office fit outs are about colour, lighting and layout. All of these factors ultimately have an impact on employee productivity and both staff and client satisfaction levels within the space.

We recommend working with design professionals to source your ideal design and layout, wall/floor coverings and office furniture. Work with the project team and solicit input. Staff involvement on a number of employment levels generates excitement and an inclusive feeling, which may enhance office morale.

An optimal office location is vital to retain current key employees and recruit future ones? Establishing where a CEO or decision maker lives can also determine the parameters for a suitable location.

Try to establish suitable building characteristics that best support the business model objectives in place, bearing in mind current and projected cash flow and profit. Has the project team managed to agree on the capital available to invest in the property decision?

In these uncertain times, more time and crisper decision-making will ensure success. The days of waiting months for “The Board” to make the final decision when it comes to an office move are passing us by. The real wisdom we bring to your organisation is to plan, advise and think practically.

Planning an office move?

The most common source of profit in a commercial property investment is capital growth i.e. the increase in value of the property over time. This can be achieved in a variety of ways across the numerous property classes and is usually realised by selling or refinancing investment assets. Capital growth can be achieved via improvements to property assets, for example the rezoning and development of agricultural land. As cities expand, land outside the limits becomes increasingly valuable.



When looking at any commercial property location to buy, the biggest factor in whether it's a sound investment or not is usually the potential for capital growth. As a node evolves, the inclusion of better transit routes, infrastructure such as shopping centres, schools, sports facilities etc., enhance property values.&nbsp;Many techniques have been refined to high-return fixes by property speculators specialising in adding value to commercial property in a short time.

A less risky approach is to invest in commercial property via stocks on the JSE. Real Estate Investment Trusts (REITs) are generally considered to be great way to generate property returns without taking huge risks. This is true, but only in the sense that property is the underlying security. With a REIT, the owner of multiple commercial properties sells shares to investors - usually to fund the purchase of more properties - and then passes on the rental income in the form of distribution. The REIT acts as the landlord to the commercial property &nbsp;tenants, where the shareholders of the REIT get the income once the expenses of running the buildings are deducted.

If you hear of an opportunity that promises a ‘new way’ to make property returns other than buying low and selling high or collecting rent, you're probably being sold on the process of property investment rather than a new mechanism for making profits. Whether the ‘process’ is worthwhile nor not needs to be carefully assessed - and bear in mind that this won't change how money will be made or lost in the end.&nbsp;

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What are the returns on commercial property?

After reading numerous commercial property market reports for 2014, we may have got a little ahead of ourselves in calling the tough economic conditions a thing of the past. Although funding conditions continue to improve and a number of larger corporates are once again reporting healthy profits, we shouldn’t be lulled into having unrealistic expectations. Forecasting a swing back to a landlord-favoured market in the next 12-18 months therefore seems a little ambitious.



Business operators are rightfully concerned about the European debt crisis, the weakening Rand, our upcoming election, labour unrest, low GDP growth, rising municipal costs and continuing high unemployment. All of this uncertainty forces decision makers into a holding pattern in order to mitigate operating risk. Any growth or expansion plans are couched until there is sufficient clarity or confidence returns.

In uncertain times, the old adage about investing in property being all about ‘location, location, location’ still rings true. In the commercial property market, we're experiencing tenant relocation activity but in many cases those are simply pieces moving around the chessboard. Tenants are willingly relocating to nearby business parks with little or no growth in their space requirements. The reason behind these moves could simply be to take advantage of the opportunity to lower office or warehousing overheads. Increasingly, we're seeing commercial property tenants moving to upgraded or redeveloped buildings with greener features that offer cheaper operating overheads.

In terms of Johannesburg commercial property, tenants often relocate to avoid annual escalations, or to secure a superior building with the same rental price as their previous premises. B Grade commercial and industrial buildings in less attractive locations are certainly feeling the pinch and will do so for the foreseeable future.

In our experience, a useful relocation strategy is to study all relevant commercial property information available before entering negotiations. By having a good grasp of the market conditions and a comparable product available, you'll ultimately put pressure on the landlord to offer competitive terms. And, a partnership with a competent commercial property broker will go a long way to securing optimal lease terms on relocation.

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Post category

Commercial Property: Is Bank Funding A Good Idea?

Commercial Property

7 Mar 2014

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Commercial Property

7 Mar 2014

Planning an office move?

Commercial Property

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What are the returns on commercial property?

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