How to Invest in Industrial Property

During the last three years, interest rates have been low and the rand has been strong, fuelling the growth of many businesses. With growth and expansion comes the need for larger premises and as many business owners begin to search for new premises, so they quickly realize that it is almost as cost effective to purchase property as it is to rent – hence many tenants become owners.

How do you find suitable industrial properties to purchase?

Epping Industrial Property, an industrial property company, offers the following insights and advice into industrial property purchasing:  

“The first step is to determine a location where one wants to invest.  Drive around the area and make sure you are familiar with it.  Next, contact industrial property brokers (more than two) that specialize in that specific area and discuss with them what they think would suit you and what is the type of industrial property in highest demand by tenants.”

“Following this, go and have a look at actual properties for sale and make sure you get enough information up front before then contacting a financier/ bank for advice on your personal circumstances with special regard to investing in industrial property.  Consult with your accountant or lawyer to make sure any intended offer to purchase will be correctly structured to suit your personal circumstances.”

“Finally, evaluate all industrial investment alternatives and select two that you are happy with – this provides a basis of comparison.  Then make a correctly structured offer with a view to negotiating to close the transaction.  And remember – stay calm and unemotional throughout the whole process and be prepared to walk away from anything you do not feel comfortable with.”

Factors and information to consider when evaluating an industrial property

According to Epping Industrial Property one should consider factors such as the location of the site, its accessibility and road systems, the age and condition of the buildings, the flexibility of the premises (specialized premises have a smaller chance of getting rented out if a new tenant needs to be found,) the background on the seller and why they are selling.

“Also make sure you see the Title Deeds for the property as well as a formal legal description of the land, along with the municipal valuation, the town planning conditions and Zoning Certificate, a copy of the approved building plans and copies of all current leases.”

“Be sure to also conduct an expense analysis – taking into account the municipal charges, electricity, building insurances, repairs and maintenance estimate as well as the month-to-month administration and rent collection charges.”

Epping Industrial Property further advise that if the property is sectionalized you must ask to see the latest financial statements of the Body Corporate and a copy of the rules of the sectional scheme.  “Also check with the managing agents that all is in order and no special levies are due.”

Financing of Industrial Property

Newcomers to investing in industrial (and commercial) property should not underestimate the tedious process that has to be gone through to arrange finance.  

“All banks arranging non-residential finance go through different in-depth processes to evaluate non-residential loans.  The purchaser will have to submit mounds of documentation relating to both themselves as well as the property and its tenants.  Allow for at least 21 days (at the very quickest) for a loan approval and depending on the bank, you may be referred to a non-residential lending division and always go to more than one bank.”

“Some standard industrial financing norms to be aware of are that approximately 35% of the pre-VAT purchase price will be due as a capital down-payment on the date of transfer.  The lending rate on an industrial property is not as low as residential loans and loans must be paid off over 10 years as opposed to 20 years for residential.  This has the negative cashflow effect of having to pay far more in bond repayments, but the positive effect of one’s bond being paid off far quicker than a residential property.”

“Finally, read the small print.  There may be hidden clauses like penalties if a property is sold within the first three years, or that one needs to give the bank three months notice before a bond can be cancelled.”

Ways in which to purchase industrial property?

According to Epping Industrial Property, industrial property can be purchased in the following forms:

  • Directly held, which is the most widely used method of ownership,
  • Listed property funds.  This is a more liquid form of holding property, but also suffers from the fluctuations of the stock market, and 
  • Syndications (while joint ownership is fundamentally a good principle, investors are urged to act with extreme caution as there are good and “not-so-good” syndication companies operating in SA.)

“Directly owned property can be purchased either through a tender, an auction or Private Treaty, where the sale is handled mainly by brokers specializing in industrial property.”

Is the Industrial property market likely to remain positive into the foreseeable future?

“There is no doubt that while interest rates are historically low, banks are not lending too much money which is having a dampening effect on the industrial sector.  Not only does bank lending affect property owners, but tenants are also under pressure and are more likely to seek less expensive premises as the squeeze on growth in the SA economy gathers a grip.”  

“However, the industrial sector should merely slow down from its frantic pace during the last three years to a reasonable pace and rental growth should still outpace inflation for at least three years. While one needs to keep a close watch on the economy and consequently one’s industrial investments, the outlook for the next three years remains solid at this stage,” concludes Epping Industrial Property.