select
|

Lessons in buying property from ‘black gold’

A coffee connoisseur can challenge even an experienced barista. When ordering, body type (skinny/not), marital status (solo or not), length (short/tall), colour (black/white), humidity (wet/dry) and even the angle to the perpendicular (flat or not) are specified.Knowledge Factory recently explored commercial real-estate against the backdrop of the economics behind this revered bean-juice.

Coffee or ‘Black Gold’ is the second-most traded world commodity after oil. It is generally traded in financial instruments known as futures contracts, through the New York Board of Trade. A futures contract is a contract, to buy or sell an underlying instrument at a certain date in the future, at a specified price. For coffee, each futures contract involves the control of 37,500 pounds (±17 tons or 250 sacks) of green coffee – enough to fill a typical shipping container. It is not a small market. Coffee exports alone will account for about $21bn in trade for 2012.

The contract pricing is driven by variables like weather conditions in the producing countries, political turmoil, production levels, transportation costs (linked back to oil) and other unexpected factors. The ‘unexpected’ could be news of drought or freezing conditions in areas of high coffee production which may reduce global supply. Assuming demand stays the same, the decreased supply would drive prices upwards in order to achieve a market-clearing price.

Similar forethought needs to be applied when purchasing commercial property. Many buyers make the assumption that the purchase of well-built office block or factory complex today automatically means solid rental income from the get-go and a handsome re-sale profit in 'five or ten years’ time. In a similar vein to the ‘unexpected’ variables in coffee economics, this is not always true.

Place, time and cycle

If the heterogeneous fickleness associated with the financial aspect of commercial property management is excluded, one is left with an elegant three-point simplicity. These three - geographic, temporal and cyclical elements - ultimately determine when a profit will be made or indeed whether the potential for handsome return on investment (ROI) exists at all.

The geographic element or ‘location rule’ is an ethereal principal in real-estate that can produce high returns when a discounted property is procured in an area of high demand. Alternatively heavy losses can be inflicted when the rule is ignored or where over-capitalisation occurs. Nonetheless, the location principal is constantly shifting. A property in demand today may be out of favour in five years’ time due to changes in business patterns, traffic nodes, a fall in foreign direct investment, politics, a slack economy or decentralisation.

Temporal analysis of a commercial property includes checking the length of anchor tenant leases, and/or surrounding business ventures and business type. For example, buying a factory building in close proximity to a newly established vehicle manufacturing plant will likely be snapped up by parts suppliers working on JIT production strategies. However purchasing a factory close to a mine that is in its moribund phase may produce only short-term benefits before being saddled with prime real-estate in the ghost town that follows the mine shutting down operations.

The cyclical element refers to where the purchase occurred within the real-estate cycle. The moving curve from buyers to sellers’ and back to buyers’ market can severely impact ROI and cap rates. Even so, the purpose of property acquisition may be for long-term revenue in which case the point on the cycle plays a smaller role. Commercial property, like shares, has a ‘price-to-earnings’ ratio (the rent). Real-estate prices can fluctuate in the short-term, but in the long run, property prices and its intrinsic value is driven by rental income.

All three elements are interwoven with broad-based economic performance. For example, prospects for office space demand influence the take-up of existing and new space. Yet those prospects remain dull in the wake of SA’s increasing unemployment figures which breached the 25% mark in Q3 of 2012.

Over two billion cups of coffee are consumed in the world every day. Traders bank on this relatively consistent consumption to predict future supply/demand ratios while trying to factor in the aforementioned unexpected variables.

Unfortunately no commercial property investor can accurately predict the future value of his investment nor can he predict the reliability of a lease contract. This makes commercial property investment both exciting and highly profitable for astute buyers.

Nevertheless, a careful analysis of the three elements mentioned above rather than gung-ho assumptions help mitigate risk. Drilling deep into regional and local business intelligence will offset some of the hazards would-be buyers will face - leaving more time to savour another cup of black gold.

Dieter Deppisch, Knowledge Factory Insight Analyst


  Comment on this Article

  Please login to post comments

Post to my facebook wall
  
2000
Characters remaining


    Latest Property News
    • 23 Feb 2018
      RE/MAX Property Associates’ Table View Office, which services property buyers and sellers along the Table Bay coastline and surrounds, has recently sold a home in Woodbridge Island for R11 million – the highest price paid for any home in the sought-after security complex.
    • 23 Feb 2018
      Choosing to invest in an overseas property can be daunting. But as more and more investors recognise the value of a diversified portfolio that includes property outside of their own country of residence, international property investment is growing in popularity.
    • 23 Feb 2018
      The positive change in South Africa’s political landscape is paving the way for an upswing in the local property market.
    • 22 Feb 2018
      An excellent credit score is one of the most priceless assets a potential home buyer can have. This tool has the power to secure favorable mortgage and refinancing rate, influencing everything from the size of the loan repayment to the interest rate on the home loan.
    • 22 Feb 2018
      What do you do if you love your home’s location and the area, but the home no longer fits your growing family’s needs? Do you stay and renovate your existing home or find a home that meets your developing criteria?
    • 22 Feb 2018
      While every owner wants to sell their property at the best possible price, overpricing a home can be the kiss of death for a sale.
    • 21 Feb 2018
      Given the hand they were dealt, government has performed a delicate balancing act which it is hoped will serve to reignite confidence in investment in South Africa, regain our global credibility and satisfy the credit ratings agencies, says Dr Andrew Golding, chief executive of the Pam Golding Property group.
    • 21 Feb 2018
      The real estate mantra, ‘location, location, location’ remains a strong market influence regardless of the prevailing economy, with suburbs like Rondebosch enjoying the buffering benefit of being ideally situated.
        
    X
    Subscribe to the MyProperty Newsletter

    Name  
    Last Name  
    Email Address  
    Email Frequency
    select
    X
    Share this Page

       
    For Sale Property
    Rental Property
    More Options
    About
    Connect with us
    FEEDBACK