Commercial versus residential property as an investment

The question which he is regularly asked by potential property investors is, “Should I put my money into commercial or residential property?”

Bill Rawson, Chairman of the Rawson Property Group, said that both types of property have the big advantage of being gearable – the investor who already has a good income stream can usually borrow a high percentage of the property’s price from a bank or other financiers, thereby benefitting from property’s main advantage in relation to other asset classes - the fact that it can be purchased with borrowed money.

However from there on, said Rawson, the differences between the two types of property are fairly wide and in general make residential property the better choice for the less experienced investor, particularly one with limited financial or property experience.

Residential property, especially in the current South African market, is easily tradable and/or rentable.  Buyers and tenants are fairly thick on the ground – and, if the property is rented, tenants are easily replaced.

By contrast, said Rawson, industrial, retail or office space presents the buyer with a more complicated set of problems.  Tenants here are likely to be harder to find because what may suit one or two will not suit another eight or ten.  Retail and industrial space in particular, he said, tends to require a specific type of tenant following a specific line of business.

On the other hand, said Rawson, commercial property will generally give a better return (a Capex rate of ± 11% in South Africa at the moment compared to residential property where the initial returns are likely to be between 5 and 8%).

These facts and suppositions, said Rawson, will become more important in the year ahead when tighter regulations by the Financial Services Regulator are likely to result in the banks having to be even more careful about their lending decisions and, equally serious, inflation is likely to run above 6%, making the achievement of good returns even more important.

Rawson foresees that in the coming year the banks will find it harder to bring their valuations in line with market prices and this could lead to certain buy-to-let purchasers having to find extra finance.  However, he said, he remains convinced that in the economic conditions of South Africa today there can be no better investment for the man-in-the-street than property – and the Rawson Property Group has many clients who are steadily buying up acquisitions.

Rawson added that he has never really supported the philosophy of some buyers who, while believing firmly in property, tend to rely on their agent’s, consultant’s or partner’s expertise in assessing it.

“I like to see the buyer becoming totally involved, inspecting the property himself, assessing the likely cost of maintenance, the unit’s tenant appeal and its potential to produce income.  Such buyers, in my experience, get by far the most satisfaction – and profit – out of property.”

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