WHEN THE GOING GETS TOUGH
“Never fall in love with a property” Those words have always served me well when advising clients on best course of action. My friend warned me that such deep emotion would in due course make you poor. I had to consider this advice to fully appreciate it but I know that this should be a key element in any commercial property owner’s motivation. A commercial property is served in two dishes; one you buy a property to support a going concern or two you buy a property for investment. Both of these have their own inherent and sometimes unanticipated risks factors. As we are now considering hard economic times it is relevant for me to reflect the likely errors property owners make when things are not quite so grand.
By Carl Kleinhans, In2assets
We all know about tough times and shudder collectively when the economic indicators peel off the depressing truths layer by layer. Our humanity, our social wellbeing and our purpose in this world is affected by factors we cannot always control. This is harshly highlighted when our world faces troublesome economic times. We read about the opinions by Macro Economists and barely comprehend the terms; Inflation, Gross Domestic Product, Consumer Price Index, Government Fiscal Policies and the lot. We may not know the intricacies of these terms but we surely feel the effects when we spend our hard earned money. A trip to the grocery store, buying school clothes, a meal at a restaurant and the odd bottle of wine. We do know how far our Rand can stretch and how we seemingly buy less for it as the bad times grip fiercely around our wallets. But do economic hardships spell pure trouble or can we find ways to endure the lows and be victors of our circumstances.
I am no economist but I do consider that difficult times allow us to reboot our urges and realign our priorities. How many of us splurge at the grocery store and overload our freezers and fridges only to discard spoilt goods when our greed taught us that we bit off more than we can chew. Shamefully this would apply to much of our habits and we nonchalantly bulldoze our way through the month flicking notes left and right. I don’t need another pair of shoes but I must buy that pair which gets tossed into a cupboard to be worn one day. We are spoilt and perhaps become a tad rotten. The hard times teach us to reel in our impulses and appreciate the value of your labour. But as I said I am not an economist and besides my domestic experiences I can venture to share my opinion where tough times affect my career passion in Commercial Property.
During my career journey I befriended a very wealthy property owner, in a fact a Billionaire. He worked hard to amass his pride and was far too humble in his achievements. I admired him and yes perhaps I was mildly jealous too. In our discussions I tried hard to absorb his attitudes in the hope that I may telepathically sponge up his knowledge but he was far too quick for my then relative inexperience. I do however remember one very valuable moral he shared with me,
“Never fall in love with a property”
Those words have always served me well when advising clients on best course of action. My friend warned me that such deep emotion would in due course make you poor. I had to consider this advice to fully appreciate it but I know that this should be a key element in any commercial property owner’s motivation. A commercial property is served in two dishes; one you buy a property to support a going concern or two you buy a property for investment. Both of these have their own inherent and sometimes unanticipated risks factors. As we are now considering hard economic times it is relevant for me to reflect the likely errors property owners make when things are not quite so grand.
If you own commercial properties as an extension of a business enterprise, it becomes relatively easy to apply the math; your business will either sustain the cost of the property or it won’t. In the unfortunate event of a down-spiral in business you may elect to seize trading or make strategic decisions such as downscaling or consolidating. The owners of such a troubled business may be compelled to liquidate assets to settle long-term debt and free the company from severe cost of capital which as result could be the final nail in the coffin. Yes, that does sound all too morbid and I know the prospect thereof will give any business owner goose bumps but reality is sometimes a monster in the dark. How do business men and woman approach such a catastrophe and what options might I share with you to avoid a raging mental eruption? Well firstly I would call for calmness to allow you pure perspective when planning a course of action. Equally important is never to leave such demanding decisions to the very last tether otherwise you are bound to fail! Failure = liquidations = you’re no longer the captain of this vessel. Remember that my key focus is the commercial property which forms part of your business enterprise as a whole. You may still save your business and prevent anarchy amongst employees and they struggle to digest the prospects of unemployment. The know-how of the latter would best be advised by business analysists or perhaps your banker. As for the commercial property my advice is strongly for you to consult with smart commercial property persons who are both compassionate and professional in their approach. Such specialists may recommend several approaches which may vary from seeking a tenant for your property or to sell by way of either online or public auction. An Auction platform will provide you with efficient timelines and defined results and you have the comfort of safeguarding the value with a Reserve Price. You may think my advice is biased now but I am factoring the urgency of your circumstances into the equation. The auction platform is also an excellent barometer of the price the Market is prepared to pay for your Property should you be in doubt on such price. A further reason why the majority of Sellers worldwide regard auctions as the preferred method of sale is that it is quick, without any suspensive conditions and not subject to long protracted negotiations. In these difficult times Sellers want quick decisions and rapid flow of funds into their Bank Accounts.
Never allow the control of the sale to be lost by you which means that once you have identified the downward trend you should engage with your property specialists straightaway.
I now turn my attention to the investor market. Yes, they too are not exempt from the bitter and hard hitting onslaught of economic woes. Many multi Billion Rand investment companies exist where some are so pioneering that they light up the stock exchange leaving stock brokers scurrying to secure investors. These big brothers are no better off than the smaller family investors when it comes to hardships. The effect remains the same. I once heard of a large property investment group who at that time had combined retail vacancies measuring in excess of 50 000m2! Now that is a bitter pill to swallow and becomes a recipe that makes investors run for their mattresses. Fortunately, there are always options when you choose to offload. The crux of my advice is simple;
Don’t be greedy!
Ok so before you think I’m overstepping the line I should remind you that this is an opinion and not the rule of scholarship. I have seen this greed cause tremendous trouble in hard times when property investors fail to find a refreshing approach to trying economic times. I know that you are now waiting with bated breath as to how I propose your steer your way through these turbulent waters. The truth is that I don’t have too many answers but perhaps I can identify and share the pitfalls I often observe when engaging with sellers. My first bit of advice is throwing away the notion that you own the apex of properties and that all of mankind is waiting to grab it as soon as you spoil the investor pool by “putting it in the market”. I hear all too often property owners praising their properties by citing attributes which most level-minded property professionals would contest. “Yes but so and so property sold for so many millions five years ago!” It may be true but five years ago banks literally opened their vaults to any novice investor, without due screening, which inflated commercial property values to unbelievable levels. Then of course there is the victim of the high times where investors bought fair value properties for very high prices. “But I paid R10m for this property five years ago. How can it only be worth R10m today?” I am sorry to crush your expectations Sir but being a realist is what makes me objective. In tough times it is important to remember that your very source of income is equally, if not more, affected by economic hardships. Businesses who cannot sustain rental escalations or who may be surviving amidst challenging conditions are worrying for any investor. It is imperative that you find ways to endure the trying times and reach the other side victorious. If you need to consider the sale of all or some of your commercial investment, please take care in considering the economic climate. In hard times Buyers will not risk low yield acquisitions and neither will they buy tenanted properties with total consideration for current rental returns. These Buyers must also factor a buffer into their risk analysis to ensure that they won’t sink when times are even harder. The truth is that there is no investment recipe for property investors just as there simply is no constant in determining true value. My advice is to approach reliable and ethical property professionals to assist you to ascertain your commercial property’s current accurate value. And yes, don’t fall in love with your property! It is a vessel with a purpose and if the purpose diminishes then it’s time to call it a day.
“I treasure my career and sharing my experiences with you makes me an ally. My objectivity is your best weapon in difficult times” ckleinhans@In2assets.com