Steady seas for commercial investors

Small changes in short-term interest rates are likely to affect consumer spending patterns, says Attie Anderson FNB Commercial Property Finance’s head.

Small changes in short-term interest rates are likely to affect consumer spending patterns but there should be no material effect on commercial property investors, according to FNB Commercial Property Finance’s head of business lending, Attie Anderson.

South African consumers have seen a more challenging start to the new year, putting a damper on the prospects of retail sales growth.

Compared with last year, the year began with a higher prime interest rate working against consumer credit appetite. A positive inflation outlook was quickly extinguished by further weakening of the rand against major currencies, a forewarning of significant increases in consumer prices.

Disposable income was further threatened by the Treasury’s announcement of an increase in individual taxation.

“Interest rate peaks have flattened significantly since 2008, with steady 25 basis point movements within a tight band of two percentage points,” Mr Anderson says. “As a result the financial impact on commercial property investors has decreased substantially.

“However, investors could start feeling the impact should the Reserve Bank decide to gradually increase rates for a sustainably longer term,” Mr Anderson says.

Some of the factors that could negatively affect commercial property investors include an adverse change in consumer spending patterns, which could affect the financial health of retail tenants. “This could lead to arrears and vacancies of retail spaces over time and may even force the commercial property owners to reduce the rent,” Mr Anderson says.

“Business owners who own their commercial property will follow the same pattern as their business cash flow is directly impacted by the spending levels of their customers.”

Mr Anderson says capitalisation rates, which are used to convert the annual property income to a market-related value of the property, will track interest rate movements, influencing changes in commercial properties’ market valuation.

“It is important for property investors to remember that location and suitability for tenants could outweigh interest rate considerations; therefore, it is vital to strike a balance between these two aspects when deciding to invest in commercial property.

“There are many ways in which commercial property investors could minimise the impact of interest rates, but success largely depends on managing income, property vacancies and optimising operational expenditure to be able to keep up with your repayments.

“It is important to be hands-on in all aspects of your commercial property investment and keep constant communication with clients.”

Property investors must remember that location and suitability for tenants could outweigh the implications of the interest rate.