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May 19, 2008:
According to Tony Bales of Bales Delaporte, Investment Property Dealmakers, during the last four years, when the commercial property market was racing along, many investors looked at other “boom time” investment criteria to assess potential investments
“In 2008, with higher interest rates and rising inflation, it appears that investors have gone back to the tried and trusted long term criteria of net income.”
“When the commercial property market is in a strong up-phase, as seen during the last four years, investors are able to justify many different and varying ways to purchase property. As George Soros said, ‘It is only when the tide goes out that one can see who has been swimming naked’. Well, the tide has gone out and there are many property investors, both locally and internationally, grappling for clothing and comfort,” says Bales. “Those investors whose property investments have strong cash flows are most likely to be in the best position.”
“Assuming one had a mortgage of Prime less 1% (which many of the larger commercial owners are likely to have negotiated) and factoring in another 0,5% increase at the next MPC meeting, one’s monthly repayments would have increased by 53%. This has eaten into investor’s operational cash flows as well as limited them in the types of new investments they are able to look at.”
Bales advises that investors are now after properties with solid cash flows. “During the last few years, sellers were able to attract a premium for future potential on their properties. Properties for sale were in short supply, interest rates were low and many investors took a view that they would be able to manage their new acquisitions to a point where such cash flow potential would be achieved. However, with interest rates having risen faster than most investors anticipated, many people have been caught short and are in a negative cash flow position, thus forcing them to sell. Unfortunately purchasers are also watching cash flows and will only pay competitive prices for properties with good cash flows.”
“The recent international banking liquidity crisis has also not helped matters,” says Bales. “In many cases, there may be a willing seller and willing purchaser, but an unwilling financier. While this scenario has been more prevalent in the USA and the UK, nervousness has nonetheless spilled over into SA, coupled with higher (as opposed to the lower USA & UK) interest rates, resulting in bankers taking a conservative approach to property funding. Once again, those acquisitions with good cash flows are likely to be the ones favoured by financiers – a current international phenomenon.”