Classic Business Day asks Michael Shrining from Alchemy Corporate Property Advisors about the pros and cons of owning your own office building
LINDSAY WILLIAMS: It must be quite tempting when you own your own business and you’re doing quite well - especially with interest rates so low - to splash out and buy your own shiny building out there in Midrand or Fourways. Michael, can you tell us about Alchemy?
MICHAEL SHRINIG: Alchemy really looks at property issues from the tenant’s point of view - we work for companies that are occupiers rather than investors. We don’t typically advise landlords.
LINDSAY WILLIAMS: Is there an ego factor when businesses start to look at premises, and they want their own building?
MICHAEL SHRINIG: Absolutely. I think once businesses get out of the start-up phase, and there’s a little bit of predictability and certainty about the future - if there’s still a founder involved, absolutely. An ego investment is often made…
LINDSAY WILLIAMS: Is that a mistake sometimes, or with the sort of environment we’re in at the moment - where the property market is booming - is owning one’s own property the best way to go?
MICHAEL SHRINIG: I think the property boom at the moment is feeding that ego investment choice - interest rates have come down, there’s this huge boom in property fed by what’s happening to residential properties, as well as what we’ve seen in the commercial market over the last two three years - so now we’re justifying the ego decision I think with some investment fundamentals saying: “Look, it’s a good investment.” But there are many pros and cons…
LINDSAY WILLIAMS: Let’s have a look at some of the cons - over the past few years there would have been a capital gain, but now the market has got a little frothy are there some pitfalls?
MICHAEL SHRINIG: Absolutely. I think what you’re looking at is an investment of time and effort from the business in something that’s not core in something that isn’t sustainable long term. As you say what we’ve seen in the past - this really large rise in capital appreciation - is not really sustainable into the future. I think taking your eye off the ball as a company is probably your biggest downfall in investing in a property. It also restricts you - not many companies have a ten or fifteen-year view which is often what you need to get the best returns out of property in a normal environment. So if your business is going to expand or contract - and who knows what’s going to happen in the future, particularly in the medium end of the market where businesses grow and fail at quite a rate.
LINDSAY WILLIAMS: Also I suppose certain areas are in favour one minute, and the next they’re out of favour - so property prices can fall - and the shift of the central business districts in South Africa over the last ten years has been extraordinary!
MICHAEL SHRINIG: Absolutely. Look at the Johannesburg CBD - fifteen years ago the rentals were higher than Sandton, then it went through quite a deep trough. If you look at retail now like the Small Street Mall - what a pleasure! If you have a store there you’re flying. So it’s swings and roundabouts - it really does change. If you’re looking at a fifteen or twenty year view so much changes - to invest a significant chunk of working capital in buying a building, you’re going to be missing out on business opportunities - and I think that’s the key. If your core business is making widgets - make widgets. You should be getting a better return on investment there than investing in property.
LINDSAY WILLIAMS: When you lease your premises an awful lot of the management of the building is taken over by the person that you’re leasing it from - is that a pro?
MICHAEL SHRINIG: Absolutely. If you are going to buy your building - even if it’s for your own company, and you’re not leasing it out to other tenants - you’re in the property game. That’s rates and taxes, it’s managing sub-tenants if you have them. Often it’s not viable to employ staff to do that if you’ve only got one or two buildings, and you can’t really delegate it to the “girl in the accounts department” - it’s too significant an investment often to do that. On the upside if you do buy a building you’ve got a fixed occupancy cost, your bond repayment stays fixed for that ten or fifteen year period - so you’ve got certainty there, you know you’re going to own the building and have rights of occupancy through a long period which sometimes doesn’t occur in leases with the “wicked landlord” scenario, and of course there are some tax deductions along the way. At the small and medium end of the market that building often turns into their retirement fund because it’s the only real tangible asset of the business. It’s very difficult for sometimes for retiring founders of the business to actually get a tangible value for their business - they are the business.
LINDSAY WILLIAMS: Is there any type of business, or is there a stage in a company’s maturity where they should look at owning a building? Should they have a certain track record?
MICHAEL SHRINIG: I don’t think it’s so much about a life-cycle stage - I think you should have a little bit of a track record that will allow you to get the funding. You shouldn’t just lease - overseas studies have found that companies that own 20% to 40% of the portfolio they occupy tend to outperform other companies - so own your core manufacturing facility, your head office, but stay flexible in the rest of your portfolio.
