Now’s the time to develop your own office building

The time may never be better than the present for tenants or owner occupiers to develop new commercial premises, says Colin Anderson, a director of Rabie Property Group.

Anderson says banks are starting to relax their lending criteria and interest rates are at the lowest they have been for 31 years.

“The lower interest rate makes the serviceability of loans far easier and the monthly repayments more in line with asking rentals. Not only is the cost of finance lower but so too are the construction prices as the construction industry feel the effects of the global slowdown and the reduction in public sector contracts post the 2010 Soccer World Cup,” he says.

In addition, he says, there are tax advantages to building one’s own office block.

“The Receiver of Revenue identified the importance of the construction industry in terms of employment and investment in South Africa back in 2009 with the introduction of the Section 13 quin allowance.

“This allowance makes provision for the owner of a new and unused commercial property developed post 01 April 2007 to write off the cost of the development (excluding land and earthworks) over a period of 20 years on a straight line basis, however the amount written off must be recouped when the property is sold.

“This obviously has a major impact on the owner’s cash flow as it defers the tax on the income from the rental until a much later date, which allows the owner to use the income to reduce the loans as quickly as possible.”

Anderson says the deferred tax, once paid, is of less consequence to the owner as the property value will, in most instances, have doubled over a period of seven years and the loan will have reduced substantially, thus improving loan to value ratios.

“In addition to the increase in capital value of the property and with the associated higher rentals over the same period, the key indicators of financial sustainability of a property, namely loan to value and serviceability ratios are far improved which limits potential risks of property ownership in the long term.

“So if one considers the long term benefits of ownership and the incentives referred to above, then from a tenant’s perspective becoming an owner occupier is a no brainer.”

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