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Sectional Title Properties
Thoughts on office and ‘switch use’ opportunities:
Sectional title residential apartments have come to the fore as an important private investment channel, albeit that presently in certain areas the initial yields often results in negative cash flow scenarios.
Developers in inner city areas hoping to benefit from the tax allowance associated with the Urban Development Zones (UDZ’s) have other concerns; currently these benefits cannot accrue to sectional end users, since the allowance for upgrading existing assets or developing new ones, applies to a single owner/developer. This is a major dilemma impacting the current legislation and there are ongoing discussions between the various interested and effected parties together with SARS.
On an altogether different perspective, owing to socio-political-economic conditions there is growing acceptance that the success of housing markets at the broadest level is more intricately tied to the success of commercial property than was previously considered to be the case.
Competition for scarce resources, more specifically land, is bringing the commercial and residential property markets closer together.
For these and other reasons, the appeal of sectional title is now also moving into another interesting arena – namely that of sectional title office space – and a view in the market is that this is the next big opportunity. Reasons include lower residential yields; owning one’s business space can make financial sense - also, utilizing residential sectional space for “office” purposes, though often strictly not permitted from a legal perspective*, makes sense in the context of residential oversupply. (*The legality and desirability of this scenario would of course be challenged by body corporate rules and town planning scheme conditions, such as parking ratios etc, and clearly we are not advocating this approach.)
What needs to be given careful consideration is the level and form of traditional office supply, as well as the supply emanating from residential apartments ‘masquerading’ as office space. The latter point of course raises an important opportunity in the property market: whereas the concept of vertical mixed use and mixed use precincts have been established, the concept of having “switch-use” shells – space that can be utilized for either residential apartments or offices or both – is something that the market may want to explore. At present the Sectional Titles Act does not permit such a scenario – what it does permit is the division of a multi-unit building into residential and commercial units on a vertical and or horizontal basis, with commensurate participation quotas/levies applying - and as such much work would be required to make this a legal possibility. From a risk diversification perspective, the allure of such a concept most assuredly stems from the fact that the office and residential property markets run in different cycles.
The risk for investors in traditional office markets, typically comprising high rise towers and office parks, is that this supply of smaller sectional spaces (whether commercial, mixed or ‘illegal’) will have an impact on overall demand; also getting a handle on any one market’s supply will become more difficult to establish.
Financing pure sectional title offices remains more complex than for residential schemes since loans are typically granted at around 70%-80% of value. The opening of a sectional title register also requires that the development be ready for occupation, making a pre-development sale of such section strictly impossible, but obviously permitting a pre-development lease to be struck by the developer, which can then be sold of to an investor once transfer is sorted. In reality it would also not be difficult for the section investor to sign up as a lessee, standing surety for occupational rent until the sections can be registered and sold. As such, the appeal from a developer perspective is that one can effectively market the opportunity to small tenants, buy-with-let and buy-to-let investors, as well as for outright sale to owner-occupiers. The potential of securing 1-3 year leases and having commercial law behind you (as opposed to concerns around residential evictions), are also aspects worth considering.
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