Interest rates and the current impact on industrial property

Owners of vacant industrial buildings have a strong desire not to sell!

Given low interest rates, when considering the options of either leasing or buying industrial property, industrial property occupiers are typically buying as it is much cheaper to own rather than lease.

This is keeping the leasing market relatively soft when compared with the selling market.

It is fair to say that owners of vacant industrial buildings have a strong desire not to sell — they either simply will not sell or prefer to lease out the property, and will only sell at the right figure.

Owners of this type of property always raise the question ‘If we sell, what would I do with the money?’ This is a very good question that is difficult to answer.

In some cases, occupiers have found that renting can be up to double the interest rate payments on a loan when comparing leasing or buying.

In these cases, the advantages of buying can be high because of low interest rates.

Many consider banks to be very cautious when loaning money for industrial property, with buyers telling us the banks say they loan 70% of the value — but this depends on valuations provided by the bank’s valuers, which are typically way below asking prices of property. In reality, buyers dealing with us claim that banks are lending 50% of the value of industrial property.

So if the equity bar required by a buyer is 50%, then that is a serious amount of money for buyers to come up with and means that many buyers are forced to lease rather than buy.

We have been involved with sellers of industrial buildings where we have suggested the owner considers selling on vendor terms which involves no bank funding. The vendor effectively loans the buyer the money to buy the property normally on 15% to 25% deposit and the buyer gets immediate occupation. Interest on vendor terms is typically 5% interest only payments.

Most owners of vacant industrial properties want to lease out their property not sell for good reasons — just as buyers want to buy for the same reasons and not lease.

It is all affected by interest rates. In time, as interest rates rise, occupiers may again favour leasing and investing the cash in their businesses for greater return.

Posted on Wednesday, 26 April 2017
by Atholl Williams in Latest News

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