Understanding property finance

Property finance is a specialised area and you will find that different lenders focus on the different types of property finance. For example, if you are considering buying a building for your business to finance, then there are a number of lenders that can help you. However, if you are looking at purchasing a building with a view to earning income from renting space to other companies, only a handful of lenders might be prepared to finance you. The reason for this is that depending upon income from tenants carries a high risk, and lenders would be concerned that you might not be able to repay the loan if this is your only source of income.

The property finance market is fairly well developed in South Africa. The building itself can be used as collateral, which gives lenders the surety they need to lend you the money. Since the title deeds are in the lender's name, they own the building until the loan is repaid and they, therefore, have the right to sell it to recover the money if you default on payments. Unless you have signed letters of intent to occupy space from blue chip clients, you might battle to find the finance for this type of property.

However, a deposit is still required, since the total value of the loan (the loan, interest charges and administration fees) is more than the value of the building. So you will always need to find additional finance for the deposit and this can vary from 30% to 50% depending on the merits of each individual loan application.

It is more challenging to sell properties that can only be used for a single purpose, such as a movie theatre, hostel or gym. These properties have to be customised to fit the business needs and therefore are more difficult to sell.  So, if your property is highly specialised and therefore difficult to sell, the lender will be worried about loaning you money, and may not be prepared to consider the building as collateral for the loan. In this case, lenders often expect you to put down a significantly larger deposit.

In general, property finance works like a term loan, only its duration is for a maximum of 10 years. The property belongs to the lender until the loan is fully paid up and only then will the title deeds be put in the name of your business. Whilst the building can usually provide a large portion of the collateral required to raise the loan, you will be expected to put down a deposit.  The amount of the deposit will depend upon the type of property and its total value.

Lenders will check your personal and business credit ratings and if either of these is poor, you will battle to raise finance.