While South African markets are still basking in the glow of the post-Zuma era, property investors would be wise to consider fixing interest rates on at least part of their loans, to buffer future uncertainty.
“Although there is no doubt that the swearing in of President Ramaphosa has lifted the mood of the people and our markets, we are still facing some interesting times ahead. Uncertainty around what meaningful policy and infrastructure reforms lie on the horizon, continued speculation about land issues, and a possible early election have yet to be factored into the markets and how our Central Bank will react. Fixing interest rates on loan facilities is something many of our clients are asking us about. And with good reason,” explains Gary Palmer, CEO of Paragon Lending Solutions.
Just as importers take forward cover to protect themselves on currency fluctuation, fixing part of the property loan can afford property investors some cover against interest rate movements.
Palmer says both residential and commercial property owners should be investigating what financial vehicles are out there to offer them some buffer against future rate movements. Despite the upswing in business confidence, there are still many areas that remain distressed. Dealing with rising interest rates (that will need to be passed onto tenants) could see higher defaults, which add risk to the owner. The upside of certainty will need to weighed up against missing out on a future rate cut.
“Commercial property owners would need to critically assess their lease horizons and take a three- to five-year view on the markets. We don’t advise fixing rates on the full lending facility, but rather a portion of it so as to retain flexibility – especially if you expect to have spare cash to put into the facility to reduce your exposure.”
Like forward cover, cap and collars can be put in place which will set upper and lower limits to the interest rates charged. So, for instance, if you take cover at prime plus 2% with prime being 10% and the prime rate increases to 13% the interest rate charged will be capped at 12%. Of course this cover comes at a fee, but you can recoup that amount if the interest rates drop. As with everything, it’s all about determining how much risk you are prepared to take in a volatile market, and finding someone who can advise you on how to manage it.
“Looking at fixing interest rates from time to time is part of good financial housekeeping for all property investors. If you know there is the potential for stormy water ahead, consulting with an independent advisor will give you access to a number of institutions and vehicles which could help you navigate the future. It gives both you as company owner, as well as your shareholders, comfort. Essentially, this goes beyond smart investing and should be seen as good governance,” Palmers concludes.