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Residential office conversions a cash cow?

Rent is not the only factor to consider when moving to a residential office.

An increasing number of residential nodes are transforming into commercial-centric areas as an answer to the lack of good-quality office space at affordable rates. But what does it take to cash in on this wave?

The home office, with its desk, bookshelf and whiteboard have been around for many years. But say you live on a quasi-residential road and both your neighbours are commercial concerns. Should you follow suit and kit out your home with office furniture, an ADSL or fibre connection and hire an agent to find you a commercial tenant?

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One of the many converted properties on 6th Street in Parkhurst, Johannesburg.

Not if you’re not prepared to fork out a small fortune, according to Dave Jones, KZN regional relationship manager at Seeff.

He says that while commercial rentals outperform residential by at least double, the onus of responsibility falls squarely on the property owner to ensure all the approvals at council are sorted – a time-consuming exercise – and office infrastructure is in place if you intend to moonlight as a commercial landlord.

“For a property that was previously residential to be identified for commercial use the normal practice is that the property in question will still have to go through a rezoning application,” he says. “This means that for the usage zoning to change the prospective purchaser would have to produce a development plan which would cover aspects such as parking regulations, sufficient and hygienic sanitation, environmental matters and aspects such as entrance and exit to the property. These applications are costly and don’t take less than six months in most cases for them to be approved. A typical cost would be in the region of R50,000 to R75,000.”

Still, a dedicated landlord could quite easily recover this cost within six months. But before you can expect to begin receiving monthly rentals, you’ll first need to install office amenities such as drywalls, air-cons, and internet and telephone infrastructure – and this will need to be maintained.

“The biggest issues are security, parking, work inefficiencies and lack of suitable infrastructure for the staff to do lunchtime shopping or to pop out and get some needed items like stationary,” says Neville Berkowitz, property economist and adviser to HomeBid. “Depending on the conversion of the property, I have witnessed inefficiencies as the workflow is not smooth as people upstairs need people downstairs and they wear a hole in the floorboards. One company I visited had staff outside in the previous domestic quarters and the rest of the staff in previous bedrooms and living areas. The need for high-speed internet access, telecoms and other electrical requirements are not conducive to residential areas as the suburbs were not designed for these levels of efficiencies.”

Jason Gregoriades, a member of the Rawson Property Group’s Commercial Business Development Team, says the pros and cons of running a business from a residential district are very subjective and depend entirely on the nature of the enterprise and its operational and physical requirements.

“Renting a business-zoned property in a residential neighbourhood will cost far less than renting an equivalent space in a purely commercial area,” he says. “This is often the primary motivator for running a business in a residential area.”

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A decor shop in the retail district of Parkhurst.

The decision of moving to converted office space in residential areas is usually done for reasons of reducing costs and improving visibility of the business’s image in the market, says Berkowitz, noting the real cost of inefficiencies and reduced profitability is not usually measured and costed. “Only the rental cost is used for comparison purposes,” he says. “The potential of theft and safety of personnel is also a factor seldom considered. Parking and the need to go outside and play ‘musical cars’ is also disruptive to the work efficiencies of the business.”

Gregoriades agrees, saying inadequate parking facilities are an everyday reality of working in a residential neighbourhood.

“Parking issues can have a knock-on effect on the image of your business,” he says. “Neighbours don’t take long to get annoyed by increased traffic, road congestion, and blocked driveways, and that can create a very negative image of your business in their minds which can easily spread to friends and relatives.”

Security should be another concern for landlords and their tenants as properties in residential areas don’t normally have onsite guarding services.

“Some neighbourhoods will require more security than others,” says Gregoriades. “But it’s not something you should neglect – offices can be seen as ‘soft targets’ by criminals who know that the premises will be empty after hours.”

In today’s internet-based economy, the potential theft of computer software and hardware could cripple a business overnight, especially if the physical backups are also stolen as is often the case. “Thieves know that the residential-based businesses have computers and many of these premises can’t afford a full-time guard or even at night as this will add between R10,000 to R20,000 per month in additional security costs,” says Berkowitz. “Thieves often access these premises by lifting up the roof tiles and exit the same way.”

For those who happen to own residential property in nodes where there is commercial activity, which is best: to let or to sell? This depends on your financial situation, according to Chris Hajec, commercial sales manager for Seeff Randburg.

“Commercial property is a lovely investment to hold and maintain as a landlord,” he says. “You generally receive a higher rent with tenants who stay longer and pay more of the expenses associated with the property. Many smaller landlords swear by and prefer commercial rentals. However, if you are in need of raising capital and do not have the time and expertise to manage, or the cash flow to hire a managing agent, selling a commercial property can afford you an excellent return on your initial investment. Particularly if you purchased the property when it was still designated as a residential property.”

If you opt to sell, consider the tax implications first.

“There are tax implications involved for residential owners who decide to change their usage rights of their primary residence and convert it to commercial usage,” says Berkowitz. “The sale of such a converted property within three years will attract full tax implications, whereas selling your long-held residential property will only attract capital gains tax at a much lower tax rate.”

So, is it a wise move for residential owners or not?

Cavan Sheahan, corporate sales manager at HomeBid, says it all depends on the supply and demand for offices in the area.

“Use a rental agent specialising in rentals for the business market as I believe properties like this could be easily rented out at a realistic and profitable monthly amount,” he says. “Once the office conversion is done and you have the correct rights and infrastructure, this would more than likely add value to your property, barring it is in the correct area of demand. This could prove to be a good investment in time when an opportunity presents itself to sell.”

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The smaller homes along 6th Street in Parkhurst lend themselves to commercial tenants.


 

 

Why this happened in Jo’burg

Suburbs in Johannesburg which are particularly prone to this phenomenon are those which are more established and criss-crossed by the major arterial thoroughfares running through the city. They did not have or have very limited areas specifically designated for commercial needs. This is particularly true as the City of Johannesburg has grown and diffused from the central business district. The old paradigm of residential suburbs with limited commercial hubs radiating from the CBD, a CBD where people would go to do most of their shopping and business needs has transformed into the city we have today, where the old model is impractical.

Hillcrest’s changing face

In KZN a suburb that has been most affected by this practice is Hillcrest in the Upper Highway area. This area between 2003 and 2007 experienced a huge increase in the number of new units being built, primarily in gated estates and this large increase in the population saw the need to substantially change the previously country-like main road into a four-lane carriageway. This meant that most of the houses immediately adjacent to the now extremely busy roadway had lost their residential appeal. In addition, the increase in population meant that there was a social need to provide office accommodation so that people could live and work in the same area. This change in property usage has seen the erection of a number of office blocks, at least four shopping centres and a private hospital. As the urban development copes with the increased population, the social needs of this population are taken into account by changing the town planning scheme that governs property usage.

Cape Town permissions

The city of Cape Town allows temporary departure for use of “soft” commercial activities, for example offices or consultation rooms. It is usually for five years and can be extended again, unless there are objections from neighbours. If this happens, a rezoning application from residential to commercial will be required.

 

SA’s soft commercial corridors

  • Johannesburg: Parkhurst, Greenside, Emmarentia, Cresta, Northcliff, “The Parks”, Dunkeld, Rosebank and Melville
  • Johannesburg South: Vorster Avenue in Glenanda, Amanda Avenue in Eastcliffe, Columbine Avenue in Mondeor, Boundary Road in Oakdene
  • Pretoria: Garsfontein adjacent to the new Menlyn Main development
  • Western Cape: Springbok Park, Arauna in Brackenfell and the Blaauwberg Road corridor
  • KwaZulu-Natal: Hillcrest in the Upper Highway area

 

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david.steynberg@gmail.com

David A Steynberg, managing editor and director of HomeTimes, has more than 10 years of experience as both a journalist and editor, having headed up Business Day’s HomeFront supplement, SAPOA’s range of four printed titles, digimags Asset in Africa and the South African Planning Institute’s official title, Planning Africa, as well as B2B titles, Building Africa and Water, Sewage & Effluent magazines. He began his career at Farmer’s Weekly magazine before moving on to People Magazine where he was awarded two Excellence Awards for Best Real Life feature as well as Writer of the Year runner-up. He is also a past fellow of the International Women’s Media Foundation.

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