The financing of corporate real estate acquisition, a South African study

Abstract

The purpose of this study is to fill specific gaps in the existing body of knowledge of South African corporate real estate management by investigating the determinants influencing the lease versus buy decision; the methods and financing sources of corporate real estate acquisition; and the criteria used in deciding on the financing technique for corporate real estate acquisition.

The research followed a similar methodology to that of Redman and Tanner (1991) in their study “The Financing of Corporate Real Estate: A Survey”. However, it specifically focused on the South African corporate real estate environment. The data collection instrument was an online survey and the survey produced quantitative descriptions of certain aspects of the population. The population for the research was corporate real estate decision makers of leading South African companies. The data captured was presented through the aid of tables, charts and graphs. The data was further analysed through cross tabulations and hypothesis testing using the Chi Squared test of independence to determine significance of results.

South African firms use some form of leasing (mainly long term leasing) in acquiring their corporate real estate. However, ownership is also a common form of real estate acquisition through the use of mortgages secured by the acquired property, mortgage backed securities and sale of unsecured bonds. The decision criteria for acquisition includes both financial and non-financial determinants. Financial analysis is also an important factor in analysing the lease versus buy decision. This is mainly done by comparing the undiscounted cash flow of leasing versus buying. Where a discounting approach of evaluation is used, the most favoured discount rates include the weighted average cost of capital and rate of return on new investments. Mostly outscored professional services are used when making the lease versus buy decision.

The benefit of this study was to understand the factors influencing the corporate real estate decision making process and to provide a corporate real estate decision makers with a decisional framework when determining the form or real estate tenure. Future studies should attempt to secure better response rate to allow for robustness of results and other methodologies of analysis.