Weighing in on property as investment
The second semester has just started with another fuel price hike predicted in August and economic conditions in general appear set to remain sparse for the remainder of 2018. While remaining hopeful that things can improve, Samuel Seeff, chairman of the Seeff Property Group, weighs in on how to advise people about making the right property investment best suited to their needs.
Data surveys of the first semester indicate activity in the property market didn’t pick up as expected after the upsurge in optimism following the election of president Cyril Ramaphosa.
Seeff explains why: “Given the political and economic landscape evident in the country over the last few years, the credit downgrades, concerns about land ownerships, rising government debt and poor policy decision-making and governance, the downward economic pressure was always going to bear on the property market.
“Any property market is a direct factor of the economy, and for a good property market, you need a good economy and hence we are seeing a market in decline.
“Disappointingly, the Ramaphoria-effect has waned fast and it is has not had the desired effect on the economy and property market. The anticipated economic and property market uptick seems to be taking much longer than what we have hoped. So, where we were looking for a more improved market performance as the year progresses, the data and our agents’ experience is that the market is struggling, although the Johannesburg/Pretoria market is better off compared to Cape Town.”
Seeff says sellers need to keep in mind there is no room for overpricing if they hope to sell. Buyers need to be careful not to overpay, do their homework and not get caught up in the hype. Investors must be especially careful about where and what they are investing in and how much they pay.
“There can be no better investment than the roof over your head and while investing in your own home is not so much about returns on your investment, it is nonetheless a significant financial commitment with life-long consequences and you should always keep the basic principles of investing in property in mind, viz: a well-researched location where property keep their value and appreciate in value, not paying more than fair value and maintaining your asset in tip top shape,” he advises.
Important for investors
Seeff says South African property has historically proven to be an excellent investment provided that the buyer keeps to the basic principles of investing in property. This includes the following:
Location– be sure to research the location and property type – see below for some suggestions.
Financial security – a second property comes with additional financial commitments and the buyer should be financially secure enough to weather any economic downturn. This is important because the second home market tends to be affected first when the economy and property market takes a downturn. Owning a second home that one is unable to offload can be a notable financial burden during such a time.
Cash investment – given the cyclical nature of the property market and risk posed by the weak economic and political landscape, it is important for the buyer to invest some cash into his/her property to create a financial buffer, this would include a deposit.
Active vs passive investment – property is not a passive investment, but one that requires involvement, management, maintenance and so on. Importantly, it requires an ongoing budget to take care of the monthly utility costs, security and keeping the property clean and well-maintained.
Holding period – property is not a short-, but a long-term investment and typically requires a holding period of at least 5-7 years before it really starts accumulating value, but always subject to the macro-economic and property market performance over this time. Not all areas achieve the same rates of appreciation either, so a high demand area such as the Atlantic Seaboard might have seen property values double (100% growth) over the 5-year period between 2012-2017, while the False Bay coast only recorded average growth over the same period of around 30% for example.
Bricks and mortar vs property funds – for many investors, especially those looking purely for investment returns, property funds are a far better option than bricks and mortar. Investing in bricks and mortar also involve significant transaction costs and while the first R900,000 of the purchase price might be exempt from transfer duty, there is still the attorneys’ fees and so on that needs to be paid.
Investing in a second property:
There are various options to consider when a client wants to invest in a second property as an investment. Here are some suggestions:
Middle-income rental market – if they are looking for a rental investment, it is best to look at where the highest demand is, which is usually in the middle-income areas, close to transport networks and other amenities.
Two-bedroomed flats and security complexes are some of the best investments in these areas as they tend to always be in demand.
Price range – it is important to investigate the high demand price ranges as they are likely to achieve a better return on their investment by investing in more affordable property price ranges. This tends to be the R5,000-R9,000 per month price range.
Schools – close to schools is always in demand, but again, take care in terms of the price ranges as the more expensive the property, the lower their rental yield is likely to be.
Risk vs reward – bear in mind that while the middle-income areas tend to be best for rental investments, this sector of the market is also more affected by economic fluctuation and hence always pose a financial risk in terms of selecting good calibre tenants, timeous payment of rents, looking after the property and so on.
Legislative challenges – the rental market is now highly regulated which means that it has become difficult to evict tenants and various processes need to be followed. This adds further to the risk.
Student market – Student housing is another option for investors but is also one where investors need to take great care. Be sure to check out the type of accommodation that is in high demand Seeff says their agents, for example, point out that 2-bed flats in secure complexes with parking which are close to hangouts and amenities tend to the be most in demand because these allow for sharing.
The location is important as housing should offer a great degree of convenience, i.e. it should be on what is considered the so-called ‘academic belt’ – e.g. within or close to Stellenbosch for Stellenbosch, in Cape Town’s southern suburbs close to UCT or Zonnebloem in the CBD close to CPUT, Mellville/Auckland Park in Johannesburg close to Wits University and so on.
Student accommodation is also a high-risk investment and requires careful vetting and ongoing management to ensure that the property is well looked after.
Airbnb/short-term rentals – While Airbnb and the short-term rental market is the trend of the day, it is vital to research the area and type of properties in demand before investing.
The hype around Airbnb has seen a flurry of new property listings and many areas are reporting an oversupply of stock while certain areas such as Cape Town for example has also seen a decline in holiday visitors due to the water crisis.
The Airbnb/short-term market is also highly cyclical which means that while higher rental returns can be earned that must be balanced with the low season periods when the property is likely to be vacant.
Many investors are taking a balanced approach, where they use their property for Airbnb over the high summer season and then for long-term residential letting during the rest of the year
Holiday flat/house – Holiday properties tend to be less of an investment for investment returns, but more about investing in a place where the investor and his/her family can enjoy many years of holiday. While there is always the opportunity to earn some rental income on a coastal home, it is subject to seasonality and holiday demand. Many areas are always well-stocked, so people thinking going to invest in a holiday home with the view to earning some rental income, must first do their homework. Holiday letting also requires a lot of admin which need to be weighed against the returns that will be earned.
Retirement property – Retirement property too is seldom about investment returns, but more about securing a comfortable retirement. It is important to investigate the retirement scheme and just what is on offer. If the person is looking to invest with the view to securing a comfortable environment for his/her ‘golden years’, it is important to weigh up a number of actors including:
Location – they will want to be close to family and friends
Amenities and leisure – they will want to be in a complex that offers amenities to ensure that they can enjoy their life to the fullest. Aside from aspects such as servicing the units, provision of meals and others, leisure facilities should also be investigated.
Medical facilities – close proximity to good medical services will be an important consideration.
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