MAIN IMAGE: Paul Haselau and Theo du Plessis, Team Leaders: Structured Lending, Nedbank Private Wealth
By Paul Haselau and Theo du Plessis
Despite the challenges the property sector has experienced over the past number of years, investing in property remains a compelling proposition for many investors – with good reason. While the various corners of the South African property market behave in unique ways and react differently to market forces, on the whole the market has served most of those who have invested in it very well.
The recent volatility seen in property sectors in response to Covid-19 is evidence of these different moving parts that make up the property market. But while there are specific considerations that must be made, depending on the sector in which you wish to invest, there are also a few universal truths about the South African economy, and the property market as a whole, that should inform any property investment decision.
For one, while the South African economy finally appears to be on a relatively firm, albeit gradual, recovery trajectory, there are also local and domestic market-moving components that are very much in play. The most obvious of these for property stakeholders is undoubtedly rising interest rates. The recent spate of rate hikes implemented by the South African Reserve Bank in response to climbing inflation has understandably generated nervousness among property investors. It is important to consider, however, that short-term rates in this country are still relatively low. Granted, they may not be as low as they were this time last year, but when you compare them to the 25%-plus of the late nineties, we certainly can’t claim to be in a very-high-interest-rate environment right now.
Of course, whether we eventually do find ourselves facing those interest rate extremes remains to be seen (unlikely as it is), so any property purchase or investment decision made today should include a careful consideration of the likely rate trajectory in coming years. More importantly, it should also be made based on a comprehensive contingency or mitigation plan if rates continue to rise later in the year.
While interest rates are top of mind for most current and prospective property investors, it is worth remembering that there is much more to consider than just interest rates when making sound and secure property investment decisions.
Trends
The shifts in working trends are another key influence on property trends and values, both commercial and residential. During Covid-19 there was a widespread belief that the office had gone the way of the dinosaurs. Today, it seems that belief was somewhat misguided. Both employers and employees are realising that physical interaction is essential for business success and employees’ mental well-being. The resultant hybrid workplace is causing businesses to locate smaller offices closer to where people live, while skyrocketing petrol prices are prompting many employees to move closer to the workspaces they occasionally need to visit. This trend is translating to increasing tenant demand for smaller, well-priced and well-located commercial spaces, with shorter lease periods, lower overall tenancy costs, good municipal service delivery and, possibly most importantly, reliable backup energy supply. Properties that tick all these boxes will almost certainly find themselves in increasing demand going forward.
For investors who are less interested in owning physical properties, listed properties remain a viable option. But there a few things to consider here as well. The most important of these is to ensure that you fully understand the sectors in which your target investment fund is involved, so that you can assess, and hopefully predict, future market influences on your investment. Making good sector choices is also imperative, and all the considerations that apply to physical-property investment also apply here. Finally, due consideration of the sustainable-development commitments of a fund and its underlying investments is non-negotiable. Environmental, social and governance (ESG) commitments are fast becoming the most important success drivers for any fund or business. It’s best to prioritise them in your property investment choices now.
The question that remains is: Where is the best place to invest? The answer is neither straightforward nor the same for any two prospective property investors, as individual preferences, objectives, and risk-and-reward requirements will always be factors.
The most prudent approach in such uncertain times is to seek out opportunities in sectors where these market and economic factors are likely to have the least impact in the coming years. The logistics industry is certainly one such sector, as its resilience has demonstrated throughout the Covid-19 pandemic.
Student accommodation is another sector with good potential. While it did succumb to the effects of Covid-19 due to students being barred from campuses, most students are now returning and demand is unlikely to abate going forward given that the majority of South Africa’s students live far from where they study.
There are also a number of emerging property growth sectors that are worth considering. Healthcare is a case in point, and we can expect governments to invest heavily in this sector going forward to bolster its capacity to deal with any possible future health crises.
Finally, there’s the residential market, where the proverbial wheel is once again turning. Very low interest rates in 2020 and 2021 prompted a move from renting to buying. But as interest rates rise, affordability levels drop, causing investment in buy-to-rent residences to become a viable option again.
One of the most important considerations to bear in mind when investing in property is that it involves much more than just putting your money into a brick-and-mortar structure or a fund that invests in buildings. It’s about the people involved in or linked to those buildings. People will always need places to live, work, shop, socialise and run their businesses. So, ensuring that you understand the relationships that those people have with the properties they use is the key to making good property investment decisions.
