The Argument against Buy-To-Let Property

Many investors approaching retirement still consider buying one or two residential rental units as an additional, sometimes primary, source of income. The basis for this decision is often an emotional one, rather than a mathematical one.

No matter how hard you try to convince investors about the foolish nature of such an act, the more determined they are to become buy-to-let (BLT) landlords during their retirement. Any advice to the contrary is viewed with supreme suspicion.

More than 20 years ago I found myself embroiled in a fairly heated debate on Radio 702 where I used to host the programme Financially Speaking, an investments call-in show. I commented on the dangers about buying flats in Hillbrow and Berea, two now notorious suburbs in Johannesburg, as an investment to fund a retirement. This was in response to a question on whether such an investment was recommended.

I expressed the view that the issue of demographic change in these, and other suburbs, could not be ignored, considering the long-term nature of such an investment as well as the illiquid nature thereof.

Boy, did that cause a firestorm on the airwaves and I was accused of being all kind of things, including being stupid, ignorant and a racist.

Twenty year on, I doubt if any of those investors - urged on by those advocating the “revival of the city centre”- have been happy with their investments since then.

In fact, property values in these areas have probably dropped by anything up to 90% - assuming buyers could be found, as there is no real formal market to speak of. The banks have long ago stopped providing finance to many similar areas – following the principle of “redlining” - and any transacting is more likely to be on cash basis.

It’s very hard to find statistics for red-lined areas in SA, but I base my conclusion on the very large number of properties sold at sales in execution at sheriff’s auctions.

Sheriff auctions

In the old days you had to scour the classified pages of newspapers to find the minutely printed “Sales in Execution”- notices. That’s what the law required - one advertisement to alert potential creditors that your house is being sold without a reserve price.

For sharp-eyed property speculators, going to these auctions that took place outside the magistrate’s offices used to be a fairly lucrative activity. I myself partook in many such auctions, often buying at well-below market value and then selling before the transfer took place.

But alas, that loophole has long since been closed down by Sars and for the last fifteen years or so you have had to take transfer of any property before it could be on-sold.

The world of sheriff auctions has also come a long way; there’s now a website, with subscribers alerted to auctions in any part of SA well in advance. With the help of Google Maps you can have a thorough look at all properties going on auction.

However, you still have trouble getting into a house or property that you fancy, with the sheriffs not usually in a position to help and you buy the property voetstoots, with no guarantees regarding its state. Normally the attorneys acting for the creditor bank demand full payment of the purchase price within 30 days. Once you’ve paid your 15%deposit at these auctions you must come up with rest fairly quickly.

The website reveals that thousands of repossessed properties are being sold every month at sheriff auctions across SA - a great deal of them in Hillbrow, Berea, Sunnyside in Pretoria and other areas which have experienced demographic implosion over the last 20 years or so.

I often attend these auctions in the hope of finding bargains in other areas, and as such can say that repossessed properties in these areas are virtually worthless. Speculators are buying them up at a fraction of the outstanding bond values—those with bonds on them—and usually simply pay the arrear rates and taxes and take on the responsibility of getting tenants or owners out of the building.

BTL drawbacks

Anyone who built a retirement plan on a couple of rented properties in certain areas 20 or even ten years ago must now be financially devastated. Both their capital and income are declining but they are still obliged to pay rates and taxes and in some cases maintenance of the property.

Therefore any inducement to enter the BTL market in the local context needs to take several issues into consideration. Do not be convinced that BTL is such an easy road to riches in your retirement.

The drawbacks include:

1. Lack of liquidity. You own a specific property in a specific part of a town/city and you have no idea what the area would look like in ten, 15 or 20 years’ time. You cannot sell half, or a tenth of the property in case of emergency. You either sell the whole property or you don’t.

2. The entry and exit costs to property are very high. These include transfer fees when you buy, estate agents’ commission when you sell and maintenance, electricity and water costs in between if your tenant doesn’t pay. Everyone is making money off your capital and you are left with all the problems.

3. No diversification. Your property is in one particular area which increases your risk.

4. Non-paying tenants. It takes six to nine months via an expensive court process to have them evicted; even then your property owner rights are severally curtailed.

5. Demographic changes over which you have no control. Many smaller, formerly prosperous towns in the SA platteland, have literally become ghost towns as a result of many factors including the decline of the mining industry, shrinking rate-paying populations and younger people moving to the larger cities.

6. Dysfunctional municipalities. The role of effective municipal management as an underpin to your property values can never be over-estimated. I rate this factor as most probably the single-largest threat to long-term property values in SA. As towns and cities implode you can be certain that your property values are imploding alongside.

7. The property marketing industry in SA is very effective and incredibly powerful. Many newspapers are wholly dependent on advertising by estate agents. You will battle to find any negative news on the residential property market in these publications. In a previous career I was the editor of a financial supplement in one of these papers. It was a fireable offence to write anything negative about estate agents. To this day nothing has changed and you won’t see anything that could jeopardise the mountain of advertising by the property industry.

8. Low returns. I often calculate the net returns of rental properties for clients, and am not surprised when the returns are well below 4% per annum, when all the costs and unforeseen expenses are included. This only leaves potential capital growth to make up for this poor investment.

My advice to investors is to approach any potential property investment - especially in the rapidly changing local market - with a great deal of circumspection. Be especially aware of claims that ‘in the long run property is a great investment’, or ‘God doesn’t create any more land’. These kinds of statements all play on the ignorance of naïve investors. Don’t be one of them.

http://www.moneyweb.co.za/moneyweb-property/why-buyingtolet-in-retirement-is-a-bad-idea

SA property value still excites expats

South Africa is among the top 20 most popular destinations in the world for expatriates, and one of the main reasons is because SA real estate still offers really excellent value for money, despite sharp house price declines in other countries over the past few years.

According to the latest Expat Explorer survey by international bank HSBC, South Africa ranks 14^th out of 100 countries included, in terms of the economic benefits it offers expats and their overall experience of life in SA.

And from our own experience we can confirm that foreign immigrants to SA and those who are posted here to work on contract for a few years are generally excited by how much real estate their money can buy here in comparison to other popular expat destinations around the world.

For example, even in the US, which was ranked 11^th in popularity among expats as against SA’s 14^th placing, the average home price at the moment is around US$170 000 - or about R1,4m at current exchange rates, while SA’s current average, according to Absa, is about R1,1m.

In the UK (ranked 27th), the average house price is currently the equivalent of about R2m and in the most popular European countries such as Germany (ranked 28), France (29), Italy (30) and the Netherlands (31), prices for average properties range between about R40 000/sqm to about R146 000/sqm, compared with the average of R28 000/sqm for a medium-size home in SA.

In the other BRICS countries – all of which were ranked well below SA in the HSBC survey – property prices currently range from around R24 000/sqm in Brazil to R109 000/sqm in Russia, according to the latest information available from the Global Property Guide, www.globalpropertyguide.com.

As for Thailand, which was ranked as the number one choice of destination by the respondents to this year’s HSBC survey, the average home cost is currently actually the same as in SA at around R28 000/sqm.

But the housing market in the country is still very underdeveloped and there are huge discrepancies between the various areas. A small three-bedroom townhouse in the coastal resort of Pattaya would cost the equivalent of about R560 000 at current exchange rates, for example, and a modest three-bedroom, two-bathroom home on the popular retirement island of Phuket would cost the equivalent of about R800 000, which compares favourably with SA.

However in the main cities of Bangkok or Chiang Mai, where most working expatriates would need to be based, it would cost anywhere between about R1,6m and R2,8m to buy a three-bedroom flat big enough for a family.

*Lew Geffen is the chairman of Sotheby’s International Realty in SA.

Invest In Property - Know The Rules

Booms do not last forever, and neither do recessions, says Rawson Properties Group MD, Tony Clarke.

In a series of 'Investment Advice' evenings in Stellenbosch, Clarke says that the question he is most asked is; 'when will there be a recovery'? He says a precise prediction is not available and granted, this is the worst and longest running SA property downturn since 1976 however, a recovery will happen.

Those buying now, said Clarke, will benefit from the fact that interest rates are likely to stay low for awhile, with a possibility of a 100 to 150 base point rise, but they need a longer term view. This, he said, means that they must be prepared to hold onto what they buy now until 2020. They must, he said, see themselves as investors rather than speculators, and they must avoid two of the most common errors in property buying: valuing the property inaccurately, and buying properties purely for their long term capital gain rather than for their rental potential.

Rule number one is to invest in properties where you can earn rental income all year.

"If you buy land, especially undeveloped land, your children may benefit one day, but you are unlikely to do so. Similarly, if you buy homes in 'out of the way' areas like holiday resorts, the return on your investment will almost certainly be unsatisfactory." Ideally, said Clarke, the property investor uses the bank's money to finance a large portion of the property purchase and the income from the tenant to repay the bond. "Even in today's conditions rents do rise, making property for many people the most worthwhile – and most easily comprehended – asset class."

Clarke advised investors going this route to appoint a really competent rental agent, to take out rental insurance and to shop around for the least expensive bond finance. They should also, he said, be aware of their own cash flow constraints and all the expenses that a property can give rise to.

Amateur investors have all too often been caught by high repair costs. Clarke also advised splitting the monthly bond repayments into fortnightly repayments. This, he said, will ensure one extra payment and a large reduction in interest payable over the term of the loan, without paying any more than the stipulated amount. This will reduce the term of the loan to approximately 12 rather than 20 years. On a bond of R220 000, for example, taken out at a 19% interest rate, will reduce the interest paid out from R635 735 to R327 307, a saving of R308 428. Clarke was given a warmly grateful response by the audience, several of whom said that this was the first talk that had explained the logic of property investment in a way that all could understand.

The Wealthy still favours property

High Net Worth Individuals globally still place property at the top of their investments lists, on average 35 percent of their assets.

The 4.4ha smallholding Piedmont wine farm situated at the foot of the Helderberg Mountain between Stellenbosch and Somerset West. Asking price R25 million.
According to the Knight Frank Wealth Report 2011, property remains close to HNWI with property accounting for 35 percent of their investment portfolios.

The report suggests that the only thing these wealthy individuals would rather put their money into besides property is their own businesses.

In South Africa, HNWI at the moment are holding back from investing in almost all kinds of assets including property, said Lanice Steward, managing director of Knight Frank’s South African associate, Anne Porter Properties.

“The favoured channels for investment are gold, commodities (especially coal, steel and platinum),” said Steward.

She said there is a trend among shrewd investors to build up their portfolios by buying repossessed properties. These properties often sell at 30 percent to 40 percent below their previous values hence the boom in the auction property market.

“SA investors should therefore follow the HNWI as stated in the report and keep significant chunk of assets in property.”

Steward explained that the report indicates a growing conservatism and risk-aversion among HNWI investors. They favour already successful property investments rather than trying riskier or unproven areas.

“South African equities are attracting good capital inflows because the returns are above average when compared to those of the world and can be quickly disposed of if the market sentiment changes.”

She said they remain confident that the appeal of property investments in locations such as Constantia and Stellenbosch in the Cape and Kloof in Kwa-Zulu Natal will continue to attract foreign buyers.

Asked about the future of residential property in South Africa, Steward said the first signs of market recovery are now evident. However, this will take time and they expect a slow improvement throughout 2012 with a return to normal trading conditions by mid-2013.

Wealthy individuals have a knack for lifestyle living. They like to buy vineyards where they can not only produce wines but enjoy a unique residential appeal to suit their status.

This wine farm located at the top of the Helshootge Pass is selling for R38 million.
Steward shares the sentiment adding that previously, four big wine estates in Stellenbosch were acquired by foreign investors. The prospects of secure residential developments on wine and olive estates still appear to be reasonable with slow but steady sales, she said.

“SA vineyards currently have an average price of US$80 000 per hectare,” said Steward.

Estate agents operating in Stellenbosch say wine estates are in demand thanks to the region’s fertile soil and renowned wines.

Pam Golding Properties (PGP) area manager Louise Varga said the wine industry has helped to create some of the most spectacular real estate in Stellenbosch.

“The cost of wine farms depend on location, the size of the farm and scale of the wine making operation,” said Varga.

As an example, she said a large scale farm of about 100ha with a state-of-the-art, high volume cellar can cost approximately R30 million. A small holding of under 5ha might also sell close to the same price.

“Pricing depends on the wine label prominence, the size of export contracts, the quality of water supply in the farm and adds-on such as a restaurant, wedding venue, conference centre and guesthouse elements.”

PGP has on its book a 49ha boutique winery on the Old Paarl Road in Stellenbosch with an established vineyard and orchards. The asking price is R23 million with features such as a restaurant, wedding venue, a small conference facility catering for up to 16 people, a deli and art gallery.

Buyers can also choose from a variety of stock in the Boland and Overberg regions with prices ranging between R4.85 million and R7.8 million for 4.5ha. Investors enjoy the lifestyle of a working farm contained within the safety and convenience of a secure estate.

Located on the Old Paarl and Kraaifontein in Stellenbosch, this wine farm is selling for R23 million.
The Knight Frank report shows demand for vineyards has gathered pace in the past five years. Wealthy vineyard owners fall into two groups – the majority of buyers looking for a holiday house with a few hectares of vines and those who want to produce wine on a larger scale.

The overall prices of vineyards will be affected by commercial vineyard land values in line with bulk wine prices. Furthermore, the report states that although areas producing the best quality wines experience less volatility, bulk wine prices moves are likely to affect the property value of boutique wineries.

According to the Knight Frank Vineyard Index, the Western Cape region in SA is ranked as a developed property market with good buildings, possibly Cape Dutch-style. A 20 to 30 ha of vineyards is valued at US$82 00/ha.

The priciest in the index being Bordeaux and the Dordogne France, classic chateau style featuring six bedrooms , 2 to 20ha priced at US$642 000/ha. – Denise Mhlanga

United Kingdom - The Land of Fish and Chips

United Kingdom – The Land of Fish and Chips

Fast Facts

· 2nd Biggest Economy in Europe
· No restrictions on foreign ownership when buying property.
· Capital: London
· Population: 60 million
· Currency: British Pound (£)

Economic Overview

‘Oi !!.......you there, Wha’ fish you wan wiff them chips, then? I aint sellin’ no chips with no fish, innit’…..

And thus our adventure with the United Kingdom and all its peculiarities get off to a good start. But apart from the adventure, experience and ‘Greener Pastures Syndrome’, what makes this mud island one of the best places, to start your property empire?

The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK), is a sovereign island country located off the north western coast of continental Europe. The UK is a union of four constituent countries & is governed by a parliamentary system with its seat of government in London, & is a constitutional monarchy with Queen Elizabeth II as the head of state.

The UK is the fifth largest economy in the world & is one of the world's most globalised countries with London being the major financial centre of the world, in front of New York City, Hong Kong and Singapore.

In 2008, a flat in central London sold for £115m, which is believed to be the most expensive apartment the world. (Crazy money if you ask me!) That aside, UK house prices are slowing down & the long-lasting property boom seems over. UK house prices fell by 2.5% in March 2008 which is also the biggest monthly decline since September 1992. To show you what this means in the big scheme of things, have a look at the graph:

As you can see, the house price boom which started in early 1997 has now returned to those levels, and the current future sentiment is anyone’s guess. Mortgage lenders have greatly reduced the amount of loans they are prepared to make & it was recorded that lending to first-time buyers was at its lowest since early 1975.

100% mortgage loans are now no longer offered & borrowers looking for new mortgages are being thrown into complete chaos, as deals they have agreed with their broker, disappear from the market just hours before applications were to be signed. (This also happened to me !!)

So, with all these doom and gloom predictions, will we if ever, return to a hint of normalcy?

Property Market Review

The UK property market is currently in decline thanks largely to the phenomenon called the ‘Credit Crunch’? (Ever heard of it?)

Definition: A credit crunch is a sudden reduction in the general availability of loans, or a sudden increase in the cost of obtaining loans from commercial banks. So, why the ‘sudden reduction in giving out loans? Show us why in Graphs they cry !!

Have a look at the affordability of property prices by the above graph which is the ratio between house prices and earnings. House prices are now 7.0 times earnings in London, 5.7 times in the South West, 4.6 times in the Midlands, 4.5 times in Yorkshire and Humber, and 4.0 times in Scotland.

This means that UK house prices are currently more overvalued now than they have ever been !! (And if I was a bank, I’d also reduce funding until affordability returns to some vestige of normality)

So, what about the ‘upside’? …….(The UPSIDE??!! Are you kidding me??!!)

Apart from the doom-and-gloom scenario as discussed, there are still ‘pockets of light’. Rental incomes have increased at an average of 16.7% over the past year & London yields are showing a very healthy 5.7% .

A major contributor to this yield is immigration which is not only featured in London as many may think. Across the country, the average proportion of properties taken by immigrants is 20% as the UK continues to attract immigrants due to job opportunities (No, this isn’t only us Saffers !!) In addition, the economy remains strong with retail sales in the year to February rose by a stronger-than-expected 5.5 %.

Furthermore, UK house prices have been continually on the rise since 1995. From late 1995 to 2008, average UK house prices have risen from £50,930 to £179,363.This is an overwhelming 252% increase !!

Also, UK house-building has largely failed to respond to booming house prices for the past decade, largely because of building regulations. Increases in population, immigration, and a decrease in unemployment, have all added to the demand for housing as have changes in household sizes.

The Barker Review (HM Treasury), concluded that to reduce the trend in real price inflation to 1.8%, the rate of new home building would have to increase by around 70,000 homes per annum to around 195,000 per annum. Government figures show that homebuilding stagnated at 148,000 new units annually between 1989 and 2005.

In 2006, 180,000 new homes were built which is still low compared to 425,000 units in 1968……..

Conclusion

So forget the credit crunch, affordability & high interest rates, because as long as the UK can maintain its demand for a skilled worforce, the economy will march on unhindered through the storm.

Investment Opportunity - Johannesburg, South Africa

With the South African property market fast becoming a Buyer's Market, investors and potential homeowners should have a look at this wonderful New Build Property which is selling at a 35% Discount to the Market Rate:

The Property is within the secure Crescentwood Country Estate Midrand, Johannesburg:

• Cost: R1 650 000 ( Market value: R2 500 000) = equivalent £ 110 000 / € 150 000


• 'French Style' 3 bedroom, 2 bathroom (main bedroom is en-suite with walk-in Wardrobe)


• 'Provencal Gourmet' Styled Kitchen with entertainment lapa leading to pergola covered patio.


• Authentic French Styled shutters with under-floor heating throughout the property.


• Exquisite ' French Garden ' with computerized irrigation system & Swimming Pool.


• Water Feature at entrance and amenities within the Estate Club House.

Now that we have looked at the Facts, let's look at how the Numbers add up:
Mortgage (10% deposit - R165,000 to secure Property) = R 1 485 000
Mortgage Payment per month = R 16 697 (12.5% interest rate over 20 years)
Rental Potential (as ascertained by Estate Agent) = R12500 - R15 000
Let us assume an average of R13 750 as Rent per month (average of R12 500 & R15 000)
Therefore, Mortgage Payment subtract Rent = Shortfall per month.
R16 697 - R13 750 = R2 947 (equivalent £ 245 / € 290 per month) !!!
















At just R2 947 (£ 245 / € 290) shortfall per month (NOTE: At an Average Rental Assumption) we are looking at an Incredible Investment combined with unrivaled luxury of a 'French Townhouse'.

This Investment will expire at the beginning of December 2007 and therefore it is imperative that Investors inform us of their interest to buy, so that we can arrange a viewing.

If you have any queries or require more information, please let us know.