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.

How is buy-to-let property faring?

Growing rental returns are beginning to attract property investors to the buy-to-let market, which has shown very little growth of late.

High rental yields and low valuations begin to make the buy-to-let market viable once again.

Residential rental demand has been driven to some extent by homeowners selling due to financial pressures. And a survey of estate agents recently estimates that of those homeowners selling due to money problems, 51 percent will rent rather than buy a cheaper property.

Rental returns and interest rates are key factors moving the buy-to-let market. During the boom years, when new property developments blossomed and outstanding capital gains were to be made from off-plan projects, profit was the major force driving amateur speculators and professional investors alike.

During the boom property values spiralled upwards, one sale chasing another - by 2004 the proportion of persons buying to let peaked at around 25%. This proportion has currently fallen to about 7% of the residential market. However, sharp investors are seeing opportunities again as values have plummeted while bargain buys are widely available, including a large number of forced sales and bank repos.

High rental yields and low valuations begin to make the buy-to-let market viable once again. The imponderable is when interest rates will rise, either later this year or during the course of next year. Another issue is the threat to impose commercial municipal rates on secondary or income-producing residential homes. The suggestion (that’s all it is at present) comes from the national government, but it may come to nothing and could well be simply some official tossing a pebble into the pond.

Rental yields are critical, and the current signs are encouraging. According to the Stats SA quarterly survey, rental growth moved up from 6% year-on-year as at June 2010 to 8,3% in June 2011. More recently we have seen more noticeable growth in both townhouse and house rental yields. Good yields, however, are dominant in the central urban nodes, where business activity is strong. This also applies to the buy-to-let market. According to the latest Rode Report, flat rentals in Pretoria led the board in the first quarter with 6% year-on-year growth, followed by Cape Town (4%).

Investors stirring

According to the Stats SA quarterly survey, rental growth improved. Good news for buy-to-let investors, says the report, is that, after peaking at the end of 2009, flat vacancies have since been drifting downwards. This improvement in demand obviously bodes well for market rentals. The investor market can well do with a boost in confidence. Current surveys indicate that the percentage of buyers (as a factor of the total residential market) is in the region of 8% compared with the boom years when the buy-to-let market peaked at around 25%.

In Johannesburg rentals in the middle market have been exceptionally strong, with some pressure on the high end. Shaun Groves, PGP’s rental manager at its Gauteng head office, reports: “Quality stock remains a constant challenge as we let these units faster than we can find them. Some landlords, however, are demanding excessively high rentals which means they can sit on the market for a while.”

Groves adds that July was a record month for PGP rentals in Johannesburg’s northern suburbs, with 70% of this being new business. “We have experienced strong demand, especially below R25 000 a month. This has resulted in high turnover in Bryanston and Parkhurst especially. Demand is always high in Morningside and the immediate areas surrounding Sandton City. There has, however, been pressure at the high end of the market. Only ex-pats are willing to entertain asking rentals of R50 000 a month or more. Corporates have revised their budgets and reluctant to exceed R35 000.”

The buy-to-let market in general tends to be most active in flats and townhouses. There, says Groves, is demand for 1 and 3 bedroom units and a little less for 2 bedroom units.

In Cape Town, rental activity continued to improve (July on June) says PGP Rentals Division manager Dexter Leite. The agents concluded 128 lease transactions and 86 valuations in July. Examples are a house in Fresnaye let at R59 900 a month, a home in Constantia at R55 000 and two apartments at the V&A Waterfron at R32 500 and R30 000 monthly.

Some landlords are looking to rent their properties on a furnished basis, seeking higher rentals, says Leite, adding: “Unfortunately there is not much demand for furnished properties.”

One specific aspect of the buy-to-let market which appears to be growing in popularity is joint ownership, particularly useful when gearing is required. One can assemble a group of friends, or like-minded investors, form a partnership and pool resources. One advantage is that the group can normally generate a reasonable amount of cash, which used as a deposit makes getting a mortgage easier (the banks are quite happy with joint ownership agreements as long as they are properly drawn up).

For the first-time investor there are important factors to consider in selecting a property to let. Obviously rental income and a sound tenant are paramount, but Laurie Wener, PGP’s managing director for the Western Cape metro region cautions that there are other important factors in selecting an investment property.

“These include the suburb, the location, the value based on current market conditions and the general appeal and condition of the property. Get these elements right and the medium-to-long-term growth of your investment will be assured, regardless of the overriding market climate.”

Wener encourages investors not to turn a blind eye to investment opportunities in the current market. “For example, we are marketing a 106 sqm two bedroom, canal-facing apartment at the V&A Waterfront for R4,995 million.”

Article courtesy of Pam Golding Properties' Intellectual Property magazine.

London Property ‘in crisis’ as Foreigners buy Property

Britain will soon become a nation of tenants as huge deposits, high house prices and strict lending criteria combine to leave millions unable to climb onto the property ladder. Meanwhile foreign investors are buying up large chucks of London real estate as they seek a haven for their wealth amid the increasing risk of a global recession.

Britain’s housing market is “in crisis” as millions are forced to rent and the government must urgently act to increase the supply of homes, an alarming new report by Oxford Economics warned last month.

The housing study, commissioned by the National Housing Federation (NHF) warned that home ownership in England will fall over the next decade to the lowest since the mid-1980s as property ownership remains out of reach for many. It predicts that the proportion of people living in owner-occupied homes will decline from its 73 percent peak in 2001 to just 64 percent in 2021.

In London, it predicts that the majority of people will rent property, with home ownership in the capital falling to just 44 percent by 2021. That means around six out of every 10 Londoners will live in rented accommodation.

Meanwhile, the average house price looks set to rise by 21.3 percent over the next five years. The group, which represents housing associations in England, says a chronic shortage of housing is to blame. Only 105 000 homes were built in England in 2010/11, the lowest level since the 1920s.

“Home ownership is increasingly becoming the preserve of the wealthy and, in parts of the country like London, the very wealthy,” says NHF chief executive David Orr.

Adding even more upward price pressure is the fact that wealthy foreign buyers have flocked to London in record numbers, buying up large chunks of property in the city’s most desirable neighbourhoods. The number of international buyers viewing prime central London properties increased by 23 percent in the three months through July, as the increasing risk of a global recession prompted investors to seek a haven for their wealth.

“We’ve had the US debt crisis, the eurozone debt crisis and financial market turmoil but none of these issues have touched London’s property market,” says Mike Smuts, managing director of Smuts & Taylor, a South African investment firm that specialises in helping rich South Africans buy property in London.

Smuts, who first predicted in February 2010 that Britain was fast becoming a nation of tenants, says that although Russian, Chinese, Indian and buyers from the Middle East account for most of the foreign purchases of London properties, wealthy South Africans have also been very active.

“Since the Reserve Bank relaxed exchange controls last October we have seen a large influx of clients who are looking for safe-haven investments amid the financial market turmoil and the alarming calls locally for nationalisation and the redistribution of land without compensation,” he says. “London property is fast becoming the ‘Swiss bank account’ of the 21st century.”

Investor Guide to investing in African Real Estate

Property investors believe Africa’s real estate industry offers unprecedented investment opportunities and is poised for growth going forward.

Accra Mall in Accra Ghana was completed in 2007. This mall was developed by Actis and is managed by Broll.

At the inaugural Africa Property Investment Summit held this week at Sandton Sun hotel in Sandton, property professionals shared expertise and experiences on property investment in Africa.

Hosted by Liberty Properties, one of South Africa’s top commercial real estate businesses and owners of the iconic Sandton City Shopping Centre, the summit was aimed at providing a platform for African real estate professionals to discuss investment opportunities and share experiences and challenges on how to invest in the African real estate markets.

Samuel Ogbu, Liberty Properties chief executive officer, says there is every reason to invest into the African real estate markets. There is improved governance, political stability, securitisation and maturing capital markets of all, which are driven by a population of over one billion consumers who demand attention, he says.

“Africa today is about progress and potential and the key is in knowing how to unlock the opportunities in the African property market for superior returns”, he says.

Africa’s real estate industry is reportedly booming with the retail sector set to drive demand and growth in many parts of Africa’s real estate markets, says Brett Abrahamse, business development manager at Liberty Properties.

“There is a growing appetite for retail and mixed-use developments in the continent,” he says.

He explains that Africa with 53 countries as recognised by the United Nations and with the addition of South Sudan in 2011, Africa is poised for growth in the real estate industry. There is an increased awareness of property investments throughout the continent.

“If you buy the African story then you have to buy the real estate story,” says Abrahamse.

Asked about what makes Africa a lucrative property investment destination, he says there are a few reasons which include shortage of quality property stock, high construction and professional costs, lack of infrastructure, increased demand which is driven by urbanisation, many property development projects are profitable from day one, private equity firms are eager to exit mature assets to dive into new developments with their capital, and lack of finance although this improving.

Savvy property investors and buyers are seeing good returns on property investments in other parts of Africa, he says. According to the World Urbanisation research, Africa’s urban centres are currently growing at an annual rate that is the fastest compared to other regions.

In Lusaka Zambia, Liberty Properties is developing the first fully enclosed mall, the Levy Business Park. This mixed-use development valued at US$200 million is set to open in the last quarter of 2011.

Abrahamse says property sectors such as retail driven by consumer spending and growing urbanisation is what drives property investing in Africa. Other sectors include industrial (driven by resource benefication and labour), hospitality (GDP, globalisation and tourism), office (GDP and economic stability) and the residential property market is driven by population growth and urbanisation.

“Investors and companies are mostly looking at opening shopping centres in other parts of Africa as this sector and the office markets are driving investor appetite for property investments.”

There is a growing appetite for retail and mixed use developments in the continent. For example, Liberty Properties is building the first fully enclosed shopping mall, the Levy Shopping Centre in Lusaka, Zambia valued at US$200 million. Abuja in Nigeria is another example of Africa’s burgeoning real estate landscape. In the next few years the city will attract major investments in property driven by increased consumer spending and business friendly policies, he says.

African real estate markets have huge yields and that attracts investors. According to the Knight Frank Newmark Research, countries including Botswana, Kenya, Tanzania and Zambia have seen yields of over 10 percent in the industrial sector while across all sectors, many countries have attractive and steadily growing yields.

He says potential growth in African real estate markets will be fueled by key infrastructure developments such as communication, quality of telecoms, electricity generation capacity and length as well as quality of road networks.

The research conducted by the European Real Estate Association, indicates real estate is the biggest asset class in the world with 2.4 percent of global stocks in property while 5.5 percent is listed property, he says.

While there are 1000s of listed property companies in the world, only a handful are in Sub-Saharan Africa. The report reveals that in Africa, countries such as Ghana, Nigeria, Kenya and Angola have no listed property companies.

Ikeja Mall in Lagos Nigeria is being developed by Actis and Standard Bank. This mall will open in December 2011.

The report shows that Sub-Saharan Africa listed property has a market capitalisation of $18 billion and 98 percent of that is in South Africa.

“In the past decade we have seen a tenfold increase in the market capitalisation of listed property in South Africa and this is likely to grow in the next three to four years.”

Abrahamse says some African countries including Algeria, Libya, Chad, Ethiopia, Sudan and the Democratic Republic of Congo do not have a stock exchange market.

Some sought-after countries in Africa to buy property in include Ghana (oil and stability), Nigeria (consumer story), Angola (oil, consumer story and urbanisation), Zambia (copper and stability), Botswana (high level of securisation and the CBD shifting towards the airport), South Africa (formal economy and stability), Namibia (oil and stability) and South Sudan (oil, new independence and infrastructure).

Abrahamse is confident that the African real estate markets will be formalised in the next five to 10 years and the continent will begin to see more listed property companies and funds enter the market. – Denise Mhlanga

Household Debt-to-Income improves - South Africa

Debt-to-disposable income has decreased in the second quarter, causing debt service risk to decline further from 6.18 to 6.10 according to the FNB Household Debt-Service Risk Index.

John Loos, FNB Home Loans Strategist, said that this decline implied a decline in the household sector's vulnerability to any unwanted events such as interest rate hiking or economic growth slowdown, which could impair its ability to service its debt at some future stage.

He said that the index takes into account the level of household indebtedness, as expressed by the household debt-to-disposable income ratio, the direction in which this ratio is moving (currently downward), and the level of interest rates (prime rate) relative to long term consumer price inflation (5-year average inflation).

The lower the debt-to-disposable income ratio goes, the lower the risk, and downward momentum in the debt ratio thus also exerts downward pressure on the overall Debt-Service Risk Index.

The decline in the ratio has been brought about by slow single-digit growth in the value of household sector credit in recent years, enabling nominal disposable income growth to outgrow the pace of credit growth according to Loos.

He said the pace of decline had been slow going, however, as disposable income growth since the recession in 2008 had also remained slow compared to the pre-recession boom years. Nevertheless, the second quarter did show some further rise in year-on-year disposable income growth from 8.9% in the first quarter to 9.9%. This, along with a slowing household credit growth from 6.8% in the first quarter to 6.4% in the second quarter, resulted in further reduction in the debt-to-disposable income ratio.

Loos said that reducing the debt-to-disposable income ratio further looked set to continue to be challenging, because the renewed economic slowdown of late looked set to see slowing disposable income growth in coming quarters.

"However, we believe that the downward trend will continue at a gradual pace due to simultaneous slowing in household credit growth, reaching a level below 70% during 2013," Loos said.

He said that on the other hand, the lower interest rates get, relative to long term average inflation, the higher the risk for the household sector becomes, because this implies a diminishing probability of further interest rate cuts and an increasing probability that future interest rate moves could be up.

Therefore, Loos continued, a slight rise in the five-year average inflation rate in the second quarter, brought about by a recent rise in consumer price inflation, had exerted slight upward pressure on the overall index. However, against this, a further decline in the household sector debt-to-disposable income ratio, from the previous quarter's 76.8%, to 75.9% in the second quarter, had offset increased interest rate risk and caused the Household Sector Debt-Service Risk Index to decline further in the second quarter.

This level of debt-service risk, however, remains high by historic standards, with the long term average since 1970 being 5.1 according to Loos. Further significant reduction in the debt-to-disposable income ratio would thus appear essential. The lowest level of 2.74 was achieved in the final quarter of 1998, and it was this low level that preceded the start of one of the country's great consumer and home buying booms. - I-Net Bridge