Six Reasons NOT to buy property

...and why none of them hold much water।

We often hear about real estate investors who have been very successful in building wealth-creating portfolios। We may believe that they have some very special skill or ability, that there is something they know which nobody else does. At other times, we think it was pure luck or coincidence that an investor succeeded, that circumstances have since changed or that it just can't be done. Our cynicism encourages us to do nothing, to avoid the risk.

Yet history proves that doing nothing could be the most risky of all। Apart from the missed wealth creating opportunities, doing nothing translates into a lack of self-development, a missed chance to learn and grow. If we delve deeper, it is clear that most of the reasons people use not to invest are actually based more on emotion than business savvy. We rationalise our fear using calculated arguments as to why it can't or won't work. But the truth is that none of these arguments really hold much validity.

So let's discuss the top six reasons why people decide not to invest in property। And lay them to rest-once and for all.

Reason # 1: Investing in property is risky

Fact: There is a certain level of risk in every investment-and property is no exception। But investing all your money in the bank (or even worse under the mattress) may be the most risky of all as the returns barely keep up with inflation. Also bricks and mortar is more tangible than stocks and you can take out insurance against fires or floods. You can also protect your asset against your death or disability. And yes, there is now even insurance available to cover landlords for non-paying tenants!

Reason # 2: I don't have the time

Fact: We all manage to find the time to do things we really want to do. Time management involves prioritising things that are more important. Anyway, you don't need to do it all yourself. Build a team of competent management agents, brokers and mortgage originators (yes, there are some out there!) and let their specialist skills work for you.

Reason # 3: I don't have the money

Fact: You DON'T need money to make money। Even in a market where 100% bonds are not widely offered, a good below market value deal will attract finance from investors। Network with people who share your passion for property and these investment opportunities will present themselves।

Reason # 4: Below market-value properties don't exist

Fact: No matter what the stage of the property life-cycle, there will always be value for money deals। The key is to identify initially whether the seller is motivated and only negotiate with motivated sellers. As long as there is divorce, relocation or excessive debt, motivated sellers will always be out there.

Reason # 5: The property market will go down

Fact: The property market has never gone down over the medium or long term. Does that mean that it won't in the future? Probably not, simply because property prices rise in relation to income levels which increase over time. Even political factors, crime and other excuses people use not to invest, have not had a serious impact on our or overseas markets. At times, these factors often have the reverse effect-lifting prices as investors choose the safer haven of bricks and mortar.
And if prices DO go down over the next few years? Who cares! Buying for the rental yield and at below market value still ensures the investor comes out trumps।

Reason # 6: I don't know where to begin

Fact: You only learn through action. Educate yourself and when you feel a good opportunity presents itself, take the plunge. It may not be the best deal you may ever do but it will be the most important in terms of confidence. Luckily, over the long term, property is very forgiving of peoples` mistakes.

Threats to SA's Property Market

PRETORIA - Steep increases in municipal rates, electricity and service charges will be one of the factors to watch in the property market according to Absa's senior Property Analyst Jacques du Toit. This and possible increases in interest rates were two of the potential threats to the property market in the coming months.

Du Toit recently addressed the 2010 ARELLO District 6 meeting in Sandton about the prospects of the local housing market going forward and said it was unlikely that the property market was heading for a boom, despite the recent recovery in house prices. The Association of Real Estate Licence Law Officials (ARELLO) is an international organisation and South Africa forms part of ARELLO District 6, which consists of non-American countries.

In a post-conference interview with Realestateweb, Du Toit said he expected the recovery in the housing market to be gradual and dependent on the income position of households. "Debt levels are high. There have been job losses and large scale unemployment during the course of 2009. Also in the first quarter of 2010 the latest figures from Statistics SA show that there has been another round of job losses. This has an impact on the disposable income of households and while this situation persists the property market will remain under pressure."

Unlike some analysts Du Toit doesn't believe that we are headed for a double recessionary dip, but cautions that the situation in Europe may have a macroeconomic spill-over, which will impact on South Africa. "At this stage it doesn't look like this will have a major effect on South Africa, but as far as house price growth is concerned we are expecting somewhat slower year-on-year growth in the second half of 2010."

Du Toit notes that the leisure market has been slow to recover and that the coastal market has remained sluggish because of that. This however may present opportunities for investors who are looking for "good buys".

A hike in interest rates may also become a factor in the second half of 2011. "We feel that is when inflationary pressures will start to escalate, especially due to electricity and other service hikes and government may increase interest rates in an effort to curb inflation."

We asked how big an impact he expects electricity and municipal rate hikes to have on homeowners: "I believe this is going to play an increasing role in the choices prospective homebuyers make in the future. We'll be seeing major hikes in electricity and the resulting impact on the cost of running a household. There is also the issue of increasing rates, and buyers will take this into account when deciding on a property."

YDL Investment Property CEO Anton de Leeuw agrees with Du Toit's analysis. "From an investment perspective there has been a significant drop in the buy-to-let market. Investors are worried about returns and they are worried that prices may contract even further. What we've found with our client base is that there has been a significant shift to buying distressed properties, where properties are bought at substantial discount to market value. "

De Leeuw says despite the difficult market conditions their investors are still looking at average yields of about 10%, but agrees that profits in the property market are to be made in the long haul, as quick turnaround speculative profit opportunities are becoming harder to come by.

It's property time!

The Reserve Bank has probably cut interest rates for the last time this year, which means it is time for cautious or hesitant home buyers to take the leap and enter the market, said Brian Falconer, CEO of Colliers Residential on Tuesday, in response to the decision by the bank's Monetary Policy Committee to hold the interest rate at seven percent.

Falconer said since December R3555 had been put back in the pockets of bondholders for each million loaned.

This had reduced pressure on homeowners and pumped billions back into the economy for discretionary spending rather than the servicing of debt.

"It is highly unlikely that this round of interest rate cuts will continue this year," said Falconer.

"We should view this decision as signalling the end of eight months of interest rate cuts, which means it won't get better, and potential investors should no longer continue to defer their entry into the property market. We don't see the market getting any easier than it is today."

Market has been sluggish

The market has been sluggish for more than a year since it became evident that South Africa was also entering the global recession triggered by the US subprime crisis.

Buyers have not found sellers, sellers have been unable to obtain the bonds they did two years ago, and the banks have been fearful to extend credit given that the cause of the recession was related to property credit, and due to the lack of liquidity in the market.

"There are very positive signs that the worst is over, so any further procrastination would be unwise," added Falconer.

We have noted that Standard Bank, for one, has relaxed its lending criteria, and at least one other bank is advancing 100 percent loans for low-end property."

Other positive signs, said Falconer, are:

Globally the word is that the worst of the recession is over.

- Several US banks are reporting high levels of profitability.

- Albeit with government incentives, such as the Cash for Clunkers initiative, the automotive market is starting to turn, both in the US and Europe.

- Inflation is declining to just outside the Reserve Bank's target range.

- The oil price is relatively low, but volatile and likely to start climbing ahead of a northern hemisphere winter.

- The rand has been strengthening ahead of the MTN-Bharti deal, and the gold price has surged through $1000 an ounce.

- South Africa's balance of payments remains positive, with inflows sufficient to finance the deficit on the current account.

- There have been positive reports locally and abroad that the property market is beginning to move.

- A number of market commentators have reported significant economic recovery in a number of South African provinces.

Against this, said Falconer, are a few negatives.

The toxic debts behind the subprime crisis have yet to work their way through the system, so a number of economic commentators have predicted what is known as a "U-shaped bounce", where the recovery is short-lived as the economic fundamentals have not changed.

"However, whatever the individual indicators, we are confident the worst of the property market is over," said Falconer.

"If you continue to be uncertain or concerned, you could be missing out. It's time to get back into the market."

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