When is property a good investment – and when isn’t it?
Food for Thought
When investing in property, you have to understand it as an asset class. Citadel advisory partner Abraham van der Westhuizen says there are five key characteristics that you have to bear in mind.
1: Property values don’t only go up
‘We as South Africans saw an unparalleled bull market in the property sector for quite a long time leading up to 2008, so we grew up with the idea that property is something that just keeps increasing in value and can’t diminish in value. But globally we’ve seen that property prices can decrease. If interest rates aren’t in your favour, your asset can end up being worth less than what you owe on the bond.’
2: Consider liquidity
‘Property isn’t something that you just buy and sell easily. If you have markets where property demand comes under pressure and you might want to exit your investment, it’s the hardest time to sell and is when you get the lowest value.’
3: The taxman cometh
‘The rentals you earn from property are added to your income, taxed at the marginal rate, whereas if you hold a basket of shares, your dividends are only taxed at 15%.’
4: Don’t neglect the expenses
‘Many people forget about the costs involved with property. You have to think of maintenance, property rates and taxes, and legal fees if you have problems with tenants, and the opportunity cost when you’re unable to find new tenants.’
5: You might be missing out on compounding
‘People don’t necessarily take their rental income and invest it back into property. But if you’re earning a dividend and you keep reinvesting it, you acquire more shares, and so you get more dividends the next year. Over the long term, this compounding is one of the biggest drivers of wealth creation.’
Between 1987 and 2008 South African house prices enjoyed a spectacular surge. For three decades, property values went higher year after year, with increases often hitting double digits.
This growth peaked in 2004, a year in which statistics from Absa showed a 32,24 per cent jump in the average house price. This was followed by a further 22,71 per cent increase in 2005.
These kinds of gains encouraged many South Africans to view property as an unmatched investment opportunity. The chance to earn such returns on capital, sometimes on top of rental income, seemed too good to pass up.
However, not everyone who bought property ended up boosting their wealth. For a start, the growth in house prices has slowed since 2008, and in some areas property values have even fallen. Secondly, many people entered the market without fully understanding that not every property you buy is automatically a good investment.
When price growth appears unchecked, it’s easy to make the mistake of thinking that you can’t go wrong with property. However, while buying real estate does sometimes make good financial sense, at other times it really doesn’t.
Your primary residence
For most people, the first property they buy is the one they’re going to live in. And while it’s true that there are benefits to renting, there are solid financial reasons for owning your own home. Most important is the stability it affords.
‘Property as a primary home, I think, is arguably one of the best investments you can make,’ says Samuel Seeff, chairman of Seeff Properties. ‘You need to own your primary home. It’s the foundation of your whole life.’
‘Your primary residence isn’t just a financial investment,’ adds Hardi Swart, marketing director at Autus Private Clients. ‘It’s an emotional investment as well.’
Over and above this, though, there’s a good reason why many advisers encourage their clients to buy rather than rent – for most people, it forces them to put money towards something that ultimately becomes an asset.
‘Many people wouldn’t save the same amount of money each month as they would be willing to pay off on their bond,’ says Swart, ‘so from that perspective alone, it forces people to save.’
Buying a second home is appealing but it’s rarely a great investment
Many people wouldn’t be able to save the same amount of money each month as they would be willing to put into paying off a bond, so from that perspective, owning your own home forces you to save.
A second home
The idea of a holiday home at the beach or in the mountains is a very appealing one for many people. There’s no question that there’s something special about having a place of your own that you, your family and friends can use rent-free. It could also be a place to retire to one day.
But does this count as making an investment?
Over the years the value of the property may well increase, but the reality is that buying a second home is rarely a sound financial choice.
‘People don’t consider the cost involved,’ says Abraham van der Westhuizen, advisory partner at Citadel. ‘It’s not as simple as saying, “I bought the house for so much and it’s now worth so much more,” because there are financing costs, maintenance costs, rates and taxes paid over the years, and the opportunity cost of the money lying there. The reality is that you have to weigh up the capital gain against what you might have earned if you’d put that money into another asset.’
Buying a second home is, therefore, rarely a great investment, and in some cases it’s a demonstrably poor one.
‘There’s a big development on the KwaZulu-Natal South Coast where a lot of people bought property back in 2008 for between R2 million and R3 million,’ Swart says by way of example. ‘Seven years later those properties are now worth the same or in some cases less than what they were purchased for. So, taking inflation into account, the owners have actually seen capital depreciation and they have still had to pay all the expenses. So that’s been a terrible investment.’
A holiday home should therefore be seen as a luxury and measured by what it adds to your quality of life, not what it adds to your personal balance sheet. Because, ultimately, there are much better ways to deploy your capital.
Where property really comes into its own as an investment is when it’s bought to be rented out, because then you’re buying it not only for the capital growth, but also for the income it can generate. The big positive that property has in this regard is that you’re able to use credit to buy it.
‘What’s significant about property as an asset class is that you can obtain mortgage finance,’ says Seeff. ‘You don’t have to purchase the whole asset up front, but you can immediately start earning income off it and see capital growth on the total value, not just on your initial investment.’ While this may make it sound like an easy win, this is far from the case. ‘I don’t think people realise how much work and effort it takes to really manage a property properly,’ Seeff says. ‘Everyone thinks you buy the property, tenant it and walk away, but it’s not that easy.
‘You have to spend the requisite time and effort to understand the market. If you do it properly and professionally, it’s a question of choosing carefully in areas that you think are going to give you continued demand from tenants and also price appreciation, so that you get the return on both a monthly basis and the capital growth down the line.’
Generally, it’s more lucrative to invest in smaller properties. This is because demand is more certain at the lower end of the market, and returns are higher.
‘The lower the price, the higher the relative return on the investment,’ says the CEO of Vineyard Estates, Anton du Plessis. ‘I wouldn’t buy a R10-million house in the hope of getting a reasonable rental return on it, because if you’re looking for someone paying R50 000 a month, you could wait for months between tenants.’
However, he points out that while the return on ten R1-million properties would be higher than on one R10-million property, the administrative burden would be much higher.
‘In addition, simply due to the number of tenants you’re exposed to, you may be more likely to have a delinquent if you had 10 properties than if you had one,’ he adds. ‘Then again, if you have only one tenant paying R50 000 a month and that one tenant becomes a problem, the result is fairly disastrous.’
While anyone doing the necessary homework may be able to make a successful investment, real estate is still not an easy way to get rich.
‘The only way to get rich is by having a successful business and applying your time and energy in a specialised field,’ Van der Westhuizen argues. ‘And the only way that you’ll get rich through property is if it’s your business. There’s no way you’ll get rich through buying a passive investment.’
The successful property investors are those who’re willing to put in this effort. Many also concentrate on a specific area, such as student accommodation.
The key is that anyone who wants to do it, must take the time and effort to understand how to maximise their returns. Anything else is simply buying and hoping for the best.
‘And hope isn’t a strategy,’ says Seeff, ‘because there are no guarantees.’
In recent years student accommodation has come to present a real opportunity for investors. As it’s predominantly a segment that covers smaller properties with good returns, it has some ideal characteristics.
‘The key factors making student accommodation attractive are the high demand and the stable income generation it gives, due to low operating costs,’ says Lesiba Mooka, CEO of Cobalt Blue Properties.
‘Institutions aren’t able to provide sufficient accommodation for all their students and this has opened doors for investors to enter the market.’ Mooka points out that the University of Johannesburg can only accommodate 6 500 students, Wits 5 000 and the University of Pretoria just short of 6 000 – but each of these institutions has an estimated 30 000 students or more on their main campuses.
He says that the most important considerations when looking at potential opportunities in student accommodation are the proximity to the university, the condition of the building and, of course, the price.
‘The area where the property is located will affect the travelling times to and from the campus and the accessibility of public transport, as well as things like security,’ he says. ‘The property mustn’t be so big that students have to pay too much, but also it shouldn’t be too small. Most students tend to avoid university residences because they consider them to be small and cramped.’
Although some investors have realised an opportunity in buying old office buildings and turning them into apartment blocks for students, Mooka suggests that anyone wanting to enter this market should rather think of starting smaller.
‘As a start, I’d advise investors to look at small apartments or old houses that they can turn into student communes,’ he says. ‘The monthly operating expenses on these types of properties will be lower, as will the start-up capital. Only when they’ve acquired enough experience in operating these properties efficiently and are aware of all the difficulties that come with owning one, should they look into something bigger, such as an old office building to convert.’
He says that for one- or two-bedroom apartments, investors should be able to find properties in the price range of between R350 000 and R450 000. These could realise rentals of between R4 000 and R8 000 per month, depending on the number of beds per room. The alternative is to pay between R700 000 and R900 000 for a standalone house that can be made student-friendly. This could see rentals of between R15 000 and R20 000 per month, depending on the number of rooms and tenants.
Following the success of The Premier and other developments in Kenilworth and Rondebosch (opposite and this page), Rawson Developers are now selling Madison Place in Observatory from R1,4 million.
30K THE APPROXIMATE NUMBER OF STUDENTS ON SOME GAUTENG CAMPUSES.
5-6k: the number of students who can be accommodated by those universities.
- Seeff Properties: seeff.co.za
- Autus Private Clients: autus.co.za
- Citadel: citadel.co.za
- Vineyard Estates: vineyardestates.co.za
- Cobalt Blue Properties: cobaltblueproperties.co.za
- Rawson Developers: rawson-developers.co.za
Text: Patrick Cairns
Photographs: Supplied/Bomax/Rawson Developers