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The Allure of the Sectional Title

Jan 26, 2017 | Property Investment

There are clear reasons why South African sectional title developments are on the rise, and why they are drawing a greater number of buyers and investors than any other property type

There is little doubt that the range of sectional title models is proving the answer to many South Africans’ property needs. They speak of a particular lifestyle on a wide continuum, one which suits an entry-level flat owner in a compact surburban complex as much as it does a high-profile family in a multi-million-rand freestanding home in a gated country estate.

Need to Know
Globally there is a strong trend towards urbanisation and denser living, with Africa experiencing the world’s highest urbanisation rate. It is not just about fitting more people into smaller spaces nearer to the city; it is happening for reasons other than spatial and financial. It is about being part of a likeminded community, proximity to the economic hub, increased resistance to hours spent commuting, reduction of carbon emissions and, in SA, strong safety perceptions. More people contributing to a communal pot to fund security in an estate, means less individual funding. Sectional title living can be more cost-effective, and that appeals to many buyers.

Maria Davey, partner at Neumann White Attorneys in Durban, suggests that prospective buyers into an existing sectional title scheme make sure they tick a few of these boxes: “Look at the financials, and get copies of the last two to three years’ AGM minutes. Those will give clues as to whether any special levies are being contemplated, or whether there are any other issues in which the body corporate is involved.

Investment
Shaun Coetzer of Montague Homes says that over the past five years, investors have comprised 65% of buyers of the sectional title flats at Jackal Creek Golf Estate in Roodepoort, Johannesburg. “Our primary focus for investment apartments is the one and two bedrooms, ideal for a lock-up-and-go lifestyle. The combination of freestanding homes and apartments here works in the investor’s favour, as lifestyle is a strong drawcard for prospective tenants — that means the investor is getting strong rentals which continue to grow year on year.

“Familiarise yourself with the management and conduct rules. And very importantly, make sure you know exactly what you’re buying — the sectional title unit might be just the home, so how do you get use of the parking bay or garage?

Is it an exclusive use area? Allocated in terms of the rules? Leased from the body corporate? Is the balcony part of the section, or is it an EUA? That would be relevant if it leaks into the unit below — if it’s EUA, it’s a body corporate problem, but if it’s part of the section, then it will be the owner’s problem.”

“Our pool of buyers ranges from first-time home owners to investors adding to their portfolio and retirees looking for a safer, less risky investment that pays them monthly.” At Jackal Creek, where buy-to-let are key investors, prepaid meters were installed in all flats to help monitor costs. The newest have heat pumps and central boiler systems with heat tracers to reduce monthly costs.

Capital Growth

Multi-Spectrum Property CEO Riaan Roos cites the four major factors of estate living as security, convenience, lifestyle and value for money. At Buh-Rein Estate in Cape Town a 51m² two-bedroom flat bought for R424,900 in 2011 carries a price tag of R729,900 today, he says. “This equates to almost 72% capital growth over the five-year term, or just over 14% per annum. “For rentals, these apartments were initially rented out at R3,200 per month. Currently, the figure is R6,500. That’s a 103% growth in monthly rental over the five-year period, or 20.6% per annum,” says Roos. The Currie Group is marketing The Winston, a 40-unit luxury apartment complex in Bryanston, with starting prices at R3.28m. Says Brendan Raubenheimer, head of marketing for The Winston: “Every unit is premium, no entry level. The take-up is a mixture of owner occupiers and investors, many looking to downscale to a lock-up-and-go environment.” Rawson Developers is focusing on Observatory in Cape Town, and bought some high potential erven with the intention of demolishing the run-down warehouses, making way for two high-quality, hi-tech apartment buildings, the Paragon and Madison Place. Sales partner Brad Morgan says a few units remain for sale at the Paragon, and Madison Place is filling up quickly.

Getting it Back
From an investment perspective, Beaumont, its flagship Claremont development, has posted up to 50% growth in purchase prices since first occupation; at the Paragon (building since late last year) the first phase of buyers has already experienced a 30% increase in purchase price. In Observatory, there is the added incentive of the urban development zone (UDZ) tax deduction allowance, says Morgan. David Sedgewick, MD of Horizon Capital Residential, confirms the appeal of a UDZ: “Our Observatory development, The Eden, consists of a large number of buy-to-let investors because development falls within the UDZ. This essentially allows investors a tax write-off of 55% of their purchase price spread over 11 years, which makes it a highly attractive investment.

The Pros and Cons
“In terms of our City Bowl and Atlantic Seaboard apartment block developments — The Elm (Vredehoek) and The Solis (Sea Point) — most of the purchasers buy primarily to live, however, want the option and flexibility to do short-term lets for periods when they are out of town.” There are pros and cons to life in a sectional title development, but many are easily discovered at the outset, such as not allowing pets, close proximity of neighbours, or not allowing building alterations to your property because you only own a section. But young families might relish the security and instant friends for children, a communal swimming pool so less maintenance, a golf course, or common use land for walks. Certainly, shared, fixed costs (levy) can be easier to manage. For commuters working elsewhere, it is comforting to know that in a sectional title the family is more secure.

 

Basic Legal Elements of all Sectional Titles
“The concept of sectional title describes the separate ownership of units or sections within a complex or development,” says Stacey Bartlett, director at Phatshoane Henney Attorneys. “When you buy into a sectional title complex, you purchase a section or sections together with an undivided share of the common property, known as units. A sectional title unit can refer to anything from a mini subtype house, a semidetached house, a townhouse, a flat or apartment to a duet house. Ownership of sectional title property involves a number of elements, bearing in mind that the unit consists of a section plus an undivided share in the common property.

“The first element is the section, exclusively owned by the owner. The second is the common property, owned by all the owners in undivided shares, meaning you become a joint owner of the common property of the sectional title scheme. The third possible element is the right to exclusively use certain parts of the common property, for example a garage, a garden or a storeroom. Even though the owner does not own the exclusive use area, he is the only person who has the right of use.”

Putting Pressure on Prices
Four categories of buyers are competing for a piece of Cape Town’s City Bowl or Atlantic Seaboard:

  1. Young professionals after proximity to work.
  2. Retirees downscaling to a secure lockup-and-go.
  3. Semigration: upcountry buyers wanting Cape investments
  4. International buyers recognising the value offered relative to offshore locations

Credits: Horizon Capital Residential

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