Ian Fife
TAKING STOCK
IT’S BEEN A WHILE SINCE SOUTH AFRICA’S LAST PROPERTY BOOM. THE LAST ONE PEAKED IN 1983, SO ALMOST EVERYBODY UNDER 40 HAS YET TO EXPERIENCE THIS KIND OF SOUL-STIRRING EVENT. THEN, ONLY WHITES COULD BUY GOOD PROPERTIES, SO MOST PEOPLE OVER 40 WERE SIDELINED AS WELL.
A residential property boom is like a stock exchange boom in your own home. The price goes up and you sit on your patio feeling like the chairman of Anglo-American sitting on a crock of gold. Each brick and tree exudes magic and well-being. Dinner party conversation revolves comfortably around success; all your own work because of your brilliant decision to buy this great property.
Of course, it ends in tears. But it’s a defining few years while it lasts.
Are we heading for a boom? None of the experts will stick their necks out yet – they’ve all been wrong so often over the past 15 years – but there is more chance of enjoying a residential boom over the next half-decade than there has been since 1983. Bond interest rates, at around 13,5%, are the lowest they’ve been for decades. So are rents. Prices adjusted for inflation are less than half their boom price 17 years ago. As a percentage of household income, homes are twice as affordable as they were 25 years ago. Confidence is growing fast.
Agents around the country are running out of properties to sell. This makes it a seller’s market and prices will soon start rising. But buyers are still nervous. They worry that interest rates will start rising again as the economy grows, and they don’t want to be saddled in a few years’ time with interest rates of 25% and bond repayments they can’t afford. Their financial advisors point out that property has been the worst investment anybody could have made in the past 15 years.
The commercial property market doesn’t look too hot either. The yields on which office buildings, factories and shops are selling have risen on prime properties from 11,5% to 12,5%, so prices have dropped in the last year. Sandton office rents might be hitting R100/m2, but secondary areas such as Randburg or Belville are languishing at R35/m2.
Yet property companies are coming to the market thick and fast – Primegro, Redefine, Lyons only a few weeks apart – and they’re not typical property unit trust or loan stock companies. Primegro and Redefine signal the renaissance of property entrepreneurs to the Johannesburg Stock Exchange after the withdrawal of the institutions from property over the past three years. Old hands from the Sixties and Seventies are heading the two companies. And Lyons has a red-hot yuppie in charge. Traditional analysts sniff at their property portfolios and strategies and aren’t impressed. So you can buy into them at yields of 17% plus. But should you?
If you own your home and the boom comes along, you’re automatically in the game. If you’re a tenant you’ve noticed that rents are rising fast, especially in Johannesburg where statistics show a 44% year-on-year increase to the third quarter of 1999. You will now pay up to R4 000 a month for a one-bedroom flat in Sandown. If you have money in a savings account earning less than 10% a year interest, you could convert it into a deposit on a house on which your bond repayments will be no bigger than your rent. But should you?
Yes, says Cape Town developer Geoff Chait, who over the past four decades has done just about everything you can do in property. It’s time to buy property shares on the stock exchange or to invest in a house or flat.
“Your savings account will get you less than 10% today, while you earn a yield as high as 20% on a listed property investment, and you get capital growth as well,” he says.
“Institutional analysts are wary of the new listed companies. They are not traditional property investment companies; they’re trading companies. They’re run by excellent property men who understand risk and know how to turn mediocre properties into good ones. They’ll do well. Yields will drop and value and income will rise. Residential property will also have good capital growth over the next few years.”
The beauty of residential property is that, unlike the stock exchange, you can see the turn coming over some months, so you don’t have to miss out.
But unlike dealing on the JSE, you don’t have a bevy of publications, financial advisors and other experts to help you and it’s easier to make the wrong decision.
The secret of property success is to get to know your market. You can make money in Parktown or Pofadder, Dunkeld or De Aar if you have good local knowledge.
Buy your local newspaper each Saturday and read the property section. Visit show houses and flats on Sundays. Learn to calculate the transfer duty and legal costs that buyers must pay, and the commissions that sellers must pay. Property does have high transaction costs, so it is rarely a short-term investment.
Location must be the key deciding factor in a residential investment. It’s always best to buy the lowest-priced property in the best area than the most expensive house in a humdrum suburb.
If you like the home you’re renting, or you can’t afford the house you would like to own, stay where you are and buy a property as an investment you can rent out. But a good tip is still to only buy the kind of property you yourself would be prepared to live in.
When you eventually buy, you will discover another advantage – you will pay less on a home loan than any other debt. You can get 2% below prime on an 80% bond – that’s 12,5% right now. You could buy a R200 000 two- bedroom flat in a good area of Johannesburg and rent it for R3 000 a month. If you put down a R20 000 deposit and get a R180 000 bond your current monthly repayment will be R2 045. You levy will be about R450, so your tenants will pay your bond and your levy. Your investment, in the parlance, washes its own face.
If property values and rents go up by 10% this year you’ll have a paper capital gain of R20 000 and about R800 net income each month – R10 000 a year. That’s a total of R30 000 on your R20 000 cash investment, or 150%.
The extra cash could carry a bond interest rate of 19%, well above the increase economists are predicting. Now calculate an increase of 20% next year. Feel good? That’s a boom.