With our property prices among the world’s lowest, bricks and mortar could be a very solid investment
Ian Fife
‘I been down so long it looks like up to me,” says the old blues song. That’s how property people feel too. Everyone else is getting instant gratification in shares and the money market, so real estate as an asset class has been off the investment radar screen for years. And they’re feeling foolish about the many times they predicted property would take off and it hasn’t.
It is a worldwide phenomenon. Liberty International is one of the most glamorous property portfolios possible, mostly made up of the finest regional shopping centres in Britain and worth R39-billion. Last year it gave a 22% total return on net asset value -great in any language. But its shares listed in London and Johannesburg at R42 are averaging 40% discount on the net asset value of R70.
This has been amplified in South Africa where 40 years of political upheaval and financial mismanagement brought a series of booms and busts as big as dongas in the economic road. The property market was not quite reduced to rubble by this, but building costs, prices and rent are now among the lowest in the world.
Recently the average cost of a two- bedroom flat in Europe was well over R1- million. The lowest national average cost was in Spain at R940E000. In Australia and Argentina it’s probably R600E000. In South Africa it’s R100E000 max.
Despite rent being about the lowest in the world in dollar terms (try leasing a half- decent flat in Lagos or Nairobi for under R3E500 a month), as a ratio of property values they are among the highest in the world. I know of absolutely nowhere else right now where the net rent on your two- bedroom flat will pay all the property costs plus repayments on a 80% bond and give you enough change to go to a good restaurant or two every month. Traditionally residential property has sold on a 5% yield, but today 17% is possible.
Returns have been improving on listed property companies lately such as unit trusts and loan stock vehicles (LSVs) and you would have made profits of 40% and more if you bought in a year ago. But at an average of 15% they’re still well above the Johannesburg Stock Exchange (JSE) average yield. Corpcapital’s Redefine LSV launched recently at more than 17% return and continues to languish at that level.
Yet all that bad news is the reason that property developers say it really is time to invest in property, particularly in South Africa. The market hasn’t acknowledged the new stability in South Africa’s economy. It is still discounting political unrest, interest rate volatility, a collapsing rand and higher inflation. Merrill Lynch’s property analyst, Harry Boonzaaier, says companies like Redefine could be down to a yield of 12% over the next year, or once the market takes these factors into account, if interest rates stay stable or drop. That means R100E000 invested now will earn you R17E000 income over the year. That income could increase 15% to R19E550 and, if Boonzaaier proves correct, the value of your holding to R142E000, a 42% capital gain and 58% total return.
“Redefine has some of the brightest property men around running it,” says Allan Groll, director of the Cape-based listed companies Wescape and Spearhead. “And some banks will lend you two-thirds to 90% of the price of your listed investment.”
Despite a drop in new listings on the JSE, the property sector is only getting started as entrepreneurs take over institutional portfolios or replace the previous institutional funding of their developments with your money. Primegro is a similar LSV to Redefine. Bonatla emphasises industrial property holdings. All are geared 50% and more. All aim for market capitalisation of over R1-billion this year. Lyons, a company servicing the needs of corporate office users, will list in the next few weeks and is expected to have a market capitalisation of less than R85- million.
Redefine executive director Wolf Cessman, asked for investment suggestions other than his company, says first-time investors can’t go wrong investing in their own homes. He started as an articled clerk in 1974 by buying an undeveloped stand in Randburg for R3E250. He paid R325 deposit and R32,50 a month instalment. “That doesn’t sound like much but it was for my salary then. I sold it a year or two later for R5E500 and used the profit as a deposit on my first home.”
Although the entry barriers are higher, Cessman still feels it’s the best starter option. “Prices will start rising and if you don’t own your own home soon you could find yourself unable to afford one in future.”
Another winner from the past for small property speculators, say property men, is to buy a GASH (good area small home) property off-plan from the developer: “You pay a 10% deposit on, say, a R250E000 unit and aim to sell it at a profit before taking transfer. Even if you take transfer, there will be no transfer duty as with a second-hand house because the developer pays VAT.” A bigger residential investment with a speculative upside is the smaller units at the V&A Waterfront in Cape Town for R400E000 plus, adds Groll.
“The trouble with direct residential property ownership is that the transaction costs are high, as much as 15% of the house price for buyer and seller with transfer duty, bind and legal fees and sales commission. A share transaction will cost you 1%.”
Whether you buy shares or direct property, you will be liable for capital gains tax, probably calculated from April 2001. If it is registered in your own name you will be taxed, according to the standing capital gains tax proposal, on 25% of your capital profit. For example, say you bought a R300E000 property and sold it for a net R400E000, after deducting sales commission. If you pay at the maximum marginal rate of 42% you would be taxed on 25% of R100E000 (R25E000) less a R1E000 rebate. Thus your tax would effectively be R10E000, or 10% of your profit. If you reinvested all your money into another property or shares, you would probably be able to defer that tax payment.
But capital gains tax will not apply to your home – only to second or other homes.
Johannesburg agent Les Pamensky says that small flats in prime areas like Sandton CBD are a good bet: “Demand and rents are high and developers haven’t started building any more stock yet.”
Most property experts believe that Johannesburg residential property prices will rise fastest, but Cessman warns investors to stick to secure areas in the north of Johannesburg, if you can afford it.
Groll warns aspirant commercial property investors that it is more difficult to make money today where the institutions are no longer automatic buyers: “You must find a niche in which you become the expert. If you can’t do that, stick to the listed vehicles.”
His favourite is Liberty International: “Not only is it at a ridiculous discount, it’s also a rand hedge.”