With South African property about the cheapest in the world, perhaps now is the time to stop being a tenant and think of becoming an owner Ian Fife Property insiders who say that it’s time to start investing in residential property are supported by a recent world survey by Knight Frank that shows South African homes are about the cheapest in the world. A price sample of prime two-bed apartments for senior executives shows the following: New York: R6 200 000; London: R5 160 000; Sydney: R1E250 000; Lisbon: R1 120 000; Lagos: R675E000; Kuala Lumpur: R653 000; Perth: R460 000; Johannesburg: R400 000. The Johannesburg example would be in one of the really posh blocks of flats around Sandton CBD like Balgowan, St James Court, De Medici and Firenzi. But there are excellent two-bedroom flats available in the same area for as little as R250E000 and in some South African towns for about R100E000. Of course, you can buy a house or even a hotel room and you don’t have to rush into anything because nobody expects residential prices to take off overnight. Property is a long-term investment. Researcher Erwin Rode forecasts only marginal real house price increases this year. Estate agents expect the average house price next year to be 10% or 15% more than it is now, but as interest rates drop and the economy improves from next year prices could rise by 20% or more each year and double in less than four years. It’s easy for most of us to get mortgage finance at interest rates below the current prime rate of 14,5% and initial yields can be 15% or more. So if you get an 80% bond and the property value doubles in four years you would get a return of more than 100% a year. If you’re a tenant you will have noticed that residential rents are shooting up. The average two-bedroom flat will soon cost you R3 000 a month in the larger cities and it’s a sign that you should seriously consider owning your own property. But what and where are the best residential investments? The answers from two experts are surprising. Ronald Ennik is Gauteng chief of estate agent Pam Golding Properties and Neville Schaefer is CEO of Trafalgar Property and Financial Services, South Africa’s biggest national manager of residential property. Both agree with the old property saw that the first three factors in property are location, location and location. Both also believe that the greatest price and rental growth will come from locations near the main business areas where the high-income population will both grow and densify and demand will be highest. They will be more convenient to executives and professionals of every age, says Schaefer and increasing mobility, smaller households and low inflation will boost the trend to rent rather than buy. This is important because it is rents that ultimately drive property values. “The same factors will apply on a smaller scale to secondary centres. Increasingly our urban areas will become a series of nodes, partly because of lifestyle trends,” says Schaefer. “These nodes will be particularly amplified in Greater Johannesburg as lack of public transport and traffic congestion force people to congregate around areas where they can work and get the widest range of services.” What you want, says Ennik, is to concentrate on high turnover areas where you can resell your property tomorrow: “Trout farms, holiday homes are out” because they can sit on the market for months or even years before they sell. So what is the best residential property investment location in South Africa? “Not Cape Town,” says Ennik. “Or Durban.” He’s right because prices in Cape Town are higher than Johannesburg and rents in both Durban and Cape Town are much lower than Johannesburg. A two-bedroom flat in Sandton can cost R260E000 and rent for R3E500, while the same flat in Cape Town’s City Bowl will cost R290E000 and rent for R2E700.
A smart Cape Town or Durban tenant might invest in a flat in Johannesburg and continue renting in his own hometown. For Schaefer there is a golden investment circle that starts a little north of Sandton CBD and stretches south to Parktown near Johannesburg CBD. It covers Bryanston, Hurlingham, Hyde Park, Sandhurst, Morningside, Inanda, Illovo, Dunkeld, Houghton, Saxonwold and all the parks. Some of these areas could deteriorate with insensitive development that is already happening, for instance in Sandhurst and Hyde Park, and could threaten parts of Bryanston. The reason, he says, is because Gauteng’s urban population of 7,5-million is likely to double in the next 15 years and this golden circle of grand suburbs will be its residential centre of gravity.
‘The older suburbs between the Sandton and Johannesburg CBDs are likely to survive best and eventually demand the highest premium. I think the commercial property owners of Rosebank will kick themselves one day for not adding high rent, high-density apartments and lofts to this node sooner. It has the potential to become the prime apartment area in the country because of its central location and combination of pedestrian friendly mix of offices, retail and entertainment.” But, unlike Ennik, he also thinks Cape Town’s City Bowl, the area west of the CBD towards Green Point and the Waterfront are the second best location. Third is Durban’s Berea.
And what are the best actual investment properties? Always buy with selling in mind and remember that smaller often means quicker selling, says Ennik. Schaefer chooses properties that fit with demographic trends. As household size is dropping and more people are renting, he recommends smaller properties – probably flats – in high-demand areas. “For my money the best long-term investments of all are sectional title flats in the potentially super-prime Bryanston to Parktown precinct,” says Schaefer emphatically. “Their prices have dropped the most so they will recover more, rents are rising fast and will continue to do so for some years and they are easy to manage. Many older blocks are excellent quality, far more so than most of the newer ones, but probably the best short-term investments are the newer blocks around Sandton CBD.” “A property in Fourways,” says Ennik, equally emphatically. “It’s a war zone with all the building and prices have been deeply affected. But it’s a prime growth area and so has great recovery potential. Flats in Illovo, another growth area, are a good investment and also Houghton and Melrose for executives who want good access to the airport.” Ennik and Schaefer agree that flats in Hillbrow and Berea in Johannesburg, Sunnyside in Pretoria, Sea Point in Cape Town and The Point in Durban are high-risk buys that could prove to be the greatest investments you could make. But they’re only for the brave, because they are not high-demand areas for high-income tenants – yet.
But you could buy a two-bedroom flat in Johannesburg’s Berea for R35E000, rent it for R1E200 a month and get a 30% initial yield. They believe these areas could become stable middle-income precincts sooner than most people think.