Sarah Bullen
Brian and two friends are in their mid- to late thirties. They all own houses, drive good cars and are what would be described as financially secure, meaning they have managed to put some money away.
Each of them had opted to put his money into unit trusts, but late last year, after looking at the performance of his investment over the past five years, Brian realised that his money might have done better in a brown bag under the bed. There is a somewhat bizarre perception among private investors that unit trusts are a safe bet, a perception not unfounded when you can literally buy them off the shelves in Woolworths. But there is an associated risk attached to any investment.
So Brian took a decision to pull his money out of bonds and equities and look at other investment options. Along with his two friends in similar situations of little gain, he started looking at the property market as an investment vehicle. After some exhaustive research the three pooled their resources and bought a house in an upmarket area in Johannesburg. They are currently renting the house out to a tenant at R10 000 a month, a sum that covers the bond and leaves them with a modest income.
The aim is that the property increases in value over the investment period, while the bond is paid off by the rent. Once the bond is paid off the rent becomes straight income and the property itself can be sold, hopefully at a higher price.
Property may have been out of fashion for a decade as an investment. Brian aside, though, there is a perception that property may now be one of the smartest investments around. Proactive investors are starting to look around as the equity, bond and currency markets continue to disappoint, and are questioning whether there are other avenues for investments. But investment advisers are cautious to advise clients to move into property. As with any investment there are two sides to every debate. The naysayers said they would not even mention the option of looking at property to a client. The reason: property and property prices in South Africa are an unknown factor and there is no guarantee that the price will rise.
The property groups and estate agents polled by the Mail & Guardian were upbeat. They say the property market is moving out of its 10-year slump and is expected to remain on a growth projectory. The most significant factor contributing to this upswing has been the sustained low interest rates, which are fuelling a bond war between lenders.
Nationlink’s figures indicate that the value of home sales rose 24% in the past year, showing a steady rise in house prices. Industry figures confirm that there is a boom in resi-dential housing prices in the greater Johannesburg area and signs of life in Durban. Cape Town, however, is showing residential property prices sitting close to replacement costs. This means it will cost a similar amount to build or buy and makes the prognosis for further growth in that market lower.
Property consultant Edwin Rode says that the average Johannesburg prices are more than 15% below replacement cost, which indicates prices could rise by about 22% as the area moves out of a long hibernation.
He takes a broader view of the sustainability of the market than the street you buy in or the crime in the area. Rode says it’s economic growth that propels property prices. And in this there is never a guarantee.
There are also more practical matters to consider if looking at moving into property. It requires a more active investor than one who simply hands money over to a broker. Tenants come with associated risks and there will be additional maintenance costs, repairs and even renovations required.
Property consultants stress the importance of good advice and proper research before launching yourself on to the property market.
Another consideration is the liquidity of your investment. Rode stresses that an investment in property is illiquid and is a medium- to long-term choice.
ENDS