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27 Aug 2008 06:00
Now is the time for investors to enter the property market, with rental yields expected to generate an income within the next five years.
While high interest rates and low rental yields may make property seem like a bad investment, it is exactly these tough times in the property cycle that offer the best long-term opportunities, says Jenny Dugmore, managing director of Colliers Dugmore Properties, the residential arm of real estate company Colliers International.
Property has finally come out of its five-year boom and prices are starting to weaken.
However, property prices are expected to recover over the next two years and waiting it out now would mean paying higher prices later.
Patrick O’Shea, chief executive of O’Shea Properties, says although the property market has not returned to the doldrums of the late 1990s, prices have dropped as there are fewer buyers in the market, putting sellers under pressure to accept lower offers. He says property buyers are able to buy below net asset value—in other words it is cheaper to buy a property than to build.
Homeowners, however, as opposed to investors, are still holding on for higher prices, says Dugmore, suggesting that if they can afford to, they should rather see out this weak cycle. But for an investor who may be receiving a rental of R14 000 on a R3-million property while paying R29 000 in mortgage repayments, it makes sense to sell now as it will take time for rental yields to catch up with interest rates.
The investors who find themselves in this position bought property in the past two years when prices were peaking. Dugmore says longer-term investors who bought several years ago are still financially secure as they bought at lower prices and their bond commitments are far lower. The same opportunity now exists for new investors. If you have cash to invest now and can afford to service the mortgage, rentals will keep increasing in line with inflation, rising by 10% a year while interest rates will begin to decline within the next two years. Dugmore says rentals have already begun to increase as the demand for rental accommodation is increasing. Within five years rental income will cover the mortgage entirely and property will become a cash generator.
From an investment point of view, property has always shown good growth, says Dugmore. If the economy continues to grow at around 4%, demand for residential property will be driven upwards. Over the next two years there is expected to be a shortage of accommodation as residential construction has slowed dramatically. At the same time, Eskom has pulled the plug on many new developments. “There has to be a point where we run out of accommodation. This will catch up with us in the next two years,” she says.
Current weak property prices also offer an opportunity for first-time homeowners to get into the property market—as long as they ensure they are guided by affordability. Dugmore says first-time buyers should use the current weaker prices to gain a foothold in the property market because over the next two years rentals will increase along with property prices.
“You are buying at the low end of the property cycle. You may feel the pain for the next few years but if you don’t buy now you will be buying at the high end of the property prices,” says Dugmore, adding that while mortgage repayments will begin to decrease over the next few years, rentals will increase and the cost of renting will become much higher relative to mortgage repayments as the property cycle peaks again.
Dugmore says the key to property investment is that it is not a short-term venture. Do not expect to make money in two years, but as a long- term asset class you can build up an excellent property portfolio to generate healthy cash and capital returns.
Cape town: Opportunity knocks
Chief executive of O’Shea Properties Patrick O’Shea believes the Cape Town property market offers a very strong investment opportunity. Although Cape Town might be seen as a regional investment, it forms part of the global property market. O’Shea says Cape Town is still not at the levels seen in similar competitive markets such as Mauritius and the Seychelles, where properties sell in excess of $10-million.
“Globally we are quite underpriced in the higher end of the market. Cape Town does not even qualify as a high net worth market.” He believes investors have a 12-month opportunity to invest in the Mother City, which is expected to re-rate in line with global investment destinations after 2010. He says there are excellent pockets of value in areas like Simons Town and Fishhoek, where one can still buy properties for around R1,5-million in areas which are relatively unaffected by crime.
‘Complexes not much safer than suburbs’
Although many people buy homes in complexes believing that they are more secure, Gari Dombo, managing director of Alexander Forbes Insurance, says statistics show that residential complexes are not much safer than traditional suburbs, with upmarket complexes suffering the same increased incidence of crime as upmarket suburbs.
One is thus unlikely to attract lower premiums for living in a complex unless its security is enhanced.
Ongoing building in a complex can increase the risk of crime. Many complexes will have one stage of the development occupied before they start building in the second phase. Dombo says that under these conditions the property owners and/or tenants’ associations would be wise to ensure that developers add conditions, such as fines or penalties for non-compliance, to their contracts with the builders.
Dombo says residents also need to let their insurance company know when building activity is taking place. Without this disclosure the insurer will not be in a position to alter the terms and premiums of the cover to provide for additional risks.
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