Finance, real estate and business services form at least 20% of South Africa’s GDP, and with the rise of entrepreneurs making their millions in real estate and property, many are asking if their properties can help them make a tidy profit on the side. From just a glance at prices in the Sandton area, renowned as “Africa’s richest square mile”, it is clear that commercial real estate could have many gains for people able to invest in the sector.
Property has long been a medium for making money — ask self-made millionaire Sisa Ngebulana, who has a portfolio of more than R400-million. But does this sector have unwritten rules and caveats that the lay investor is unaware of? On a flat, formless piece of land, what the layperson may see is its commercial opportunity, but not the hidden costs.
The property market in South Africa is valued at R5.8-trillion according Nigel Adriaanse, head of the Enterprise Development Property Fund. Of this R5.8-trillion, R1.3-trillion is in the commercial market, R3.8-trillion in the residential market, R237-billion is in the public sector and R520-billion in other markets.
Globally, many large enterprises such as McDonald’s have made fortunes in innovative revenue generation from property. The fast-food giant is better known for its burgers and value meals, but many argue that they are actually real estate moguls. Former McDonald’s chief executive Harry J Sonneborn is even quoted as saying: “We are not technically in the food business. We are in the real estate business. The only reason we sell 15-cent hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent.” McDonald’s is in effect a property business, because it buys the best properties in the world and then leases them out to its franchisees. Effectively, McDonald’s becomes the landlord of the franchisee and leases the properties at large mark-ups. This is one of the reasons this fast food giant has seen great wins with regards to profit.
It is worth remembering that it was the American residential property market (along with faulty financial instruments used by bankers) that caused the 2008 worldwide recession, which devastated so many lives. How safe is this market with regards to your investments?
Property development, property management and property investment are all interlinked and broadly be described as the real estate environment. Generally property development refers to the improvement of land and/or buildings to meet the needs of society from a social, commercial or infrastructural standpoint.
Property development includes residential (housing), commercial (offices), retail (shopping centres) and industrial (manufacturing and logistics) sectors. The residential sector primarily focuses on consumers, while the commercial, retail and industrial sectors primarily focus on businesses. Within all these sectors, anyone can start a property asset management portfolio. One can start investing individually, or in groups, depending on the timeline of the project and the income.
From an entrepreneurship standpoint, property ownership and management with the intention to earn profit has gained much attention because more and more previously disadvantaged South Africans are gaining access to property through the transformation agenda, in the form of the broad-based black economic empowerment (B-BBEE). One of the ways that black entrepreneurs have obtained access to property is through sale of assets, under the B-BBEE scorecard. To put this into context, companies seeking B-BBEE compliance need to ensure that a particular percentage of their assets is owned by black people/and or bodies such as trusts. Each sector charter will define how much black ownership a company needs to have. However, some multinationals are prohibited by their international company policies to sell a stake in the business, and thus opt to a do of sale of assets transaction. A sale of assets transaction allows the multinational to sell an asset to black people/entities and this transaction earns the multinational points under the ownership scorecard, depending on the value of the asset. Typically these multinationals will sell equipment, and in other cases, property. This allows the black entity — now the new owner — to rent the property out, and thus generate an income.
For the South African with two bonds to pay, you may have access to an extra property and are considering renting it out at a profit. Is the equation that simple, or are there other considerations to be made when attempting to make a profit from the property sector?
According to property experts, ordinary South Africans can enter this obviously lucrative market, and with a minimal capital investment. However, besides cash, there are two interlinked investments that would-be property gurus must make: time and education, or knowledge.
According to Nigel Adriaanse, chief executive of the Enterprise Development Property Fund (EDPF), patience is a key factor in perfecting the art of growing your property portfolio. There are a few key levers to pull in order to win in the property game, and the most important factor is to make decisions using reliable information. “Never get emotional about property,” Adriaanse warns. “Look at it as an asset, rather than a place to live.” Adriaanse further suggests that a due diligence be conducted and for financial feasibility studies to be done, with an understanding of credit ratings, before buying a property.
Ensuring that South Africans — especially the previously excluded individuals — are empowered is a mammoth task to achieve, and the EDPF is at the forefront. The fund aims to change the way South Africans think about property and to change the landscape of ownership in South Africa so as to create opportunities.
The EDPF gives property entrepreneurs an opportunity to access important resources to grow their real estate portfolio. They have access to top mentors and resources in the industry to help them gain a foothold in the property sector. The EDPF is playing its part in producing a transformed property sector and is affiliated with bodies such as the South African Institute of Black Property Practitioners.
The sector is also being joined by youths hoping to make a difference. A great example of young South Africans’ desire to make a difference (and a bit of profit of course) in the property sector are the founders of Jenga Properties, Jimmy Masaua and Mpumelelo Ayirebi, who founded the business in their honours year of quantity surveying at the University of Cape Town. This ambitious duo cut their teeth by managing their personal properties, and they aim to empower other people to get returns out of property too.
Masaua and Ayirebi recommend that the first sound investment in property can only come by first educating yourself: “An investor must be well informed to create valued investments, then financial profit and gain will inevitably follow.” Here they echo the sentiments expressed by experienced property professional Adriaanse.
The Jenga Properties owners cite the following regarding entering the property market: “As the old saying goes, with knowledge comes power. Once you are armed with the knowledge, you will invest wisely, beginning to build the confidence you need to get in and stay in the investing game. The objectives for investment must be clearly set out and serve as a constant reminder to the investor. Furthermore, risk versus reward is always a point of departure for anyone with the desire to invest in property.
“Buying many properties does not ensure that you will be a successful investor. Conducting extensive research and buying the right properties will provide good return on investments. There are many bad property deals out there that can make you lose money. Do not always take people’s word, but do your own research to confirm what you have heard. There is always room to negotiate in property. Do not take the first deal that you see. Purchase prices can be negotiated. Even interest rates with the banks can be negotiated.”
As a new, ambitious and innovative company, they are looking into unconventional models for generating revenue, and the word “stokvel” has now entered property jargon.
Jenga Properties encourages would-be property investors to look into property stockvel — investing small capital collectively into REITs (real estate investment trusts). These are property stocks listed on the JSE that provide cheap entry into the property market, from as low as R100. The investor will earn dividends each year, as by law REITs must pay out 75% of their income back to shareholders. Also the investor will gain capital share appreciation over time.
The current trend of REITs is investing into offshore commercial property that earns foreign currency income such as euros; this improves your share earnings when the money is converted back into rands.
Bodies encouraging sound investment into property have gained a foothold, and coaching around the sector is now quite popular. At the helm of this property education revolution is the South African Property Investors Network.
Professional property investor Warren Brusse, cofounder of the network, has this powerful message to aspirant property investors: “Property has the unique ability to produce passive income; to allow the deduction of expenses to reduce one’s taxes; to provide instant equity when one purchases; to appreciate in value over the long term; and is the ultimate vehicle for leverage and creative finance.”
Brusse says there are two main models to generate revenue. The first one is focused on income cash flow: where you buy a property and rent it out. The second is focused on projected cash flow. This is where you buy a property, refurbish or develop it and then sell it for a profit.
Rent to rent
Brusse has taken note of a new trend in the property market; the new revenue stream that is gaining traction is rent to rent. This is where an investor agrees to a long-term lease over a property with the right to sub-lease. The investor may then change strategy to either room rental or serviced apartments, increase the income and pocket the surplus cash flow. Location of the property is key here to ensure alignment with the intended strategy.
The message is clear that with three key investments, your property portfolio can produce profits. Time: be patient and perform a due diligence on any property that you intend to buy. Be levelheaded: treat the property as an asset. Invest in gaining knowledge on property, and importantly: start small.
Perhaps one of the biggest debates in the political arena today is around land. “Give us back the land!” is a popular chant. Many see land as home or a place to lay your head and rest. Others see land as a possible inheritance for their offspring. You have a place to call your own now, elders may say to their children. Land has the ability to produce wealth and new opportunities. Perhaps, if you own a small piece of land, you should look into exploring its potential for wealth creation.