South African investors have a love-hate relationship with listed property, with significant shifts in sentiment and demand evident over the last 10 years. Before 2017, it was quite common for multi-asset funds to have healthy allocations to the S.A. listed opportunity set mostly due to the appeal of property companies offering relatively stable dividends. The S.A. property market demonstrated strong performance between 2013 and 2017, attracting significant investment flows into the sector, as depicted in the chart below. Source: Morningstar
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Property investment is high on many investors’ list. Many investors like property as it consists of land and buildings, has physical presence. Property offers capital protection, its value increases over time.
Buying real estate is about more than just finding a place to call home. Investing in real estate has become increasingly popular and has become a common investment vehicle. Although the real estate market has plenty of opportunities for making big gains, buying and owning real estate can be a lot more complicated than investing in stocks and bonds. Owning your own home that you live in is not a property investment. Property investment is something that provides you with regular income over time. There are generally four ways of investing in property:
Ideally, the landlord charges enough rent to cover all of the aforementioned costs. A landlord may also charge more in order to produce a monthly profit, but the most common strategy is to be patient and only charge enough rent to cover expenses until the mortgage has been paid, at which time the majority of the rent becomes profit. The disadvantages of buy-to-let properties is firstly you need to manage tenants. You need to find a good tenant that will pay rent on time and look after your property. If you have a bad tenant that doesn’t pay or damage your property, it can be costly and stressful to the landlord. Worse still, there can be times when you end up having no tenant at all. Also you need to continuously maintain the property, fix things that are out of order, to maintain the use and value of the property. Lastly, property is not a liquid investment: you cannot sell property and get your money in a matter of days. Doing research and finding property in the right location are important in the success of buy-to-let properties. Also be aware of the costs associated with acquiring a property, such as Conveyancer’s Fee, Bond Registration Fee, Deeds Office Registry Fee and Transfer Duty. 2. Real estate trading Real estate traders buy properties with the intention of holding them for a short period of time, often no more than three to four months, whereupon they hope to sell them for a profit. This technique is also called flipping properties and is based on buying properties that are either significantly undervalued or are in a very hot market. Pure property flippers will not put any money into a house for improvements; the investment has to have the intrinsic value to turn a profit without alteration or they won't consider it. Flipping in this manner is a short-term cash investment. If a property flipper gets caught in a situation where he or she can't offload a property, it can be devastating because these investors generally don't keep enough ready cash to pay the mortgage on a property for the long term. This can lead to continued losses for a real estate trader who is unable to offload the property in a bad market. A second class of property flipper also exists. These investors make their money by buying reasonably priced properties and adding value by renovating them. This can be a longer-term investment depending on the extent of the improvements. The limiting feature of this investment is that it is time intensive and often only allows investors to take on one property at a time. 3. Real Estate Investment Trust (REIT) A Real Estate Investment Trust - REIT (pronounced ‘reet’) - is a company that owns, and often operates, income-producing property. The REIT is the international standard. More than 25 countries in the world use a similar REIT model like the US, Australia, Belgium, France, Hong Kong, Japan, Singapore and the UK. A South African REIT - SA REIT (pronounced 'essay reet') - is a listed property investment vehicle that is similar to internationally recognised REIT structures from around the world. Listed Company REITs or Trust REITs are publicly traded on the JSE REIT board and qualify for the REIT tax dispensation. A JSE-listed SA REIT must:
If you like property but do not like the hassles of managing properties, then property unit trusts are for you. Property unit trusts are unit trusts that invest in listed property stocks and REITs, which in turn invest in office, retail and industrial properties. Property unit trusts allow investors into non-residential investments such as malls or office buildings and are highly liquid. They offer investors instant diversification benefit, by investing in a number of property companies. Property unit trusts distribute the income it receives quarterly to investors. You can also benefit from capital growth through rising unit price over time. Over the last 20 years property unit trusts have given investors an annualised return of 20%, making it one of the best investment vehicles over the long term. 5. Leverage This is probably the biggest advantage of investing in properties. With the exception of REITs and property unit trusts, you can borrow money on your property. Banks are willing to give you a home loan, as they can secure their lending with the value of the property. Most mortgages require 10% to 30% deposit, however, depending on your financial standing and credit score, some home loan providers may give you up to 100% bond, meaning you don’t have to put down a deposit. This means that you can control the whole property and the equity it holds by only paying a fraction of the total value. Of course, your mortgage will eventually pay the total value of the house at the time you purchased it, but you control it the minute the property is transferred to your name. This is what emboldens real estate flippers and landlords alike. Whether they rent these out so that tenants pay the mortgage or they wait for an opportunity to sell for a profit, they control these assets, despite having only paid for a small part of the total value. |
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January 2025
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