In good times and bad, investment in real estate has proven difficult to beat on almost any measure. While world stock markets have had a good run, the fickle nature of excessively high priced earnings ratios has brought a nervousness which for many is difficult to live with. Equally, gold has been erratic in its performance.
Elwyn Schenk, Pam Golding Properties area principal in Umhlanga and Umdloti, explains that without detracting from the need for a balanced portfolio by geography and asset class, long-term investors in quality real estate have been well rewarded.
Returns on residential property have two elements, a capital growth portion which over the years has comfortably outstripped inflation and, for investors rather than owner occupiers, a rental component which is also normally inflation proof.
More recently, capital growth nationally has been around seven percent per annum while rental yields vary from five percent to nine percent per annum – a combined return of 12 percent to 16 percent. In prime areas such as the golden triangles of Cape Town, North Durban and Sandtonin Johannesburg, these numbers have been appreciably better, he says.
But, asks Pam Golding Properties, what really contributes to the intrinsic value of a property, assuring the owner of future good returns when they wish to sell the property, or rent it out for a sound monthly income?
The astute investor market continues to retain an appetite for residential property, particularly the buy-to-let investor.
Their purchase decisions are carefully considered on the basis of price, location, features and importantly, yield potential.
Multiple housing projects under sectional title can result in investors achieving extremely sound returns, driven by those who understand the ultimate value of buying into a preferred housing solution, well-run schemes with excellent communal facilities and the potential to rent out apartments easily due to their broad appeal.
This makes good sense as new developments in well established areas are attracting like-minded people on the basis of lifestyle and convenience regarding access to major routes, the workplace, good schools, amenities, and shopping and leisure facilities.
It is logical that location plays a major role in the buying decision, particularly from an investment perspective. Given that the smallest, average property in a sought-after area is likely to increase in value at the same rate as the other properties demonstrates the fact that location and price appreciation go hand in hand.
What adds value to a property?
Laurie Wener, managing director for Pam Golding Properties in the Western Cape’s Cape Town metropolitan area, says the criteria for adding value to a property varies from suburb to suburb.
In family-oriented suburbs that consist predominantly of family homes, proximity to good schools, shopping centres and public transport and/or arterial roads are important, for example, Rondebosch in Cape Town’s Southern Suburbs.
“Conversely, in more rural type settings, it is an advantage to be out of sight and sound of arterial roads and away from the hustle and bustle of retail centres.
“The value in living on the famous Western CapeAtlantic coastline is defined by proximity to the sea or elevated views of the mountains and sea and, of course, modern architecture.”
Generally speaking, says Wener, the adage still applies – it is better to have a shack in a good position than a palace in a poor one.
Also, security and sufficient covered or at least secure parking is important everywhere. Investment properties are popular in established areas where rental demands for apartments are high.
Rental returns are highest at the lower end of the market – percentage wise, decreasing with increasing property value. If you are growing a portfolio of properties then having more, smaller properties versus fewer, larger properties spreads the risks and will increase the rate of rental return, although not necessarily capital growth.
Bear in mind that young working or professional singles and couples and those at the other end of the spectrum who are scaling down often opt for easy, low maintenance, secure city living for the ambiance and style as much as the convenience and security.
“As an investor it’s important to do one’s homework and decide what you want. If your requirement is for low risk tenancies then aim for an established area such as Claremont or Sea Point and properties which appeal to a mature, more affluent market,” says Wener.
Speaking of high net worth investors, Basil Moraitis says those looking for pure capital growth and who are unconcerned about generating a yield on the property until they dispose of the asset, tend to look for trophy properties which offer special attributes and are distinguishable from the general residential property market.
“Along the sought-after Atlantic Seaboard these special and unique features include: guaranteed panoramic sea views, protection from prevailing winds, privacy from neighbours, direct beach access and rarity value.”
Moraitis says the actual dwelling house is often a secondary consideration as this can always be changed – and may even be a brand new house which the buyer elects to extensively alter – it’s the position which is paramount.
The pure investment buyer, while wanting to include some of the attributes set out above, is more concerned with monthly property yields as well.
What about the layout?
What of the configuration of a home, is there a ‘formula’ for how many bedrooms, bathrooms and the like? Again it depends on the area’s specific demographic. Commenting on the Cape Town metropolitan area, Wener says family home areas should have three to four bedrooms with at least two bathrooms, while a level garden with swimming pool certainly adds value.
“However, most apartments in Sea Point have only two bedrooms – with a new trend among buyers demanding three bedrooms. If all bedrooms are en suite – which is usually not the case in older blocks – this will add value.”
Undercover parking at one bay per bedroom also adds value as well as views, appealing outlook, good maintenance, attractive gardens, modern bathrooms and kitchens.
Newer areas such as Constantia and super luxury areas such as Bishopscourt, Bantry Bay and Clifton demand modern architecture with good flow, excellent indoor-outdoor entertainment facilities, at least three reception rooms, top security and irrigation, and electronically controlled access.
Homes with energy saving features are definitely attracting increasing interest and becoming more and more important.
Bear in mind that apart from location, style and functionality determine the initial attraction evoking the emotional response of any buyer or tenant, so quality and finishes will only be of any value if the response is positive.
“In today’s market purchasers are looking for good buys and value for money and may be more inclined to compromise on their dream for a better value offering,” says Wener.
Flow is important
Depending on affordability, many buyers today prefer a modern, low maintenance home with an open-plan layout with an emphasis on the flow of living and entertainment areas from inside to outdoors.
Carol Reynolds, Pam Golding Properties area principal in Durban, Durban North and La Lucia, says it’s important to bear in mind that it is easy to improve the cosmetics of a home – the difficulty lies in trying to reconfigure a badly designed property with poor flow.
Generally, bedrooms should cluster together either upstairs or in one wing of the house, with a spare bedroom being located away from the core bedroom wing for privacy.
The kitchen should be open-plan and flow onto the lounge and dining areas, which should then lead onto the veranda and pool and garden.
“If the house is double-storey, the bedrooms should be upstairs, instead of being on different levels, and ‘upside-down’ houses where the bedrooms are downstairs and living areas upstairs, are always more difficult to sell.”
Another factor to bear in mind is that if you are selling a home in a high price bracket, there is a buyer expectation that such a home should have excellent finishes and be in immaculate condition, so finishes become critical in the higher echelon and less critical at the under R3 million level.
Special features can add value to a home, but generally, having a home with no negatives will outsell a home with a few negatives and some special features. For example, a home with an exceptional view but a very steep driveway will be more difficult to sell than a home on a level garden with less spectacular views.
“One of the most critical factors to consider when choosing a location is to look at the price ceiling for an area,” says Reynolds.
The best investment will be one where the difference between the purchase price of the property is well below the ceiling for that area, so that over-capitalising will not become a concern, and there is plenty of room for improvement and growth.
Consider the big picture
Annien Borg, managing director for Pam Golding Properties in the Boland & Overberg regions, advises buyers to consider growth in property values in the area over the last five years – are you seeing other houses being upgraded in the area, what are the short and long term development plans for the area, such as new access roads, growth in industries around the area that might create job opportunities, thereby adding to the demand for properties in the area, and then establish what the rental returns would be if you had to rent out the property.
Right price is key
It is very important to acquire the right property at the right price in the right address, according to Jonathan Davies, Pam Golding Properties joint area manager in Hyde Park, Johannesburg.
“First consider the type of property that involves lower maintenance, such as a cluster home or a sectional title development.”
He says the right price is very important as every cent spent over the market price will need to be recovered over time and this can eat into a potentially rewarding investment.
Avoid an emotional purchase and look at the facts and return. Remember, although a property may look discounted and may offer a good deal if it is in the wrong location it may never be as rewarding financially and it may also be more difficult to find a tenant. Also consider good security and good access to public transport and highways, according to Davies.
“If you are looking to build up a property portfolio, start small and avoid having too much debt. If you ‘own’ several properties but they are all heavily bonded and interest rates commence on an upward trend, you may over time be compelled to offload.”
Never rush to acquire property, consider your own financial position and future growth and once you have established yourself with a few rental opportunities and they are more secure then look for others.
Plan for the worst-case scenario and have a contingency plan available. Also remember that your rental income is taxable and it is wiser to have a high bond on a rental property as the bond interest can be written off against income.
Any excess liquidity can be moved to other investments or the bond on the home in which you live. Be prepared to make the right decisions and you will then reap the rewards over time, he says.
Dexter Leite, Pam Golding Properties rentals manager in the Western Cape, says budget is a high level determining factor as to which areas, suburbs and property type you invest in.
“It’s also important to consider spreading your risk, for example if you have R5 million to invest in property, do you put it into one, two or maybe three properties in three different areas?”
He also emphasises the importance of buying at the right price, besides timing, location and all the other relevant factors. “If you pay too much when you enter the market you ‘pay’ more later, when you sell.”
What rental return can you expect?
Leite says in the Cape Town metropolitan areas rental return generally is around five to eight percent gross of the property’s value.
“For example, a R1.9 million purchase could provide an approximate R132 000 gross annual rental return (R11 000 per month), and so the return does not generally vary hugely on a particular purchase price – although, there are of course exceptions to the rule.”
The return does, however, reduce on the more expensive or exclusive properties i.e. it could be below five percent, but the capital gain on these properties is usually inverse.
The rental escalation will probably be around six to eight percent so over time, depending on current market conditions, as the rental increases and ultimately one aims for a reasonable capital gain on the sale of the property.
As a simple example, if you pay R1.9 million for a property and sell it a few years later for R2.28 million, seemingly you have made a 20 percent profit.
However, all costs associated with such a purchase since its acquisition up to the date of sale need to be taken into account. And if the property was acquired specifically as a buy-to-let investment, then the rental income needs to be offset against all expenses, reflecting the actual return one makes.
Given the current acute shortage of rental properties available which is widespread in Cape Town areas such as Southern Suburbs, City Bowl, the Atlantic Seaboard, Southern Peninsula and Northern Suburbs, it makes very good sense to consider investing in the buy-to-let market – with the pent-up demand keeping pressure on increasing returns, he says.
“Ultimately you pay for what you get, provided you are a discerning buyer, so a well positioned, constructed and well presented home with a good layout and quality (modern) finishes will command a realistic price or rental,” adds Leite.
http://www.property24.com/articles/how-to-spot-good-property-investments/19461 – Property24