Listed property is the best performing South African asset class over the past 12 months to the end of October 2014, delivering total returns of 19.38 percent, compared with cash at 5.73 percent, South African bonds at 8.98 percent and South African equities at 10.49 percent.
The return on a direct investment in residential buy-to-let property is not decimated by fees and it is not shared with anyone – the rental income and the capital growth over time belong to the investor, and only to the investor, who remains in full control of the investment at all times.
These are stats from Catalyst Fund Managers, however, it is only since August that listed property performed significantly, and this surge was due to the strong performance of the bond market. As such, experts have warned that this degree of relative out performance is not sustainable and that current economic headwinds are likely to dampen this performance.
It is an unfortunate reality that investors in listed property funds are exposed to the vagaries of the stock markets, often driven by uncontrollable external events and irrational investor sentiments, and particularly to movements in the bond market, to which listed property returns are strongly – and certainly peculiarly – correlated.
There is, however, a way in which investors can replicate – and even exceed – the performance of listed property companies outside of the ambit of the volatile stock markets. He says for those investors who prefer not to expose their life’s savings to the volatility of the stock markets, and the rather strange correlation to the bond markets, the answer lies in a direct investment in buy-to-let property – using the same modus operandi used by the listed property companies, while enjoying additional benefits.
Listed property companies are, essentially, large-scale buy-to-let specialists. They acquire a portfolio of commercial property and rent it out to tenants. The acquisition of the property is financed through corporate property finance provided by financial institutions; by issuing shares or units and listing these on a stock exchange, or a combination of these strategies.
The key to success is the careful selection of the right properties that attract and retain quality tenants and the appointment of professional property managers that manage the tenants and the properties to the highest standards.
Those who invest in these listed property shares receive a portion of the monthly rental income generated by the properties in the portfolio and, as the value of the properties appreciate over time, the value of the shares or units also increase.
Using the same formula, ordinary income-earning South African investors can also acquire a portfolio of buy-to-let property, albeit on a smaller scale and in the residential sector, and rent it out to tenants. The acquisition of the properties can be financed through a home loan or mortgage bond. If the right property – in a good area with high rental demand – is selected, the monthly rental generated by the property should cover most, if not all, of the monthly expenses associated with the property, including the bond repayments. In some cases, there may be a shortfall between the rental income and the property expenses during the first few years, but as the rental increases each year and the main expense – the bond repayments – remain static, the property soon breaks even and then starts to produce a profit each month.
In addition to this ongoing passive monthly income, which keeps pace with inflation year after year, the property also produces capital growth. As with listed property, the key to success is the careful selection of the right properties that will attract and retain quality tenants and the appointment of a professional rental and property management agent that manages the tenants and the property to the highest standards.
Replicating the success of listed property companies is far simpler, more affordable and more accessible than most investors believe. It also offers a number of important benefits. Firstly, residential buy-to-let property investments are not exposed to the vagaries of the stock markets and, particularly, the movements of the bond market. Secondly, the residential property sector is less affected by general economic conditions, because, regardless of the prevailing economic conditions, people still need a place to live as a basic necessity, unlike investing in listed shares or units, which requires a cash lump sum, a direct investment in residential buy-to-let property allows investors to gear their investments, which greatly enhances the returns.
And lastly, but perhaps most importantly, the return on a direct investment in residential buy-to-let property is not decimated by fees and it is not shared with anyone – the rental income and the capital growth over time belong to the investor, and only to the investor, who remains in full control of the investment at all times.