Investing in residential property

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The recent instability in the JSE securities exchange prices has reinforced a suspicion in the minds of some investors, that South Africa’s share prices have become over-valued, and that a five to ten percent, or possibly greater, correction was overdue.

“According to TPN, residential property has ‘ploughed its own furrow’ and performed above expectation, with returns on high density urban areas being anything from 6.5 percent to 10 percent, with annual value increases of the same order,” says Rawson.

According to Bill Rawson, chairman of the Rawson Property Group, while he would not necessarily agree with this thinking, it is noticeable that this mindset has increased the number of enquiries that his group is receiving about the potential for building property portfolios as an alternative asset class.

“The thinking behind these enquiries appears to be based on the belief that the JSE will probably no longer experience the highly satisfactory value rises seen in the last two to three years.”

Rawson says financial advisers have traditionally calculated that South African equity based unit trusts can be expected to give a return of 8 percent plus the inflation rate, for example, 14 percent at present. Last year, of course, they performed far better than this. According to the Cape Town financial consultants, The Financial Coach, they achieved a peak growth of inflation plus 24 percent.

Now many investors suspect that these bullish conditions will begin to slow down – so they are beginning to look at what the property sector can offer. “According to TPN, residential property has “ploughed its own furrow” and performed above expectation, with returns on high density urban areas being anything from 6.5 percent to 10 percent, with annual value increases of the same order.”

Rawson was asked if residential property is a safe investment in a slump period, and if it follows downward economic trends in the same way as the JSE.

He says it is true that in a downturn, the number of defaulting tenants will rise, but it is also true that defaulters can be made to leave their premises (although with some difficulty) and that in today’s market, it is seldom difficult to find a replacement tenant. It is worth noting, too, that in the second quarter of this year, TPN was still reporting that ± 70 percent of tenants were paying on time, while 22 percent paid within the grace period, late, or in partial instalments.

If it does become necessary to evict a tenant by resorting to legal procedures, it can be expensive, and the landlord may have to accept a total lack of rents for as much as half a year. However, comprehensive prior checking before accepting a new tenant can greatly prevent the risk of this happening.

Rawson says the actual return on a property investment will seldom be equal to that of a well-chosen share portfolio, but unlike shares, property can be acquired with geared capital, and in a really unstable market, will usually be less affected by fluctuations than shares.

“Property has a reputation for suiting a more cautious investor, and for such people, tends to form a 30 percent to 40 percent base to their total investment portfolio.”


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