Most of us look at property as a secure long- term investment, or a vehicle for retirement. But you may find the different messages given off by the property investment pundits confusing. Let’s find some perspective to these conflicting opinions to help you get closer to the truth.
I have written at length about getting started in property and residential property investment is my favourite option. But it is certainly not for everyone. There are other options designed to take the hassle out of owning physical property, and rounding off the ups and downs of the property cycle.
Home sweet home
Let’s kick off with your own home. While I am scared to even use the words owning your own home and investment in the same sentence, it is an investment and probably the most fundamental investment that you can make. It will almost certainly be a low yielding investment that can really only be redeemed when you sell, or liquidate the asset.
Economist Erwin Rode is a great protagonist of the theory that owning a home is much more expensive than renting. While Rode has a good point, I would still argue in favour of home ownership.
You cannot take an average and apply it to all, and by selecting a good home in a good area, and maintaining and improving it over time, you will provide yourself with a great (and secure) nest egg for your retirement.
It will also force you to save as you pay into the bond every month and make improvements as you replace obsolete features. A home is also a home, a place where you can keep your family safe. And as the value grows over time, you can refinance and take out the capital to fund other needs. It is an important part of protecting your wealth but should not be regarded as a hard core investment.
Buying to let
Almost anyone with good secure employment, a good credit history and a small deposit can investment in property. What makes this type of investment work is leverage, and from a small deposit you can use borrowed funds to maximise your return.
Put simply, a small secure apartment in a good area, close to work, shops and good schools that can generate good rentals, is a sure bet. Currently there is stock on the market that after paying a small deposit the rent will cover the bond instalments. As the property increases in value your actual return can be exceptionally good.
Commercial, industrial and retail are more attractive than residential property for a few reasons. The most important is the length and value of the lease. A normal commercial lease would not be shorter than three years, compared with a residential lease of one year, and commercial tenants are easier to manage.
Commercial buildings are valued primarily by the value of the leases, and discounted cash flow, and it is normal to factor in annual increases and push any additional operating costs, taxes and levies onto the tenant. So commercial property is a more solid investment than residential, but investing directly in commercial property is harsher and more risky. You also need capital. R1 million will buy you a R3 million building if you are lucky, and that is entry level. But R3 million can double with a well-placed tenant.
Risk of direct ownership
Direct ownership can produce great returns. But there is a downside. Buildings are not liquid, and cannot be cashed in at any time. Most often when you really need the cash, the market is against you and there is no chance of exiting.
Direct ownership is risky and if you have a small portfolio losing a tenant can be a disaster. You also need to have good management to maximise your returns and for a small operator that means you will be the key person, requiring serious skills. This is a business that has to be run.
But there is hope. There are two types of listed property companies in South Africa, Property Loan Stocks (PLS) and Property Unit Trusts (PUT). The main difference between them is that PLS pays capital gains tax on profit on the sale of assets, whereas PUT does not pay corporate or capital gains tax provided that they distribute most of their income to their investors. Over five years, the top performing unit trust was Prudential Enhanced South Africa Property Tracker Fund A with a return of 121%.
Investing in these listed funds will give you exposure to buildings with large capital requirements, such as shopping centres, that require huge amounts of capital but yield great returns and are considered a safe haven in uncertain times.
While listed property stocks may not be sexy for the ambitious investor, they provide an opportunity for investors who are looking for good stable returns in the property sector, without the associated hassle of direct ownership.