Repeated advice from investment consultants to the effect that portfolios should always be ‘balanced’, by having a significant proportion of the assets in real estate, are only too easily shot down by those favouring other, possibly more volatile, asset classes, especially at a time when, as now, stock exchanges are hitting record highs. Nevertheless, says Paul Henry, Managing Director of Rawson Developers, the advice to invest in property has never been more appropriate than it is at the present – and those who ignore it – he predicts, will in the next three to five years look back with regret.
“Several interlinked factors make property investment right now totally logical and suitable to the man-in-the-street, especially if he has limited means and is not in a position to take big risks,” said Henry.
Perhaps, Henry added, the most important reason for confidence in the property sector at the moment is that property prices, after dropping across the board from 2007 to 2009, are now stabilizing and straight-lining.
“Further drops are not on the cards and almost all reputable South African surveys now predict growth at inflation-beating levels, i.e. 6% to 9%.”
Equally encouraging, said Henry, is the fact that interest rates are at their lowest levels in many years and could well drop further now that the Consumer Price Index is coming in at sub 5,7%levels.
“Investors are now often paying half what they did each month on their bonds in the boom era,” said Henry. “Despite the huge savings now possible, some people are nevertheless still holding back from investing in property.”
Then, too, said Henry, the whole tricky business of applying for a mortgage bond is now becoming less daunting, especially for investors with a proven income stream.
“Almost all the Rawson Property Group franchisees are reporting that the banks are now more open to suggestions and more flexible in their approach this year than previously,” said Henry. “This, incidentally, also applies to their attitude to developers – we are getting more favourable rates than before and there is a new respect for those developers who have managed to keep going and achieve fast sales despite recessionary conditions. Residential lending is, I believe, set to increase and take its place once again as part of South African banks’ core businesses.”
Conditions for buy-to-let investors, added Henry, are also now favourable.
“Since the implementation of the National Credit Act and the cut-back on home loans,” he said, “the demand for rental accommodation has risen exponentially – and this has been strengthened by the slowdown in development. Rawson Properties Managing Director, Tony Clarke, has recently shown that with a net return countrywide to landlords of 5,7% on residential property (after all costs and tax deductions), the return is better than is being achieved in some 30 of the world’s leading centres, where very often returns are below 3%.”
This demand for rental accommodation, added Henry, is particularly strong right now in high density areas that are seen as feeder suburbs for tertiary educational institutions. In Cape Town this applies to Rondebosch, Claremont and Rosebank; in Stellenbosch many of the CBD peripheral areas fall into this category; in Johannesburg, rents in Auckland Park and Braamfontein have benefitted greatly from their being close to the University of Johannesburg and to Wits University; and in Durban much of the CBD is now achieving record per metre square rentals because of the large tertiary education population here.
Where new developments are still coming on stream, said Henry, developers are finding that more competitive material and equipment price costs are enabling them to cut prices. Developers who do their own construction and other services have a further advantage as there are no independent builders trying to make an “extra” profit out of the development.
It is, said Henry, noteworthy that in Knight Frank’s global survey of 5,000 high net worth individuals, most with $100 million or more in assets, over 30% of their assets were in property.
“If property works so well for the very rich, it can surely work for less affluent people,” said Henry. “It remains the safest, if one of the least spectacular, of all asset classes – and it is one of the few where gearing is not only allowed but in fact encouraged by banks.”
