Regular media surveys on the residential property sector in South Africa frequently compare the ‘returns’ on property with those of other asset classes (particularly the JSE Securities Exchange) – and this often reflects poorly on the performance of property. However, says Bill Rawson, Chairman of the Rawson Property Group, most surveys tend to overlook one all-important fact, the simple truth that property can be – and almost always is – geared, whereas most other asset classes have to be paid for in full upfront.
“If, as in annuities or endowment policies, these are paid for in installments over a lengthy period of time, they generally give returns related only to the sums paid out so far and any early sell-out or cancellation of the policy is usually punished with severe penalties,” said Rawson. “By contrast, the great advantage of property investment is the simple fact that the returns (i.e. the rentals) are calculated on the total value of the property from day one, not on the amount invested to date.
“What is more, reputable investors with good credit records are still able to get as much as 90% or even 100% gearing, making the actual return on their outlay from day one far higher than it appears on monthly statements.”
Taking a simple example, Rawson said that many South African residential properties bought in urban areas today for ± R1 million would, from day one, give a rental of R7,000 per month. This would result in their achieving an annual return of R84,000, which equates to a return of 8,4% per annum on the property in which the investor may initially have only ± R100, 000 invested.
“Even when the property’s rates, taxes, maintenance and possibly levies are taken into account,” said Rawson, “such a return is highly satisfactory by any standards.”
Furthermore, he added, while it is usually possible to fix the interest rate on a bond for a low level for an extended period (say two to four years) today, the rents on most South African homes are rising by 6% per annum. Over a ten year period this means that the compounded return will have increased by approximately 79%.
Rawson said that in his view far too much emphasis is currently being given by analysts to the low real growth rates on residential property. The economist Erwin Rode has, for example, predicted that real growth will hover around or below 2% for the next five years.
“Serious investors knowing that their rents will rise steadily are not put off by low growth because they have committed themselves to the long run (anything up to ten years growth) and they know that low growth periods are almost always balanced by high growth periods in most decades. In addition, when money and/or stock markets do crash, history shows that property tends to hold its value better than they do.”
Rawson pointed out, too, that although overall real growth in South African residential property is slow, many precincts have been identified by Lightstone, ABSA and other reputable analysts as able to buck the trend and achieve annual growths of ± 10%.
Asked what message he has (if any) for potential property investors, Rawson said that while he hopes that they will seriously consider investing in South African property care should be taken not to over-gear.
“The advice often given today is to invest in one new property per annum, but never to reach a point where your total borrowings exceed more than 60% of your portfolio’s value. Anyone operating on this formula is likely to be able to survive crashes and crunches in the economic market – and this advice could be particularly relevant right now because many analysts are saying that the JSE Securities Exchange is showing signs of being overheated.”
