A pragmatic approach to property investment

The dilemma facing an aspiring or potential investor has never been so acute, says Elwyn Schenk, Pam Golding Properties’ area principal in Umhlanga and Umdloti on the KwaZulu-Natal north coast.

“In financial markets we’ve seen any positive news being tested with a resurgence of concern about the eurozone, which serves to sap confidence,” he says. “Investors have also been unsettled by less promising news about activity in the major economies and the potential knock-on effect on global markets generally.”

Schenk says it is little wonder that the investor, faced with highly volatile share, bond and even gold markets, is again turning to property as a traditional, solid and lasting store of value.   This especially in the face of an interest rate regime likely to remain muted at least through 2014, which means that in real terms (taking inflation into account), fixed yield investments such as savings accounts have their value eroded each year. Fortunately, South Africa, with conservative fiscal and monetary policies, has fared relatively well through the global economic contagion.

“Many investors view investment property as the ultimate inflation hedge, providing as it does a regular, escalating income as well as over a long period of time, healthy capital growth. Globally many fortunes have been made through investment in property and today’s tighter market conditions present an ideal opportunity to purchase property at reasonable prices, often well below their replacement costs.

“However,” says Schenk, “a highly selective approach to property investment is important, with emphasis on several important factors.  As always position is key, with traditional blue chip areas and high growth nodes likely to be more attractive. These could be in the sought after areas such as the ‘golden triangle’ of Western Cape, North Durban/uMhlanga and Sandton, or other areas where substantial government infrastructure spending will create conditions for high growth, for example the port development in Richards Bay.”

He says property is one of the few asset classes against which one can borrow - this is especially beneficial in these times of low interest rates, which means  that the benefits of gearing can be maximised, thereby improving the net return to the investor.

“It is also important for the investor to understand the dynamics of any investment.  So before buying property get a quality estate agent to evaluate the options to see what best suits your situation. Sound investment logic does not mean buy the best property in the area.  In fact Warren Buffet recently advised US investors to buy older homes in good areas, for restoration to either hold or resell,” says Schenk.

“The sought after and ideally positioned area of uMhlanga Rocks presents a good example of this principle. Prices here range from R700 000 for a one bedroom apartment near Gateway to R18.9 million for a penthouse in Oyster Quays, with a wide variety of options in between. While capital available for a deposit and affordability are important factors, either end of the scale represents an excellent investment in its own right.”

Adds Schenk: “The explosive growth of corporates on uMhlanga Ridge and La Lucia Ridge has led to a strong demand for properties to purchase and rent.   So for the investor, apartments in the range of R700 000 to R2.5 million offer especially good returns.  In uMhlanga village, the new Beacon Rock development will appeal to investors aiming at the lucrative holiday market.

Apartments priced from R2.2 million for a 112sqm unit will command a rental of around R12 000 per month, representing a net yield of about four percent. Bear in mind that a yield on a property has two elements, ie rental yield and capital growth.”

He offers some useful advice. A professional estate agent will help you spot ‘special situations’ where property can be acquired at reasonable prices, but beware of ‘cheap’ as most sellers are astute and knowledgeable about the market so bargains are hard to come by in good areas. Rather pay a market related price in an area which has shown price resilience under difficult economic conditions.

Schenk says in the case of individual title (free standing homes),  check the title deeds for any registered servitudes, make sure that the structure is in accordance with the approved plans and if in a new area check the precinct plan to see if any new developments are planned for the area eg shopping centres, new housing developments etc.  For sectional title it is necessary to obtain the rules of the Body Corporate, which covers the often contentious issue of whether or not animals are allowed on the premises.

Equally important, obtain the latest Body Corporate financial statements from the managing agents.  These will give an accurate (audited) picture of the state of affairs of the block, which will signal any issues such as the likelihood of a special levy being raised.

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