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Should you consider investing in property to protect against inflation?

We urge caution when making property investments at this time, despite the low rate of interest and marketing from property developers.

Last month the governor of the Reserve Bank said that he expected that interest rates would not increase during 2021 and that he expected inflation to stay under control.

Have you noticed an uptick of unsolicited property-investment related offers coming to your inbox? Or the increase in the number of property adverts in the Sunday papers? Are property marketers ‘putting lipstick on pigs’ or are there bargains to be had?

How do we take advantage of the current environment? Is this the right time to take a leap of faith and give up your rental to buy a place of your own? Or upgrade to a bigger home? Or buy residential property to rent out? Alternatively, how does this information affect investments in the beleaguered property unit trust sector?

The answer, of course, is always ‘… it depends’. It depends on your net worth, and how much you can afford to lose. It depends on your knowledge and understanding of both the physical and investment property sector. We would suggest that although there are bargains to be found, a thorough review of the risks and costs associated with property investments, as well as research into alternative investment destinations for your money is vital.

Residential property

The combination of 50-year low-interest rates and Covid-19 has fueled, and in some cases, changed the requirements of residential property buyers in many parts of the world. Work-from homers, home-schoolers and those who have taken in extra family members have led the charge to find bigger properties in the suburbs.

In the US, for example, new home sales were 43.2% up in Q2 of 2020, as Covid started to spread in the US, contributing to a 35 year high in homebuilder sentiment. US buyers seemed to be on the lookout for both lower-tax locations and more space. In the UK, annual house price growth rose sharply in the latter part of 2020, to a high of 7.6% in November 2020, considerably above the rates typically seen over the last two years, and the highest the rate has been since June 2016.

However, in South Africa, there has been little to celebrate for homeowners for about a decade. A May 2020 report from Global Property Guide noted that house prices rose by about 57% between 2007 and 2019, but real prices fell 18% when adjusted for inflation. However, more recently, the February 2021 edition of the FNB Property Barometer showed that the latest data reflects improved house prices of specific house types in high demand areas.

The FNB Property Barometer noted that the first wave of employees impacted by Covid were mainly blue-collar workers, who typically would not afford a mortgage. However, more recently, employment woes have impacted professionals and white-collar workers. Stats SA data published in October 2020 showed that 670 000 formal sector jobs were lost in Q2 2020, year on year.

Buy to occupy:

If you are a first-time buyer or want a bigger home, what should you look out for? We gathered some tips:

  • Taking advantage of the buyer’s market, low-interest rates and banks falling over themselves to compete for ‘good credit’ might make you simultaneously excited and anxious. Our main tip is ‘don’t rush’. Slow down. Don’t just wait for a good opportunity; wait for the right opportunity.
  • If you are a first-time buyer, don’t fall for the ‘rent is throwing away your money’ line. Renting is not throwing away your money; it offers flexibility, a key advantage for younger buyers. In countries with an uncertain economic or political future, it makes good sense to rent while the long-term scenario unfolds.
  • Before you contact estate agents, start looking for auction notices or deceased estate properties, decide how much you feel comfortable spending on a home loan. It is also a good idea to get pre-approval for a home loan so that you can start negotiations in good faith with a seller. Note that you should talk to other banks once your offer has been accepted to see if your original deal can be improved.
  • Negotiate with the seller. Haggling is part of the home buying process. Remember that when the rubber hits the road, the estate agent works for the seller.
  • Before you make an offer, ask a professional evaluator to inspect your new home. They will know to check for electrical compliance, the strength of foundations, leaky roofs, leaking swimming pools, the quality of gutters, rising damp and other easily hidden flaws.
  • Buy a home that is easy to sell when you move on. Look for an area that remains buoyed by good-quality neighbourhood schools, where homes and streets are well maintained. Before you buy, evaluate the physical safety features of your new home, the efficiency and reputation of security companies in the area and the strength and cohesion of the local community.
  • Bear in mind that there has been an increase in the popularity of multi-generational homes and homes with extra space for working from home. It might be a good time to target homes with granny cottages, either to rent out to help pay the bond or for {boomerang?} children or parents.
  • Budget for home maintenance and utility bills. In South Africa, the costs of property rates, water and electricity have increased at above inflation rates for almost a decade in many municipalities.

Buy to let:

Property economists and analysts seem to agree that the last year has seen increasing residential vacancy rates and that the residential property industry is in a slump. This trend has been in place since at least 2016, as this article from Moneyweb shows. Since then, conditions have deteriorated and more than ever, landlords are struggling to find tenants who can pay the rent, and are accepting lower rents from reliable tenants.

An article published by Daily Maverick, ‘Buy-to-let has become buy-to-regret for SA’s residential landlords’, in April 2021, illustrated plummeting rental escalation figures sourced from credit bureau TPN after 2014 in three of SA’s provinces. These trends have left many buy-to-let investors with vacancies. Pensioners who invested in property to shore up their retirement income have been particularly hard hit.

Investing in property via collective investment funds or real-estate investment trusts

A quote attributed to 18th-century British banker Baron Rothschild advises us to ‘buy when there’s blood in the streets, even if the blood is your own’.

Individual investors can access retail, commercial and industrial property investments either through buying shares in a real estate investment trust (Reit) or units in a property collective investment fund, which invests in Reits and other income-generating assets. Both of these investment vehicles offer investors a mechanism to get in and out of the property market very quickly.

Both Reits and property collective investments are mandated to invest in a spread of South African property types, including commercial, retail, storage, health-related, residential and industrial properties, depending on where they see opportunity. Income is derived from those properties that offer a secure and escalating income stream. Capital growth comes from quality shares that show potential for an upward share price movement.

Reits are listed companies on the Johannesburg Stock Exchange and buy, manage and develop portfolios of properties according to different mandates, while property unit trusts invest in Reits. One of the main differences between Reits and collective investments is that Reits are permitted to leverage (borrow to buy investments) using their assets. In contrast, collective investment property unit trusts finance their investments through new inflows.

According to data from Profile Media, as of May 7, 2021, the two largest (as measured by assets under management) property unit trusts in the South Africa/ Real Estate / General sector, (the R5.4 billion Stanlib Property Income Fund and the R5.1 billion Sim Property Fund) have had cumulative (not annualised) negative returns over the last seven years. The third biggest, the R2.9 billion Old Mutual SA Quoted Property Fund, has had cumulative negative returns for five years. However, fortunes have reversed for all of these funds over the last 12-month, six-month and three-month time periods.

Reits have experienced more diverging returns, probably due to the wide range of underlying investments. However, the Goliaths of the sector (Growthpoint, Resilient and Vukile) saw their share prices peak between February 2018 and November 2019, before taking a tumble. Share prices have had a few tentative signs of growth since then, but need economic growth, stability and confidence to spur them to new highs.

Property unit trust fund managers warned in their commentaries that while yields may remain attractive, they expect little nominal short-term distribution growth and negative real growth. There seems to be general agreement that retailers are struggling, and it is unlikely that landlords will be able to negotiate higher rents given the high vacancy levels.

Global Credit Ratings, a rating agency, also weighed in with a view on the Reit sector. In an article published on the company website ‘A Moderately Less Bleak House; GCR’s 2021 outlook for South African Reits’, the agency believes that South African Reits’ performance fundamentals will remain under pressure in 2021. But if less restrictive Covid-19 lockdown levels remain, GCR believes that ‘short-term operating risks should ease and allow for greater stability, although the longer-term trajectory is dependent on how Reits adjust the usage of their properties to meet the evolving requirements of tenants and their customers’.

Rosebank Wealth Group would urge caution when making property investments at this time, despite the low rate of interest and marketing from property developers. However, it is possible that those with patience, good research skills and knowledge of the property sector may find good value.

ADVISOR PROFILE

Alwyn Smit

Rosebank Wealth Group (Pty) Ltd

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I’m interested to see this article a week or so after I submitted this very question to MW.

Hmmmm.

Thanks for a good and valuable article. Food for thought.

End of comments.

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