There is no asset class in the world that provides absolute capital growth and income. There is one asset class that has proven itself over many centuries, in fact since humankind moved from daily survival to building personal wealth. And that, in its simplest form, is shelter.
The evolution of property as an investable asset
Early man evolved over millennia and by the middle ages were living in fortified castles. When we get to Mars, we will also need shelter to survive. As man evolved so it was realised that one can earn income from shelter by renting out to those who required a roof over their head.
Shelter – property – or real estate as it is referred to, has become a sophisticated asset class that offers investors many alternatives.
Wealth from property is derived in three ways:
- Capital growth: Purchase to sell at a profit
- Rentals: Invest in yields
- Capital growth and/or rentals
The hidden gem of property is in the entrenched demand in that the world’s population needs shelter. And as the planet’s population expands so does the demand for property. Demand drives property prices which are underpinned by the increasing cost of building new property.
Rental demand is driven by the fact that more and more people cannot afford to get onto the property ladder and the escalating trend of globalisation which drives job mobility. As little as 20 years ago, it was the rare exception that persons and families would move continents, now emigration an accepted fact of modern living. Gone are the days where one grew up and died in the same neighbourhood.
Wealth management by property
Investors who wish to progress towards financial security need to build wealth. The popular choices are paper assets; like shares, unit trusts and bonds; commodities like gold coins and diamonds and property such as residential, commercial and student accommodation.
Every asset class has its pros and cons, yet it is acknowledged that property is a robust investment able to deliver in good times and bad. In good times there is profit from capital growth; at all times there are rentals. Even when economic times are tough the landlord can still negotiate a return. With paper assets, the investor has minimal, if any control, and of course has to be able to handle volatility.
We believe that in this uncertain and disruptive world future-proofing tomorrow is paramount, as irrespective of the challenges of today, tomorrow will arrive.
Each country on the planet has varying degrees of investment risk. Global credit rating agencies like Moody’s and Standard & Poor’s rate the investment grade of a country looking at how safe an investment is versus the potential return.
Once a country is rated sub-investment grade it is referred to as junk status as the risk versus the reward is out of balance.
In an emerging country like South Africa, the risk is further exacerbated by the rand. One symptom of globalisation is that efficient economies put uncompetitive industries out of business. The result is the country loses its ability to produce goods and services locally requiring the importation of goods and services.
|The rand is self-destructing | On average +7% pa|
|1971||R1 000 000||$1 400 000|
|2000||R1 000 000||$303 687|
|2020||R1 000 000||$69 000|
Simply, every year the same pair of shoes costs more and more, as most of the shoes available are imported and are priced in US dollars.
Passive income by property rentals
The outstanding characteristic of property is the ability to generate rentals in good times and in bad. Referred to as passive income, this income is deposited into your bank account and is accessible to the landlord anywhere and in any currency.
Hard currency passive income
But when you earn soft currency passive income the reduction in purchasing power is unavoidable. One becomes poorer and poorer as the rand-denominated income purchases less. Thankfully globalisation has made investing in hard currency property passive income possible and profitable.