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  I can sympathise with you here Magnis, I'm finally freed myself from my last property. From 3 down to zero. The last one was where I lived and after 5 years I lost over R140k. Worse still, that was be...  

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My long road to freedom

If you want to invest in bricks and mortar, do so via listed property … better still, an offshore property fund.

In September last year I wrote about my intentions to start disposing of the remainder of my so-called investment properties that I still owned. I don’t want to repeat all the reasons for this decision but interested readers can read the original article here.

It’s a pity that due to the makeover of the Moneyweb website the comments have been lost, but they could be divided into two camps: those who’ve had the same experience and agree with me and, naturally those that don’t.

The people who didn’t agree with me still trotted out the old hairy arguments of gearing and letting the tenant pay off your bond, making you rich over time, blah, blah bloody blah….

Very soon after the article was published and following another unreasonable demand from the tenants, this time wanting the pool remarble-lited, I decided to give notice and put the house on the market. This was over-and-above other ‘discussions’ we had about the sprinkler systems/imaginary rising damp/the fish pond/curtains … you can fill in the rest. In short, I was gatvol. I just wanted shot of the house.

The discussions I had with a number of estate agents in the Dainfern area went something like this:

Me: “How’s the market?”

Agents: “Great, couldn’t be better. Show days are busy and there is a shortage of stock. All the experts agree. We will move the house quickly”.

Three months later the discussion went something like this:

Me: “What’s happening? Any offers yet?”

Agents:” The market has gone very quiet. Maybe we should drop the selling price some more….”

And so on. We all know the story.

More than five months later I eventually managed to sell the house for a price not much more than I could have gotten about five years ago. Just thinking about the opportunity cost here makes me a little sick to the stomach. To think of how many Biotech shares I could have bought when the rand was trading at around R7 to the US dollar.

But no use crying over spilt milk. As I wrote in the original article, show me an investor who isn’t covered in battle scars.

Bear market blues

The residential property market is now in its eighth year of a ‘bear’ market – by which I mean that on average prices have not beaten the inflation rate over the same period. Had you bought an investment property in or around 2007, chances are very high that the property is down over 20% in real terms over the same period.

Further proof of this bear market comes from a colleague in my office who recently bought a house for her ever-growing family. It’s in a very good middle- to upper income area (Fourways) and on enquiry I was told the seller received very much the same price that it was purchased for over five years ago.

Those aspiring property tycoons who stocked up in the previous property boom – fuelled by cheap credit from the banks and gaps in the Credit Act that allowed property buyers to obtain credit from several banks – are experiencing the financial equivalent of being squeezed by an anaconda.

Slowly but surely you are getting squeezed by rising costs (maintenance and ever-rising rates and taxes), finance costs much higher than the growth on the underlying property, as well as the inability to raise rent due to slow economic growth and stagnant wages and salaries in the private sector.

Don’t even think of trying to increase your rentals in line with inflation or in line with the original, hopelessly over-optimistic rental contract, signed a couple of years ago. The tenants simply cannot afford inflation-adjusted rentals and if you put the squeeze on them they simply up and leave to somewhere cheaper. So what do you do? You keep the increases modest.

Trying to find exact figures on the performance of the residential property market is difficult: you need Sherlock Holmes-like financial skills to find out exactly what is happening.

In my previous column I wrote that prices in the Western Cape last year were up by 14% for the year – the only province showing real growth. We know why.

Compare that with the average increase for 2014 of 6% for the whole country, according to FNB’s numbers. If one assumes that the Western Cape represents about 25% of the market, then it means that prices in the other eight provinces rose at an average of only 3.3% for the year – about 3% shy of the inflation rate over that period. Note that figure does not include maintenance and rates and taxes.

Compare that with equity funds on the JSE that have grown by almost 20% year for the last 15 years and more.

Property hopes dashed

At the beginning of the year FNB put out a fairly optimistic forecast for the year: expect an increase of between 8 and 9% for the year. This good news was broadcast by every participant in the property market. Property pundits appeared on TV and radio….2015 was the year of the great recovery in the property market, they trumpeted.

I had my doubts and, not surprisingly, my inbox collected a couple of rather scathing emails about my unpopular views on the market. “You see, you see … property prices are going higher.

Barely three months later and John Loos, the likeable property economist at FNB has had to downscale his forecast for the residential property market. In a much-ignored press release just before the Easter weekend Loos admitted that his optimistic view of the property market was way off the mark.

He now does not see nominal growth of much more than 5% for 2016 – about the same as the expected inflation rate for the period. I reckon he will be lucky to get that.

Again, if one strips out the Western Cape from the equation, one gets expected growth of not much more than 3% for the rest of the country. Meanwhile your interest costs are anything between 8% and 10% per annum (and heading higher) while that vampire squid of ever-rising municipal rates and taxes, trots along at about 14% per annum.

There are still undoubtedly some pockets of the residential property market showing signs of life. But there are also ever-increasing areas of our country, especially in smaller to mid-sized towns, where the residential property market has virtually ceased to exist.

When Pam Golding moves out of a town and the Chinese retailers or Capitec and Finbond moves in, you must know the end is near. I travel a lot throughout the countryside and what is shocking to see is how many formerly pristine and vibrant little towns are collapsing in a heap, and with them the property values they used to represent.

As local as you can get

Residential property is the most local investment that you can make. You buy a house/townhouse/duplex in a specific street in a specific suburb in a specific town or city in a specific country. It does not get more local than that.

From the moment that you take ownership of that property you are exposed to the economic, political and social conditions that influence your investment…and there is nothing that you can do about it. You cannot sell the house at short notice and buy another one in a better area. Even if you could, the costs would be enormous and it’s a time-consuming process.

Further, as the rand goes so does your investment.

You cannot hope to foresee what the area/suburb/dorp/city will look like 10 or 20 years down the line – the demographic changes in our society are far too powerful and unpredictable.

In around 1994 I was asked on Radio 702 for my views on investing in Hillbrow/Berea/Yeoville. I said I considered the risk too high and would not advise it. Boy—did I find myself in a verbal storm of note.

Today my inbox is filled daily with “special offers” on properties in these areas at prices less than R1 500 per square metre. Prices have not risen one cent over 20 years in these and other areas.

Some time ago I took a short cut through Hillbrow to get to the Ellis Park rugby stadium. It looked like a scene from the movie District 9. Best avoid it.

If you want to invest in bricks and mortar, do so via listed property counters on the JSE or a collective investment property fund. Far better still, invest into an offshore property fund. Last year the returns were in excess of 30% and no local rate and taxes than can be squandered.

*Magnus Heystek is the investment strategist for Brenthurst Wealth. He can be reached for ideas and suggestions at magnus@brenthurstwealth.co.za.

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   11 comments

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Sorry about your experience Magnus, I have done reasonably well investing in the western cape. I have always looked for the areas where there is the highest rental demand and then looked for properties that are very simple and tenant proof. No pools, fishponds, or fancy fittings. If in doubt post an advert offering the property for rent before it is bought on Gumtree. If you inbox is full within 24hrs with hopeful tenants begging for it, you are in the right place. Final advice never base your decision on what the estate agent says.

Might I suggest that next time any Moneywebber feels like taking an adventure holiday without a passport then they can do the Eastern Suburbs of Joburg/Germiston ‘getaway’ gig.
They can travel down Jules Street, Malvern, (if they dare) the longest street in the country and then enter Germiston where they can pass by a suitably squalid ‘Good Story’ squatter camp on their way to the Germiston CBD (I use the term loosely) where the sight before them of the once proud city will rival their worst downtown Darkest Africa NIGHTMARE.
Take the advice of Mr. Heystek and stick to overseas property, less Good Story to tell but a lot more security.

Hi Magnus, I cannot agree with you more! I am in the process of getting rid of my total property portfolio. I have an offer on one of the two remaining from an Australian couple on a Golf Estate in the Western Cape. I currently live in the other one on the same estate. I support your view on local and offshore listed property investments. I will be keeping a close eye on the local property investment this year with a view of also placing those funds offshore. You will always get some “grapgat” having a dig at some of your articles, but I for one has benefitted hugely by gaining some useful knowledge from your articles. Thank You.

One has to compare like with like – a geared property is a bet that the Rand will continue to loose value. If you can borrow R1m at say 8% tax deductible, is an after tax cost of money of 5.6%, in other words very close to the inflation rate which means it is cash for nothing. Each year there is inflation of 6% you “gain” R60 000 being the amount that the value of the bond has declined in real terms. Invisible and tax free wealth generation.

The number of property bears make me think it is time to add to my property portfolio.

Agreed! There is no worse way of having all your eggs in one basket like having a specific property “In a specific street in a specific suburb in a specific town”. Just one thing thats starting to worry me is the NAV’s of listed property. I bought listed property for the dividend income – and was not disappointed. What was unexpected is the capital growth I’ve had. With many listed property funds having NAV’s around 1.3, does it mean the inherent listed property values are 30% overvalued? I.e., am I skating on thin ice to keep my money in listed property?

Thanks for you’re experience. As per JFK comments you have shaped my way of thinking after you’re book “The World of Money” and the talks we had on 702.
You get my vote for MR MONEY in ZA.

Great advice for 5-8 years ago, looking back. Since then rents have caught up more to bond repayments, while shares & listed property have become expensive, and the Rand has weakened. What will the future hold? No idea, but until the Eskom crisis has passed, I wouldn’t bet on a new property bull market. For that matter, I wouldn’t bet on a recovery until the building of free RDP and subsidised housing for the “gap” market has abated either. And in other news, Capitec is aiming for 25% national market share by 2020…

Thanks for this Magnus, always enjoy your articles and the way you “scribe”. You covered residential/business properties, how’s about a look at agricultural properties, especially in the light of our friend Julies recent comments re ground. I have a substantial piece of real estate in the North Eastern Cape farmed now by my son, better than I did I might add, now third generation and hoping to stay that way. When Agri SA comments about the land invasions of agricultural ground they always say they are in consultation with government. That does not do much for us at the coal face. Imagine the horror of waking up to manic chanting one day with a few thousand crazed fellows erecting shacks with the police watching. This is the reality of it. I have always held the view that not all of the previously disadvantaged (PA) want farms. If you farm near a city you may be in danger as transport, the spaza shop etc is close by but maybe those of us that toiled for years in the inhospitably cold Eastern cape, far from transport, work for the squatter, fire wood, water, intense winter cold, may just be lucky enough to have been let off the hook. I am sure if you asked the majority of the PA’s they would say all they want is a place close to work, transport etc where they can build a house and have security……a scarce commodity in this land of ours. I ask this because getting rid of investment property is a lot easier than a farm, which is also your profession.

Very interesting take on the local property market. Whilst being factual wrt local statistics on the sector it is heavily skewed in negativity due to the writers own personal experience in this asset class.
Similar to how someone doing poorly in the equity market swears off never investing in stocks again.
I own property in Durban, which was bought(cash) to let, and have been fortunate enough with my investment to have had decent returns in the properties value as well as rental income. I have had some NIGHTMARE tenants, prominent businessmen acting like animals and have had to do major damage control at times with our body corporate. Currently there are fantastic tenants requiring no real admin. It ebbs and flows and can test ones patience at times.
A family member invested in the local property market in Durban (Umhlanga) between 1999-2001 and sold majority (80%) before the global melt down, in some cases more than tripling the initital investment in higher-end properties (R10m+). The unsold properties have continued to appreciate although obviously not at that rapid rate.
The major takeaway for me has a;ways been location location location.
The right property at the right % of ones portfolio can be a great investment.

I can sympathise with you here Magnis, I’m finally freed myself from my last property. From 3 down to zero. The last one was where I lived and after 5 years I lost over R140k. Worse still, that was before inflation and opportunity costs. With those added it was R2.7m on a 1.3m property. Ridiculous, I won’t do that again… Here are the stats for the doubters http://investorchallenge.co.za/the-last-house-ill-ever-own/

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