Registered users can save articles to their personal articles list. Login here or sign up here

What’s really happening in SA property…

Why the ‘it’s always a good time to buy’ statement is false.

Property is not the largest investment the ordinary person will ever make – as the industry likes to claim. That, in my view, is your pension.

But it remains an important decision nevertheless, and one that anyone in the middle to upper class will make several times in a lifetime.

Know that when you read most comments and articles about the state and future prospects of home prices in South Africa, as elsewhere in the developing world, you are most probably reading marketing fluff.

Developers, estate agents, home-owners, banks, mortgage originators and everyone else in this industry is always optimistic about the market. Google the property market going back over the last five or six years and most, if not all commentary about the outlook for property prices is always positive. “It’s always a good time to buy property, some more so than others,” is the constant refrain you get from estate agents.

Cassandras like myself and property economist Erwin Rode tend to get shouted down when we dare suggest property is not as good an investment as most people suggest – with the exception of in the Western Cape, Sandton and maybe a small part of the KwaZulu-Natal north coast.

For the rest, the residential property market is still in the grips of a seven-year bear market with property prices in real terms, i.e. after inflation, still down 20% or so from the peak at the end of 2007.

Secondly, property prices in SA have not recovered after the Great Financial Crash in 2008, as has happened in cities such as London, New York, Sydney and Toronto for instance. This suggests that something fundamental has changed as far as our residential property market is concerned.

I tend to go to three sources for my research in the local residential market: the surveys conducted by Absa, FNB and lately Pam Golding. Each one measures something different, so a strict comparison is not always possible. When I get hold of it, the Rode survey also has some very academic work done by the Bank for International Settlements (BIS) (part of the World Bank), which analyses property trends on a global scale.

Trends in the local property market

Dr Andrew Golding, MD of the Pam Golding (PG) Property group, is quoted in its latest newsletter: “As has been seen over the decades, in buoyant times and even through recessions, investment in property has proven a sound decision for home buyers and investors. In fact as a catalyst for wealth creation it’s hard to beat, particularly over the medium to longer term.”

Well, dear reader, you can make of that what you will, but I see it as further misinformation about the true state of the property market. People make decisions on those kinds of statements and there is no recourse if things do not turn out as positive as the expectation created.

Elsewhere in the report it states very clearly that property prices, according to the Pam Golding Properties National Index, which measures resales within the group, have not increased in real terms in over ten years. Yes, dear reader, your property, on average, is worth less than it was ten years ago in real terms. If you bought at the peak, at the end of 2007, your real decline in purchasing prices is down anything between 20% and 35%.

Screen Shot 2015-09-04 at 9.57.54 AM

You will find virtually the same information and conclusions in the Absa and FNB surveys. The bottom end of the market, with prices under R1 million is buoyant, with prices rising between 7% and 9% annually, but the current price movement in higher-priced properties is muted at best. On average homes valued at between R1 million and R2 million are rising at about 3.54% nationally and even less for those above R2 million.

Alarm bells

It’s when you move into the price-range above R3 million that the alarm bells start to go off, at least in the PG survey. In June house prices in this category declined by 2.7% from a year earlier following a decline of 0.4% in May. This is the first time since the 2008 recession that house price inflation slipped into negative territory.

Screen Shot 2015-09-04 at 9.57.39 AM

Many reasons for this trend come to mind: a lack of consumer and business confidence, the poor state of the economy, middle-class wealth under severe pressure (electricity, medical aid schemes, food, petrol and weak rand) as well as threats of possible ‘custodianship’ of all kinds of property – one of government’s ideas currently being floated.

I have another reason. Wealthy individuals with disposable cash would rather invest their money offshore to protect against a declining currency, than upgrading or buying more property, as would have been the case years ago.

And as far buy-to-let? Don’t let me even get started on that issue.

P.S. Yet another month and I still have not received clearance papers for a property I sold in Johannesburg in January. And we still claim to be a World Class African City. Yeah right.

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

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.

COMMENTS   39

To comment, you must be registered and logged in.

LOGIN HERE

Don't have an account?
Sign up for FREE

I have always read Magnus’articles with a bit of scepticism. It is always quite opionated and no real proof or proper comparisons are made. Vague statements and references to sources are usually made and he probably has a following that accepts everything he says and even quoting him as an authority. I do not doubt that he does his homework and research but I have always contented that if you do this diligently and with much gusto you will be able to prove anything you want to. But the question remains – what is the real truth? If you do these sums over a period of a lifetime where someone diligently put money into a pension fund vs someone who has bought property as a savings mechanism for his retirement – yes even with other peoples money – like homeloans you will find that the rich people did not come from putting money in a pension fund. You will find dips in the market but even with that I cannot agree with the views in this article.

I bought my investment property in Northgate for R600k in 2008. It is now worth only R750k. Essentially a 21% increase over 7 years or avg growth of roughly 3% year on year. Now my pension fund is growing at about 12% y-on-Y. Bottomline:
1. If you are sitting with a LUMP of cash DO NOT buy property UNLESS it is in an exclusive area where there is a huge demand, as Magnus rightly suggested above.
2. As for buying an investment property I still don’t see it as a bad idea as long as it is priced below R750k whereby the lease amount will exceed or equal your expenses on it. At least this way you can get the capital amount you borrowed+a small capital gain. With a cheap rental property you will still score. Thus forget about buying an investment property in Sandton! Way too expensive and you will not cover your bond with the lease.

I can assure johnbrandow that the factual basis for this article is real and exists.
For this article I used the following sources
Pam Golding Property Augustus 2015 newsletter.
FNB August Property barometer
Comments by John Loos on the Property Market
Absa Property Surveys
Bank for International Settlements (BIS): Long term trends in global residential property (Only for nerds).
Mr. and Mrs. Heystek property files.
Its a pity that MW could not publish the chart and graphs in the PGP newsletter. It corresponds exactly with the same chart in the FNB Property survey.
Personal experience from many clients who were sucked into the property boom ten years or so ago.
Unfortunately the facts are real and I cannot change them.

A buy-to-let investor that covers 25% of the loan installment over a 20 year term with expenses costed in and a 20% downpayment, and sees a 10% pa property appreciation will still be matched by a 15% unit trust investor over a 20 year term with 20% invested up front.

If the buy-to-let investor installment coverage rises to 50% then the unit trust investor wil see a 36% greater return, investing the same amount each month as spent by the buy-to-let investor.

If the installment coverage drops to 10% then the unit trust investor will have 25% less return than the buy-to-let investor, simply because the investment is now smaller while the property value appreciates fully.

The local S&P500 trackers such as Old Mutual Global Equity Fund saw a 28% pa return for almost a decade now, 15% pa unit trusts are a sure possibility without the hassle of dealing with buy-to-let properties.

Apart from recent negative real growth trend as an indicator, there are other factors that is making property investment in South Africa very risky. The largest factor that influences value of property is interest rates, which is currently relatively low and is bound to be increased. Zimabawe’s economy apparently seemed to recover before they got another brilliant idea of forcing 51% ownership to locals. That led to another catastrophe. The new BEE legislation is not yet at 51% but it has recently been amended to go into that direction. Its only logic that our economy will also go in similar direction as Zimbabwe if similar policies is adopted. Its only logical that no-one will make new investments , if it means they will have to give a large chunk of it away. An economy can’t grow without new capital and a weak economy will translate into a weak property market.

My own personal experience is as follows;
I bought a flat in Bedfordview some 7 years ago, and sold it 6 years later for the same price.
If you take the agents commission into account I made a loss in Rand terms, take inflation into account, I made a big loss!

Your problem is you bought that property at the peak of the boom

It’s quite easy spotting that with hindsight Lynne, but at the time, nobody knew we were at the peak of a boom! I had a similar experience buying about 5.5 years ago, and selling earlier this year: http://investorchallenge.co.za/the-last-house-ill-ever-own/

I’ve also had another two rental properties I also lost money on relative to inflation. Now I no longer have any property in my portfolio. If for some mad reason I wanted some, I’d rather buy a REIT, far less transaction costs, and I could get rid of them quickly if needed.

WE get it that Magnus is not a fan of property, and wants everyone to move their funds offshore preferably into biotech. Anything new?

Surely if you are achieving a net return on your property buy-to let investment of 8% and upwards its still a good investment? Maybe not the very best but along with an equity portfolio it does spread the risk by being diversified.

Any thoughts?

Diversification provides stronger assurance. If you are happy with 8% pa, why not get 8.5% pa guaranteed return with RSA Retail Bonds. All indications show that you’ll be lucky to get 8% pa property appreciation, at least for the past decade.

Do A-B testing to see which investment will perform best. See my other post in this thread for such a comparison. Conclusion is that in todays market you are much better off investing your money outside of property.

I am in the fortunate position that I own (no bonds) several homes in SA and in UK – each in a special location and for a different application.
I use these for my own personal joy and convenience and occupy some houses but for a very small time per year.
I regard my purchases as investments but not the type to render a max return on my capital every year.
when I sell a house, I use the capital as part payment for a new house but lately I have stuck with what I have.
Sale prices have, until recently, been more than purchase price.
As I see it:
– the ‘investments’ are for my own joy and comfort which is immeasurable in monetary terms;
– the funds managed by my money managers give a return which is taxable
– money left I the bank or invested in equities bring me no joy – not like the houses and cars (another BAD investment).

Magnus is probably right but the enjoyment I get is immeasurable AND not taxable – so it works for me.

thanks Magnus

quick question – i understand your points and rationale. isnt this more than compensated by the fact that property is the only asset where an individual can utilise leverage ? ie if i have R1m is my return better by putting that in a fund for 20 years or buying 4x R1m houses with 25% downpayment and rent covering the mortgage ? assuming flatline property growth i still have a R4m asset in 20 years.

one other point – i have seen the evidence of your comments re the >R3m market. I think its solely a demand issue as this is the wealth bracket that is currently leaving SA in numbers. speaking to estate agents (eg pg or rawson in the parks) or schools (eg jan cilliers) and the trend is clear and material.

cheers

under your example the fund is far better… for property, If you have no capital appreciation and your rent covers your bond, then your R1m downpayments = R4m after 20 years. That means you only made a 7% pa compounded return to quadruple your money, which is basically 1% above inflation.

A basic index tracker has historically given you a better return than this – and even a “risk-free” government bond will give you that return without the hassle of running a business such as buy-to-let.

Property makes sense if a) you get reasonable capital appreciation or b) your rental yield and tax shield are very high that you’re getting cash out after paying the mortgage. Otherwise why bother – just get a REIT with no hassle?

Hi Berty Buzzkill.
Leveraging confuses a lot of people because:
From day one, one would have only R1M invested, whilst the other would have R4M of assets to their name, even if only just.

At first glance, it seems like the property owner will be better off, but, in 20 years time, the correct calculation to make would be:
Take your monthly bond repayments, and assume you contributed them to another asset class, do the interest calculations for both and compare. I.e Compound interest vs value of the property.

OR

Take the property’s average rate of appreciation in that time, and calculate it only to the initial R250K per property, and find your return on investment.
Remember, your return is Rent income minus bond repayments, not the fact that someone else is paying your bond as most assume.

Despite assuming flatline figures, most people will calculate it as having R4M worth of property in 20 years time, whereas the R1M investment in other asset classes will be significantly less.

N.B, I am not a property expert, therefore I do stand corrected.

Barney, thanks for taking the time to reply, appreciated.

I agree on the returns in the interim and for sure there are expenses you need to cover and you need a fund to cover shortfalls in mortgage repayments when the rental income is falling below the mortgage repayment.

BUT surely you are also benefiting from the leverage ? the reality is that you are leveraging up 300% and all going well you have someone else paying that off for you. and then of course the capital appreciation (which should be enough to take care of the estate agent fees :-))

I guess the other trite point is that any analysis must take account of the last 8 years where most property has underperformed and the JSE has been on steroids.

thanks again for replying

The rich people do not get rich from investing in a home; they make their money in business

But you’ll find very few rich people that do not have significant holdings in property in their portfolio

I think we are missing a trick here fellow commentators. One of the reasons returns aren’t were we expect them to be on residential property is the inefficiencies in property transfer. My business partner has been waiting now for 26 months for transfer to go through on his investment property. During this time he has effectively lost 50% of his potential rental as he and the purchaser had a agreed a nominal occupational rental which has not been increased over the time. Factor in the legal fees involved in just trying to get the council to do their job and your upside is further diminished. The opportunity cost of putting the proceeds from that flat into his equity portfolio over the last two years are enough to make your eyes water.
If our processes ran smoothly and you could rely on the council to actually effect transfer this may be a different picture entirely.
PS I have just put my property on the market, after 4 years of ownership it is valued at 6% more than I bought it for despite me having spent 10% of the purchase price upgrading it (not maintenance). Even at that kind of price level there are few bites, which probably mean I will end up selling it at a loss.

To generalise the property sector as being a bad asset class is I think a bit unfair. As with any investment decision you have to find the good assets to give you the best returns over the long term. If you buy a good quality property in a good area with a long term view you will make money.
Similar to equities you have good and bad investments. If you bought into the RECM Equity fund a couple of years ago you will be crying. Similar if you bought a property in Windsor years ago. If you bought into the PSG Equity Fund you would be styling, similar if you bought a property in Hartenbos 10 years ago (where property prices have trebled). You must find the gems out there, surely it is a bit more difficult in the property sector compared to the stock market, but there are still a lot of opportunities out there.

What about leverage. You can’t leverage your share portfolio as you can for Real – Estate. Commercial property and chasing IRR is where a lot of people make great money.

The costs of selling property have also become considerable. These include acquiring certification for electrical and plumbing etc.The new building requirements frequently mean that expensive upgrades have to be made .
It would appear to me that there are two building industries in RSA. One which actually builds the structure and the second which rectifies the problems made by the former.

Never take investment advice from an investment strategist

It is unfortunate that this author’s biased negative views on property will be taken as sage advice by the uninformed with others jumping on the bandwagon w.r.t costs, bad tenants etc

What the author does not say is that all markets move in cycles and the property market is not different. Stock market pundits are quick to point out that it is time in the market that counts not timing the market. They also point out that you can make money in a bull market as well as in a bear market. If property is in a downward cycle, you have to adjust your investment strategy accordingly.

If you do not have the time or the inclination to do the research to invest directly in stock market, why should it be different for the property market. To make money in the property market as a direct investor requires as much research, time and effort as other asset classes. There really are no free lunches. If you cannot do that stay away and give your money to an investment manager.

This article is disingenuous at best

Strangely enough I once upon a time possessed a book by this gentleman where his opinion is diametrically opposed to what he says above. Bit like a certain chap by the name of Malema who used to say ke would kill for Zuma.

I remember years back when there was a spat between Magnus and a financial guru (I forget his name) as to whether it is better to own or rent property. If I remember correctly, Magnus was in favour of owning . Well with hindsight, equity has outperformed property significantly since that spat. Has Magnus now turned full circle?

The debate was with Justin Hooper (now in Australia, by the way) and took place in 1997. Up to the GFC in 2008 residential property was a better investment. Since then equities have been much better, especially offshore. These are facts, not guesses.. When the facts change, I change my view. What do you do, sir?

Magnus’ articles have mostly become irrelevant. On what basis does he know what wealthy individuals do? From my experience, wealthy individuals stay in very nice houses AND keep investing offshore. They can afford to do both.

… and they don’t bother reading investment columns as they are too busy enjoying their spolis.

… and they don’t bother reading investment columns as they are too busy enjoying their spoils.

I would like to see a survey covering gated communities >R2 million located in the Dolphin Coast. What I see down in Ballito is an increasing number of new retirees pushing up house prices. A lack of retirement homes/villages adds to the problem. Undeveloped property in some gated estates have risen 40% in a year! Check out Simbithi and Brettenwood Estates.
My stock market performance has definitely been better than my property investments however down on the Dolphin Coast (in gated estates) property is booming.

I live in an upper-middle class area of Cape Town. Small houses in my neck of the woods are priced at around R5 million+ if you’re lucky, and what badly built or deteriorating rubbish most of them are for that price. And trust me, this is pretty much in all residential areas of Cape Town, yet you need to be a CSI specialist to spot the rot, so to speak. Don’t believe the candy-floss pictures and over-hype expressed by real estate agents, whose teeth are the softest part of them. And don’t get me started on killer rates and taxes charged in Cape Town.

Well, property investment is cyclical in nature. The question is whether we are in a downward phase and should one then apply a contrarian approach by investing in property now and reap the rewards later.

I’ve got three young kids – 1, 4 and 5 years old. I’ve bought each of them a small bachelor pad and each of those pads cost me 420,430,430k.In all the instances FNB gave me a 100% bond. All the units are close walking distance to WITS and UJ… just in case my kids make it to campus.
Rental is 4840, 4950 and 4900 and it basically covers the bond and most of the other expenses. I still have a shortfall of about 1500 a month for the three properties to cover bond insurance etc.
Total cost to me has been 90k (30 each for legal fees) and 1500 x 12 = 18000 for the shortfall. From 2016 November the shortfall will cease.
So total cost to me has been 90 + 18 = 108,000.
Assuming a 15% growth if I were to invest R 108,000 in shares at 15% the result would be 1,767,586.04 in 20 years. If I assume dividend yield of 15% I’ll draw about R 25 409 a month from the shares in 20 years.

On the other hand my three properties now values at R 1 280 000 growing at 5% would be R 3,396,221.06 in 20 years. In 20 years the rental will be R 49 940 a month assuming a 6% rental escalation. I’ve been getting 10% escalation for the two years I’ve owned these units.
I know there is political risk but I’ve accepted that as a fact of life.
In invest monthly for them satrix 40 for them and pay 650 each just to hedge their bets. I think the bottom line is context and personal circumstances.

I think your thinking is very sound. Just a point though…I dont think your assumption of a 15% dividend yield is correct. Your kids are lucky to have a dad like you who thinks and plans so far ahead. Those properties will eventually pay for their education.

Let’s think about the worst possible investment you could make. How would we define that:
-It should be not just an initial, but if we do it right, a relentlessly ongoing drain on the cash reserves of the owner.
-It should be illiquid. We’ll make it something that takes weeks, no – wait – even better, months of time and effort to buy or sell.
-It should be expensive to buy and sell. We’ll add very high transaction costs. Let’s say 5% commissions on the deal, coming and going.
-It should be complex to buy or sell. That way we can ladle on lots of extra fees and reports and documents we can charge for.
-It should generate low returns. Certainly no more than the inflation rate. Maybe a bit less.
-It should be leveraged! Oh, oh this one is great! This is how we’ll get people to swallow those low returns! If the price goes up a little bit, leverage will magnify this and people will convince themselves it’s actually a good investment! Nah, don’t worry about it. Most will never even consider that leverage is also very high risk and could just as easily wipe them out.
-It should be mortgaged! Another beauty of leverage. We can charge interest on the loans. Yep, and with just a little more effort we should easily be able to persuade people who buy this thing to borrow money against it more than once.
-It should be unproductive. While we’re talking about interest, let’s be sure this investment we are creating never pays any. No dividends either, of course.
-It should be immobile. If we can fix it to one geographical spot we can be sure at any given time only a tiny group of potential buyers for it will exist. Sometimes and in some places, none at all!
-It should be subject to the fortunes of one country, one state, one city, one town…No! One neighborhood! Imagine if our investment could somehow tie its owner to the fate of one narrow location. The risk could be enormous! A plant closes. A street gang moves in. A government goes crazy with taxes. An environmental disaster happens nearby. We could have an investment that not only crushes it’s owner’s net worth, but does so even as they are losing their job and income!
-It should be something that locks its owner in one geographical area. That’ll limit their options and keep ‘em docile for their employers!
-It should be expensive. Ideally we’ll make it so expensive that it will represent a disproportionate percentage of a person’s net worth. Nothing like squeezing out diversification to increase risk!
-It should be expensive to own, too! Let’s make sure this investment requires an endless parade of repairs and maintenance without which it will crumble into dust.
-It should be fragile and easily damaged by weather, fire, vandalism and the like! Now we can add-on expensive insurance to cover these risks. Making sure, of course, that the bad things that are most likely to happen aren’t actually covered. Don’t worry, we’ll bury that in the fine print or maybe just charge extra for it.
-It should be heavily taxed, too! Let’s get the Feds in on this. If it should go up in value, we’ll go ahead and tax that gain. If it goes down in value should we offer a balancing tax deduction on the loss like with other investments? Nah.
-It should be taxed even more! Let’s not forget our state and local governments. Why wait till this investment is sold? Unlike other investments, let’s tax it each and every year. Oh, and let’s raise those taxes anytime it goes up in value. Lower them when it goes down? Don’t be silly.
-It should be something you can never really own. Since we are going to give the government the power to tax this investment every year, “owning” it will be just like sharecropping. We’ll let them work it, maintain it, pay all the cost associated with it and, as long as they pay their annual rent (oops, I mean taxes) we’ll let ‘em stay in it. Unless we decide we want it.
-For that, we’ll make it subject to eminent domain. You know, in case we decide that instead of getting our rent (damn! I mean taxes) we’d rather just take it away from them.

i see you and raise you my investment in a nikkei tracker fund about 1 month ago. sigh.

I think property can be used as an investment vehicle, I bought a house in late 2011 for 720k and had already accessed over 400k from the financial institution with only about 60k worth of upgrades and maintenance, I have to agree that it was a lucky find, but if you want to get serious returns you have to hunt for those run down properties in good areas, that is where the money is.

Bought 378K apartment late 2011 in Kempton Park.
Now Selling 580K
Currently I am owing the bank 340K.
Maintenance: 0 / None
Planning to sell it Next year (2016)

Load All 39 Comments
End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

Podcasts

GO TO SHOP CART

Follow us:

Search Articles:Advanced Search
Click a Company:
server: 172.17.0.2