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Is it a good idea to invest in the SA property market?

On a valuation basis property does show upside potential, but there is a large degree of uncertainty.

Do you think it’s a good idea to invest in the South African property market in the form of an index fund given the current conditions? It is clear that the property market is struggling as can be seen with the losses on some of the larger property funds. But do you think it would normalise in the next year or two? Possibly even provide good returns over the next five years if it climbs back to pre-Covid levels? I was looking at this as part of a TFSA [tax-free savings account].

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Dear reader,

Thank you for your question!

2020 sure taught us the lesson that what we once thought is a secure investment can literally change overnight. The story of property is one that we are all quite curious to see how it will play out. Large, incredibly impressive corporate buildings are standing empty. Home offices have become the new normal and also will stay for quite some time … What the world will really look like post-Covid-19, nobody knows at this moment. I do believe many ways of living will change forever.

When it comes to asset classes, property is only one of many to consider. On a valuation basis, property does show upside potential, however, there is a large degree of uncertainty as was mentioned above, which can lead to continued underperformance or negative returns. The sector is very volatile with a larger array of outcomes and any exposure should be positioned accordingly in the context of an overall portfolio.

It’s important to remember that one asset class should not be seen as a replacement for, or as an alternative to, another. Nor should past performance be your main motive for investment.

I would rather advise you to always follow a diversified approach – by including all asset classes in your portfolio.

Asset classes behave in different ways in market cycles, and therefore, including all of them in one way or another in your portfolio will diversify your risk and your return optimally.

If you are specifically looking at a TFSA, I would advise opting for higher exposure to growth assets (equity exposure). The main benefit of a TFSA is the fact that there will be no tax payable on proceeds in the future, which is a great benefit on any growth asset as you don’t have to be concerned about any CGT payable in future.

You also don’t have any regulatory restrictions in terms of equity or offshore exposure. Therefore, you can diversify your total portfolio quite well in your TFSA by investing 100% in equity exposure, benefiting from the longer-term nature of the investment.

A TFSA has an annual limit of R36 000, and a lifetime limit of contributions of R500 000. Ensure you maximise your annual limits, as well as the lifetime limit. It will take around 14 years to reach the lifetime contribution limit if you contribute R36 000 each year. Therefore the more time you have for a TFSA, the bigger the tax benefit.

Most local and global equity funds have some property exposure as part of their overall asset allocation, so this can be a good way to gain exposure in these uncertain times.

Do you have any questions you would like answered by registered financial planners?

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Yep, all depends on location

“Is it a good idea to invest in the SA property market?” It was 20 years ago. If you want to burn your fingers invest in the SA property market.

The biggest advantage of an investment in physical property also brings the biggest risk. The bank might finance your investment in a physical property whereas the bank will not finance the purchase of listed property or shares. If things go according to plan, which happens only 10% of the time, then you make capital gains on the bank’s money. If things do not go according to plan, then you lose your entire deposit and owe the bank money.

If you do decide to invest in property, your biggest competition is the municipality with their redistribute rates and taxes. They will syphon off a large chunk of the potential capital gains of your property over a period of time to provide free services in the townships. That brings us to the point. Maybe the best investment in property is a shack or RDP house in the township. The rental income is cash and you do not pay rates and taxes, sales tax, transfer duties, estate duties, capital gains tax or private security firms. You do not own a title deed either. So SARS knows nothing about you.

By investing in the informal settlement, you become a beneficiary of the socialist redistributive policies of the government. The lack of capital appreciation of the wealthy property-owners will show up as a profit in the value of your shack as the municipality transfers it from the high-end market to the low-end market. This is why some entire African cities are slums. The socialist process has reached its logical conclusion.

This is how socialist redistributive taxation transforms a formal economy into an informal one. This is the work of the hidden hand of the market. The law of unintended consequences.

The laws are the to push those who abide by them not those who work outside of the system.

Fantastic advice @Sensei, let’s all work out side of the system.

10 years ago when I lived in SA and worked near the industrial area of Kempton Park which borders the 3rd largest informal settlement in South Africa.
Our African IT Technician was promoted a managerial position and moved to the upmarket town of Edenglen, after 3 months he moved right back to the township. His reason was that apart from requiring additional security, he needed to pay rates and taxes whilst electricy and water cost a great deal more on top of paying a small fortune for his house.

…and some geniuses thought they were snapping up a bargain when the SAPI crashed to 500 three years ago…

Recent Articles—————————————————- Housing expected to plummet in 2021 (12 January Moneyweb)
Massacre for buy-to-let landlords (21 January 2021 Moneyweb)
AND with the 3 million newly unemployed the market will see foreclosures and repossessions GO THROUGH THE ROOF. I wouldn’t buy now wait 12 – 18 months for a real bargain. A little tip from your Uncle Joe

Elke correctly highlights the major uncertainty for commercial and listed property above and no one knows how this will play out. With all the great diversified ETF options out there to choose from for your TFIA I don’t understand why you would want to go for Listed Property. Look at something like SYGWD / SYG500(0.2% TER!) / SYG4IR (great long term innovation play) or the Satrix options. Grow your tax free investment using offshore equity etf’s and beat the pros.

Ever escalating rates & taxes never mind, up keep costs, does not even make it worth while owning a so called urban property. Buy to rent, get the non paying tenant with our laws and you have a negative cash flow. With municipal services in decline where are you going to have positive property value growth, perhaps in 5% of the country. so choose well. So yes township properties is definately a very good proposition with the right local in area property manager.

So the article basically waffles on about asset classes and doesn’t answer the question!

IMHO, if you believe property will recover somewhat then it’s looking really cheap right now…
Will it recover to anything near pre covid levels – I guess that’s the million dollar answer you need to find.

Why isn’t anyone talking about the elephant in the room…EWC?
Many will say, Nah, Cyril will never allow this but, given that property is a long term investment, what happens when, God forbid, Julius becomes president or Ace for that matter.

Sold our last SA investment property 2 years ago now and invested in safer jurisdictions…ZERO investment capital left in SA. That is how much we trust the EFFANCkers.

If I buy property how long till my money will double…… Realistically in the next 2 years?? No.

Now include all the rising property taxes plus elec. And water….. ( remember over 90 % of all the municipalities are bankrupt…. There only cash cow are the middle class property owners….)

….. I bought saw 12 months ago at the collapse….. Around 40 a share….. Now around just under 200……
Around same time I invested in bitcoin and sold out 2 months back….. Tripled my return……. Now compare that with buying property in sa.
Crazy. What are the chances of us having a 7 or even 4 % growth rate in the next 2 or so years ????? Lol zero…..
And if we did have a miracle – eskom would put paid to that……..
No sorry the days of owning property and growing a business in sa are over……. Going forward the place is only gonna be good for the excellent sunsets ( like the rest of Africa)…… Investing and capital growth – sorry do that else where overseas.

If I buy property how long till my money will double…… Realistically in the next 2 years?? No.

Now include all the rising property taxes plus elec. And water….. ( remember over 90 % of all the municipalities are bankrupt…. There only cash cow are the middle class property owners….)

….. I bought saw 12 months ago at the collapse….. Around 40 a share….. Now around just under 200……
Around same time I invested in bitcoin and sold out 2 months back….. Tripled my return……. Now compare that with buying property in sa.
Crazy. What are the chances of us having a 7 or even 4 % growth rate in the next 2 or so years ????? Lol zero…..
And if we did have a miracle – eskom would put paid to that……..
No sorry the days of owning property and growing a business in sa are over……. Going forward the place is only gonna be good for the excellent sunsets ( like the rest of Africa)…… Investing and capital growth – sorry do that else where overseas.

End of comments.

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