If you have money to invest in property, should you invest directly, either by buying residential or commercial property, or should you rather put your money in property stock on the JSE?
While direct investments can give higher investment yields than investing in the stock market, rising “stealth taxes” in the form of municipal rates and taxes have eroded these yields quite substantially over the past few years. On the other hand, investing in property stock means you have to be less involved in daily management of your assets, and you can have a more diverse portfolio.
We weigh up the three options below:
1. Property Stock on the JSE
Investing in property stock on the JSE means you can have a diverse portfolio of commercial property including office, industrial, retail and hospitality assets. At this stage, exposure to the residential property market on the JSE is almost non-existent. Another advantage is that your dividends will be exempt from taxation if you’re investing in South African property (non-South African dividends are taxable, subject to certain minimum earning exclusions). Bear in mind, however, that buying and selling shares may result in you being considered a share trader. This means that profits from your share activity will not be seen as a capital gain, but will be treated under normal taxation principles.
We believe that the listed property sector will continue to produce good returns in the medium to long-term, because they’re underpinned by quality assets and covenants coupled with conservative balance sheet gearing.
2. Residential property investments
If you want to invest in residential property, you’ll need to do so directly by purchasing houses, apartments, flats or into residential schemes / syndicates on a ‘buy to lease’ basis. These assets may carry higher risk profiles because you’ll be dealing with individuals as tenants rather than business tenants in a commercial property investment. In residential property, tenant turnover also tends to be relatively higher, since residential leases are typically shorter than commercial leases. As an investor, you’ll have a higher probability of vacancy, so you’ll need to be liquid enough to accommodate periods of little or no income.
3. Commercial property investments
While commercial property investments tend to be hugely capital intensive, they do possess better fundamentals than their residential counterparts. Good quality assets with good covenants and long leases assist greatly in achieving attractive lending structures and predicting accurate forward cash flows.
However, these assets often attract significant fit out or improvement allowances as well as sizeable broker commissions over lease renewal periods. Landlords provide for these improvements and work in conjunction with the tenant to make the premises suitable for their business operations, provided the work required is of a capital nature and translates into an increase in value to their investment. Broker commissions are paid according to the length of lease achieved, the landlord must agree the tariff prior to engaging the prospective tenant.
Weighing up the pros and cons of these three options, we recommend investing in the listed property sector for the foreseeable future, unless of course you have a patient outlook consisting of large capital reserves and an appetite to get ‘hands on’ in in order to manage these assets.