Choosing property investments: Part 1

Choosing property investments: Part 1

Property Insights

2011-11-08

Pundits are predicting that the property market may only recover at the start of the next interest rate cutting cycle, which in reality could be years away. Rising “stealth taxes” in the form of municipal rates and taxes continue to erode direct investment yields, coupled with unfavourable lending conditions make the property market a challenging environment for the individual investor. In this environment, should you invest directly in property, or buy property stock on the JSE? When deciding which option will give you the highest yield possible, consider the following: 1. Liquidity If you need to access cash in the short to medium term, listed property stocks have the advantage of high liquidity, since their shares are easily tradable on the JSE. In contrast, direct property investment is less liquid and so suits a more patient investor with a longer-term outlook who has less need for cash in the short term. Also bear in mind that exiting from direct property investments can take considerable time with increasing sluggishness at the Deeds Offices and City Council when it comes to applying for rates clearance certificates. 2. Equity requirements Investing in the listed property sector is an accessible mode of investment for all, with investors requiring relatively low unit values to secure stock. Direct property investment requires significant capital injection at the outset, with lenders currently looking for a minimum of 30% equity up front on commercial property transactions. Be aware too that the bulk of commercial property bonds are ten-year contracts versus the usual twenty years commonly applicable to residential bonds. For these reasons, you’ll need significant debt facilities if you’re investing directly in the property market. 3. Management Investing in property stock means that professional property practitioners will manage your assets – so you don’t need to worry about daily management concerns. In contrast, as a direct individual investor you’ll need to manage tenants, collect rent, pay levies, rates and taxes, and oversee repairs and maintenance to your assets. As a direct investor, therefore, you’ll need to be prepared to get “hands on” in order to generate attractive returns. 4. Interest Rates With interest rates likely to increase in the foreseeable future, it will be interesting to see if the listed sector can continue their consistent returns for investors. We believe this trend will continue and that the bulk of the listed funds will continue to produce good returns. The key to a successful ‘buy to let’ scenario if interest rates do increase is to ensure that your income stream outperforms the interest payable on your bond. To do this, you’ll need a sizeable equity injection  in order to stay ahead of the interest rate curve and allow investments to ‘wash their own face’ in perpetuity. Considering these factors, we would recommend investing in the listed property sector for the foreseeable future rather than buying a direct property investment. The exception exists for a patient investor with access to large capital reserves who is prepared to get “hands on” when managing these assets.

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