Real Estate Investor November 2013 digimag

Z

Listed Property?

It’s time for a new strategy

LIVE THE PROPERTY DREAM Get a bond today

THE GREATEST REAL ESTATE DEAL

Lessons that put Trump on the map

THE RACE TO INVEST IN AFRICA

Ready, set, go

WINNER

SAPOA AWARDS

Best Printed Property Publication 2013

November 2013 R50.00 (Incl. VAT) R43.86 Other Countries

www.reimag.co.za

MASTER INVESTOR ETTIENE PRETORIUS

C

M

Y

CM

MY

CY

CMY

K

CONTENTS November 2013 COVER STORIES

8 Master Investor

12 Listed Property?

22 Live The Property Dream

COMMERCIAL

Annual Europe 1% growth in labor 1.5% U.S productivity, 2.8% 2000 to 2008 Africa Economies of sub-Saharan Africa ranked amongst the lowest in the World Bank’s 2010 Ease of Doing Business report

$1.4 $1.6 trillion trillion Africa’s consumer spending in 2020

20

52 The Greates Real Estate Deal

Africa’s collective GDP in 2008, roughly equal to Brazil’s or Russia’s

Africa’s number of telecom subscribers exceeded 450 million in 2009, up from 52 million in 2003

40 The Right Information

Will lead you to the right investment

42 Managing Your Maintenance

Compounded annual real GDP growth, 2000-2013 Number of African companies with at least $3 billion in revenue last year

Developed

Is essential to your industrial property

2.0%

Latin America

4.0%

Africa

4.9%

Emerging Asia

40% 62 The Race To Invest In Africa

44 Establish A Turnaround Strategy

8.3%

For your struggling shopping centre

Average African inflation per year

Revenue growth in African telecom industry at compounded annual rate over the last five years

1900s

22%

48 Your Mind Map

2000s 8%

Pick the best investment for you

Percentage of world’s reserves in Africa

UPFRONT 5 Investor Talk

From the editor and publisher

6 Inbox

Ask The Property Experts Value your home

8 Master Investor

Helping others: My passion and key to success

12 Time For New Tactics?

Weigh your options with listed property

18 Guest Expert

Brian Azizollahoff talks about corruption associated with government leases

50 Despite The Tough Economy

RESIDENTIAL Oil

Gold

Chromium Platinum

10% 40% 84% 88%

Listed still delivers results

Number of cities with population over 1 million

52 “The Greatest Real Estate Deal- Ever”

24 Education Is Priceless Latin America Europe

63

52

52 Africa North America 48

It paves the way for your future

Lessons that put Trump on the map

26 Decrease Your Tenant Risk

OFFSHORE

And increase your success

28 Don’t Let Repairs

56 Important Questions You Need To Ask

Get your finances down

Before you buy a property overseas

30 Can You Be Fined For not building in time?

32 Auctions

58 The Successful Four Dimensional Investment Model

36 Improving 101

62 The Race To Invest In Africa

Make the right decisions

Are they a bargain or a bad idea?

Ready, set, go

Update your home today

INTERACT WITH US find us on facebook

www.facebook.com/Real Estate Investor Magazine

www.reimag.co.za

find us on twitter

www.twitter.com/Sa_Reimag

find us on youtube

www.youtube.com/reimag

November 2013 SA Real Estate Investor

1

CONTRIBUTORS BRIAN AZIZOLLAHOFF After gaining vast experience in the property sector as CEI of Redefine Income Fund, managing director of Apexhi properties limited, various positions at Investec Bank and JHI properties, Brian established Capstone Properties.

Publisher - Neale Petersen Editor - Angelique Redmond Designers - James Clark & Amy Little Traffic - Juanita Heilbron Financial Manager - Marisa George Office Assistant - Melissa Petersen Web Administrator - Russell Bennett Sales Manager - Roy Lategan Sales Executives - Andre Evans, Renier Lombard, Alex Masamuna, Marc Oppel Lindsay Reynolds, Mfundo Tyeli, Fabian Murphy & Chase Daniels

MEYER DE WALL Meyer de Waal has been a practising conveyancing attorney, conveyancer and public notary since 1989. He holds a B Proc from the University of the Free State and is a member of the Western Cape Law Society Wills Estates and Trust Committee.

MIKE SMUTS Author, entrepreneur and full-time property investor, Mike Smuts is a recognised London property expert who has helped many South Africans make great returns in the London property market.

Tel: 021 674 5026 Fax: 086 627 2400 Email: info@realemedia.co.za Physical: Bizmall, Shop 3, Heritage House, 20 Dreyer Street, Claremont, 7700 Postal: PO Box 858, Howard Place, 7405

XOLANI MEVA Xolani has completed a B.compt degree from the University of Transkei on Technology). Xolani has over 9 years management experience and currently holds the position of Area Manager in Property Investments at Business Partner Limited.

SCOTT PICKEN Scott is the CEO of IPS Invest & Wealth Migrate and is an offshore investment specialist. Since 2003, IPS has been helping people invest internationally with confidence.

Advertising: 021 674 5026 Subscriptions: 0861 228 669 / subs@realemedia.co.za Distribution: On The Dot Distribution For distribution inquiries contact Craig Hughes on 021 918 8659 / 073 395 2396 Printing: CREDA Communications

JONATHAN SMITH Jonathan is the director of Courtwell Consulting and has extensive experience in property and consulting including educational programs. Courtwell Consulting provides five key services to the private and public sectors in South Africa.

Published by REALE MEDIA Neale Petersen (CEO) B. Taylor

Printed by

RUI MARTO Rui has been the Director of Marto Lafitte & Associates for the past 18 years. He specialises in negotiation and drafting of commercial agreements, civil and commercial litigation and property law. “I see myself, and the law practice as problem-solvers.”

Distributed by

MONIQUE TERRAZAS Monique is a journalist and freelance writer, with more than a decade of experience across a range of industries, and was the winner of the 2012 SAPOA Property Feature Journalist of the Year Award.

KOOS DU TOIT Koos is the CEO of P3 Investment Group and an invaluable source of education and information on investing in property. P3 offers hope and guidance to anyone looking to build a succesful investment portfolio.

JOHN ROBERTS John is the CEO of The Just Property Group. He is one of the property industry leaders. The Just Property Group’s vision is to provide focussed property services through specialised franchise outlets, in specific niche areas in the property arena.

IAN ANDERSON Ian Anderson (B Com, CFA, CAIA) is Chief Investment Officer at Grindrod Asset Management. He has more than 17 years’ experience and a proven track-record in managing the portfolios of listed property securities.

Also Published by REALE MEDIA JUST PROPERTY MAGAZINE

©

Mega Trends In Commercial Property Shaping the future of investors

What to look out for

Jason Lee tells you how

Heavenly Tenants

ENSURE YOUR RETURNS

How to find them

In a volatile economy

Rent killing you!

COME OUT ON TOP

How to save www.justpropertygroup.co.za

With Africa investments

FREE

OFFSHORE HANDBOOK

August 2013 R50.00 (Incl. VAT) R43.86 Other Countries

WINNER

SAPOA AWARDS

2

November 2013 SA Real Estate Investor

www.reimag.co.za

Autumn 2013

Best Printed Property Publication 2013 Z

PROPERTY Spot Checks

GET THE RIGHT FINANCE

Digital Edition on your iPad, Mac, PC or Laptop now!

Go to www.reimag.co.za

Just

ISSUE

4

www.reimag.co.za MASTER INVESTOR JT FOXX

All rights reserved. No portion of this publication may be reproduced or used in any form without prior written consent and permission from Reale Media. The publisher gives no written guarantees or assurances and makes no representation regarding any goods or services written or advertised within this edition. Prospective investors should always consult their attorneys, advisors or accountants.

Copyright © Reale Media.

www.reimag.co.za

privateproperty .co.za

Where do you want to live?

Search

Cape Town

BE MOVED TO THE ULTIMATE LIFESTYLE Private Property’s brand-new website makes house hunting irresistible! It looks like no other property site. It has more virtual tours, floor plans and property images. Feel inspired as you visit the widest variety of unique property available on the web. Why not start your own private viewing experience now?

Down load our iPad app.

To sell or not to sell...

IZE

IFESTYLE EL

As SABC3’s Top Billing celebrates turning 21, Private Property is partnering with the iconic show to bring one beyond-lucky South African the opportunity to win a lifestyle worth over R5-million! There are also iPad Minis to be won weekly. Visit www.privateproperty.co.za and click on the Top Billing icon for entry details.

PR

ULTIMAT

Visit www.privateproperty.co.za or call 087 375 1000

U LT I M AT

E

Thursdays 20:30 - 21:30 Sundays (Repeat) 12:00 - 13:00

INVESTOR TALK FROM THE EDITOR Times are a changing. Property today is simpler and yet more complex than ever before. Today you can still go out and buy a house, a flat or a building, and the information to do so is right at your fingertips. Gone are the days of looking in the newspaper, now with a click of the button you can search for property and educate yourself on the process involved in buying, renting or selling. But that’s not all, you can now invest in property through the JSE, this gives you greater diversity than before, opening up new investment fields that simply weren’t there 25 years ago. While more complex, this form of investing shouldn’t be discounted, the best thing to do is investigate. Learn about it, about what it can do for you and what it will ask of you, and then decide.

In this edition we pull back the curtain on listed property investment. We are also in the very exciting process of launching our new digital platform and with this will come more interactivity and more exciting news and views for you. So keep an eye out on our Twitter and Facebook pages for the competitions to come and the allnew digital magazine. Lastly we are nearly at that time again, the close of one year and the start of a new one, don’t miss out on the double edition we will be releasing in December, two magazine packed in one, for the price of one, double the knowledge and half the price.

And without further ado, happy reading and investing!

ANGIE REDMOND

FROM THE PUBLISHER South African listed property has delivered consistent returns of above 15% for the past few years. It is just question of whether it can continue. It can provide a great platform for investors looking to diversify across multiple property sectors and geographies indirectly. Read our feature about listed real estate stocks as an alternative investment option.

Growth in unsecured lending and the increasing debt spiral are out of control. As long as consumers remain cash-strapped, so will the banks, as they are reliant on loan repayments. Given the 1.8 million mortgage bonds and limited new bond growth, the banks will transfer the pressure back to cash-strapped consumers. Banks also expect stricter regulations for consumers on unsecured loans and, as a result, are aggressively pursuing sureties on old mortgage loans of properties, which they repossessed more than three years ago. The problem is banks are compelled to write off the loans and they no longer own the original promissory note the borrower signed as a mortgage backed security. However, they still want consumers to pay back the shortfall without any collateral or asset behind the loan. This makes it an unsecured loan. Question is, who is going to stop the banks from continuing this deplorable practice?

Watch this space to see what ensues over the next few months.

NEALE PETERSEN

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” Winston Churchill

TWITTER COMMENT Jim_Ingersoll@SA_Reimag

Thanks for the follow! I always follow back and look forward to your tweets!

FACEBOOK COMMENT Amber Bezuidenhoudt commented on Real Estate Investor Magazine

Amber wrote: "This is an excellent Table magazine to have, Not only does it add to your status but you just dont know when you have a potential investor, or investment.”

Follow us on Twitter SA_Reimag

www.reimag.co.za

Like us on Facebook

http://www.facebook.com/RealEstateInvestorMagazine

November 2013 SA Real Estate Investor

5

ASK THE EXPERTS Property Finance

Meyer de Waal Oosthuizen & Co Meyer de Waal Attorneys www.oostco.co.za

Q

A.N Carrim Asks:

I have had some credit problems in the past, and banks have declined my bond application (which was done via a bond originator). I am very positive about the block of flats I would like to purchase.

Could you possibly advise on what I should do?

A

Meyer de Waal Responds:

The type of f inance required may not be a classif ied under a “normal ” home loan.

Working with an ordinary mortgage originator may not be the best solution. It may be a better solution to approach the commercial section of a bank to apply for f inance as a loan of this type ought to be treated as a commercial loan. A commercial loan may have different interest rates and loan repayment period than a normal “home loan” – establish this during the first meeting and also how much “weight” the leases will add to the income required and what requirements the bank will have. It is unclear what your current credit status is and we cannot provide any proposal in this regard - any bank will reflect back on your past status to determine the risk they have to take to lend you money. Consider perhaps a rent2buy transaction with the seller in that way you secure the property and have time to repair your credit profile. If you enter into a partnership to co-own the property – the bank may still not approve the loan as your own credit profile will still be relevant. It is recommended that you repair your credit profile as soon as possible.

Value Your Home

Q

Carol Reynolds Pam Golding www.pamgolding.co.za

Thando Maboneng Asks:

Deposit

Q

Justin Clarke Private Property www.privateproperty.co.za

Linda Viljoen Asks:

I am a new homeowner and am looking to insure and value my home, what is the best way to go about doing this?

I am a new landlord, and have just recently rented out my property. I just want to know, when my tenant’s lease is up, what is the procedure I need to follow to return the deposit?

A

A

Carol Reynolds Responds:

As a new homeowner it is critical to obtain insurance from a reputable company and to investigate the best rates available on the market.

Often when you register a bond, the bank will offer homeowners insurance as part of the finance package. You are not obliged to accept the bank’s insurance, and you are entitled to shop around for other deals and then advise the bank accordingly.

It is critical that you obtain insurance for the buildings, as the banks will not finance a property without the requisite insurance. If you elect to obtain insurance via another source, you will need to advise the bank so that they can cancel their insurance and approve yours.

With regards to valuing a property, the most accurate method is to call three reputable estate agencies and request valuations from their area specialists. The agents will be able to give you a comparative market analysis, showing recent sales in the area and they will be able to give you a market-related value based on current market conditions, together with their experience in the area. Independent valuers charge a lot more for their services, whereas most estate agents will offer this service as part of value-add to their clients.

Justin Clarke Responds:

If you have already placed a tenant I hope you have signed a good lease with the tenant so that you both know what your responsibilities are. A good lease should spell out the handling of the deposit but, if it doesn’t, here are some points you should follow, on rental collection and other rules, so the tenant knows where the boundaries are.

1. The deposit paid by the tenant should be held in an interest bearing account for the benefit of the tenant. It is only to be utilised by you in the event that there is damages to the property. Damages do not include fair wear and tear.

2. Two weeks before the end of the lease you should do an inspection of the property with the tenant and run through the checklist that the tenant should have signed before they took occupation. List the items that the tenant should attend to before moving out and agree on a plan of action to remedy the damages. If the tenant accepts that there are damages you should try to remedy them while the tenant is still in occupation.

3. If there are no damages then you should release the deposit within 7 days but if remedial work carries on after the departure date this can reasonably be extended to 14 days.

Do you have a property question you would like answered by our experts?

If so, post it on ASK THE EXPERTS on www.reimag.co.za or email angie@realemedia.co.za 6

November 2013 SA Real Estate Investor

www.reimag.co.za

MASTER INVESTOR

BY NEALE PETERSEN

ETTIENE’S SUCCESS TIPS FOR INVESTING IN PROPERTY 1

If you don’t want to lose money, make 100% sure that you build a good team around you

2

Know where to find deals - brokers who just want commission are not interested in giving you a good deal

3

Develop your own investment strategy

4

Get to know town planners who can provide insight into developments in the pipeline that can influence a property deal

5

Know where you can buy land below market value

6

Change the thinking about a property, for example, rezoning and changing the face of a property can add value

7

When renting out a property, aim for a 9 – 10% rental yield

8

Depending on your strategy, hold or sell

Helping Others: My Passion and Key to Success Money is just a tool

8

November 2013 SA Real Estate Investor

www.reimag.co.za

E

ttiene Pretorius is a successful real estate entrepreneur based in the East of Pretoria. His real estate career started in property construction, residential property development and residential investment and he recently bought into a residential estate agency franchise in order to create that funnel of information and build pipelines of communication between buyers, sellers, developers and professional people.

His rise to success in a few months has been nothing short of spectacular. His business sales turnover grew from 5 deals in the first 9 months to 76 deals in the next 6 months by implementing game changing strategies and is still growing.

While Ettiene has a solid track record of success, he admits it has been a continuous learning process. He attributes much of his success to business coaching, which opened his eyes to new ideas, and helped him implement methodologies he learnt. His definition of success is based on realising the power of his choices, understanding his ability to impact the people around him and mastering the art of rapid action when facing new opportunities or dealing with problems.

Ettiene also attributes his success to the good upbringing provided by his parents in the Lowveld, where he grew up. He says they taught him to live life to the fullest and to lead conversations by asking questions, instead of talking.

Ettiene has been an entrepreneur all his life and started his first business at the tender age of six. At age 10, he made his first investment, which taught him the principles of passive income. However, a year later, he learnt ‘there is no such thing as easy money’ after investing in a pyramid scheme offering unrealistic returns and, as a result, he lost his entire investment.

During Ettiene’s third year at university, he made his first real estate investment. In his fourth year, as an honours student at the age of 21, he made his first million. At the same time, he received an award from ABSA as a Top Entrepreneur In SA. Ettiene identif ied a demand for student accommodation in Potch in 2003. In his third year at University, at age 21, he bought his first www.reimag.co.za

UPFRONT property in Potchefstroom. He demolished the house on it and sold seven units off-plan to raise money to build the units. He subsequently c omple te d t h r e e mor e d e v e lopme nt s , comprising of 80 units for students. He retained ownership of 28 of the 80 units in line with his model of retaining properties at breakeven point for investment and renting.

At age 27, Ettiene had completed developments worth more than R35 million. He has been fortunate to travel across the world, visiting every continent. In 2009, he moved to Pretoria and built a house, commencing a restructuring phase in his career. In 2012, he bought the first Engel & Volkers Pretoria franchise in Silver Lakes, and later the Moreletta Park franchise, and recently he bought the Nelspruit franchise.

He received an International Businessman Award from the JT Foxx Organization in 2013, and was congratulated by Arnold Schwarzenegger, Donna Karan (DKNY – Fashion and Fragrance) and Wayne Allan Root (US Vice-Presidential candidate).

Ettiene says that the current economic times make it diff icult to make game-changing decisions. That is why it is so important to continuously inform yourself about the latest trends and movements in the market. An important principle he lives by is knowing the facts, numbers and statistics in the areas you work in.

Ettiene says it is crucial to cultivate the ability to put things into context. The key to context is having multiple perceptions. To gain perspective, one needs to experience things the more experiences you allow yourself to have, the more multiple perceptions you have access to and the easier it will be for your mind to put things in context.

Ettiene also believes you can only say “yes” or “no” in life, “maybe” is not an answer. If you say “no” and there was a positive outcome, you cannot earn from it, and if there was a negative outcome, you cannot learn from it. So that leaves you with only a “yes” answer.

Et tiene suggests creating a f unnel of information by surrounding yourself with people in the industry. Phone people and ask for introductions to the lawyers, town planners, architects, developers and brokers in your area.

Secondly, do more research in real estate and

ETTIENE PRETORIUS Personal Statistics Age: 30 Marital Status: Married Experience: Risk Management Degree and Honours (International Trade), both from Potchefstroom University; Masters Degree in Real Estate from Tukkies Hobbies: Ettiene believes endurance sports contribute to breaking through mental barriers. He has completed the Iron Man, Comrades, Duzi canoe marathon, Argus cycle tour, etc.

Close-up Mentors: His late father, late randfather, JT Foxx and George Ross (Donald Trump’s right-hand man), his business coach Books: Among his favourites are “How life imitates chess” by Gary Kasparov; “Blink”

by Malcolm Gladwell, and “Black Swan” by Nicolas Talep. Ettiene listens to audiotapes when runs or travels to maximise his time and stimulate his mindset Biggest Achievement: The one that stands out is making his first million at 21 years of age. He bought a property and rezoned it, demolished the structure and built a small development with seven student units, which he sold. He has won numerous awards, including JT Foxx award for fastest business growth, ‘New Innovations’ award from Engel & Volker’s and South Africa’s Top Entrepreneur Award by Absa in his honours year at Varsity The best financial advice you have been given? Understand what is behind the facts, numbers and statistics. Don’t lose sight of people and relationships, these are the crucial factors behind the numbers Motto: : Failure is not an option. I learn from mistakes every day and, as a result, I make better decisions

November 2013 SA Real Estate Investor

9

MASTER INVESTOR understand what the bigger picture is about.

Master the art of negotiation, networking, valuation and education. Coaching is a must!

Paying for a mentor is a different game than getting free advice.

Ettiene has ambitious plans for the future. He is currently creating a model to access property listings faster. He says that if all goes well, he should have contact details of 75% of all

homeowners in South Africa within the next three years, which will change the game. His 30-year plan is to lead our country with one term as president and create the future with a more capitalistic than political approach. He believes it is time South Africans take action and control of their own lives: to stop talking and start doing.

RESOURCES

Engel & Volkers

ETTIENE’S 7 LESSONS FOR BUSINESS AND LIFE 1 Keep it simple He started his first

business at the age of six, selling beer to the 350 workers on their farm over weekends, for which they would otherwise have to walk 15 km to town.

2 Create a passive income At the

age of 10, Ettiene realised buying and selling would require sacrificing sport and time with friends. So he set up a foozball table that charged 50c per game at the farm store and created a passive income stream.

3 There is no such thing as a quick

buck At the age of 11, Ettiene invested in a “project” offering returns of 45% per month. He lost his entire life savings in one month. Today, when offered an opportunity with a return higher than 15%, he walks away.

Since then, he has never regretted his decisions.

4 Lead conversations with

questions At 17, his mother had a

stroke and lost her speech. He learnt from her that the only way you can communicate effectively is if you ask questions. This taught him to guide negotiations, meetings or conversations to the desired outcome by asking the right questions to which the other party can only respond.

5 Take action At the age of 21, he

bought his first property after visiting a friend. As he left, he announced: “I am going to buy my first property”. As he drove away, he saw an estate agent driving by, so he followed the agent, stopped behind him at the house and made an immediate offer. The rest is history.

6 Live with purpose and meaning

Losing his father suddenly when he was 24, jolted Ettiene and made him realise two things: live life to the fullest every day, and always be ready for when your path changes.

7 Context One cannot create context from one experience. Multiple experiences will allow you to form different perceptions of the same event. Evaluate every perception and then create the bigger picture (context).

10

November 2013 SA Real Estate Investor

www.reimag.co.za

665 000

5 TYPES

MEDIAN

PURCHASE PRICE FOR 2012

OF PROPERTIES

5 ANALYSIS REPORTS

9,4

MILLION PROPERTIES LISTED

5 SEARCHES AVAILABLE

336 734 MEDIAN NUMBER OF TRANSFERS FOR 2012

Property Intellect provides an accurate, reliable and constantly updated data research tool that results in every business decision being successful.

Property Intellect’s searches are smarter with increased functionality and richer data, along with uncapped reporting.

Property Intellect is one of the key products that assist clients in making business decisions, designed to increase the effectiveness of property reporting and evaluations with leading data processing techniques.

But don’t take our word for it, give it a try.

We know* you’ll love it.

The Smart Way to Search tel: 0861 53 53 53 www.propertyintellect.co.za

Powered by

COVER STORY

BY MONIQUE TERRAZAS

Time For New Tactics?

Weigh your options with listed property

W

hile many investors remain committed to the long-term strategy of creating wealth by investing in income-producing and capital growth-generating assets, it may be necessary to consider a change of short-term tactics employed to achieve the long-term strategy.

12

November 2013 SA Real Estate Investor

www.reimag.co.za

UPFRONT A direct investment in propert y, using the tried-and-tested principles of acquiring income-producing and capita l g row thgenerating property assets, remains the most effective and eff icient way for individual investors to create wealth.

straightforward and based on tried-and-tested property investment principles.

investing would be companies that employ the same strategy.

1. Acquire a well-located property in an area with strong current and future rental demand and capital growth potential.

However, many investors are becoming increasingly frustrated by the stringent lending criteria imposed by the banks, which is proving to be a signif icant obstacle to building a property portfolio, even now when interest rates are at historic lows and the property market favours buyers.

2. Apply the principle of gearing or leveraging by acquiring the asset through finance.

Fortunately, investors do not have to search far: the strategy of building a portfolio of propert y assets that produce an ongoing inf lation-linked passive income as well as ongoing steady capital grow th over the long term, while harnessing the power compounding, is not restricted to residential property – works just as well in commercial property sectors, including office, retail or industrial property.

Strategy vs tactics Etienne Pretorius, speaking about building a property business at the recent SA Real Estate Investor Magazine annual Wealth MasterClass events, explained the difference between strategy and tactics in a succinct way: strategy is the long-term vision and goals an investor has set, while tactics are the shortterm moves, more responsive to current realities, which are implemented to achieve the long-term goals.

Pretorius pointed out that in the dynamic and uncertain world we live in, there are many challenges to overcome to realise a longterm strategy. But these challenges often require a change in short-term tactics, not the abandonment of long-term goals.

Applying this insight, property investors frustrated by the challenges of obtaining f inance to acquire income-producing and capital growth-generating property assets may want to consider a change in short-term tactics, instead of abandoning their long-term strategy of creating wealth through property.

The strategy The long-term strategy for most individual investors is fairly straightforward: build a portfolio of property assets that produce an ongoing inf lation-linked passive income as well as ongoing steady capital growth over the long term, while harnessing the power compounding, which Albert Einstein called “the eighth wonder of the world” and underpins both these multiple streams of returns.

The tactics For most individual investors, the short-term tactics to achieve this long-term strategy is also www.reimag.co.za

3. Let the property to a thoroughly-screened and well-selected tenant through a water-tight lease with built-in rental escalation clauses.

4. Use the income generated from the tenant’s monthly rental to cover the finance repayments and property expenses, including maintenance.

5. Benefit from both the ongoing monthly income and the capita l grow th to earn impressive returns over the short and long term.

Change of tactics required?

Since the current property market favours buyers, interest rates are at an all time low, and the rental market is strong, the real obstacle for individual investors in implementing these tactics is obtaining finance.

There are options to explore, for example, partnering with family or friends to increase the chances of obtaining a bond, or joining forces with other investors who may have access to money, but lack the time to find, acquire and manage income-producing property assets.

Another short term tactic investors could consider is to invest the cash they have budgeted to carry a monthly shortfall between the rental income on a rental property and the monthly expenses. This will assist the investor in ensuring that the cash budgeted for the monthly shortfall amount is still producing maximum returns, and will contribute to building up a deposit. When the investor is able to obtain finance for a buy-to-let property, he/she would already be used to paying the monthly shortfalls without straining cash f low, and will have a deposit amount readily available.

Maintain the strategic vision To ensure that it is only the short-term tactics that change, and not the long-term strategy (creating wealth by investing in incomeproducing and capital growth-generating property assets), the obvious choice when

This same strategy is also employed by listed property companies who are, essentially, large-scale buy-to-let specialists operating in the commercial sector and own commercial properties such as office blocks and shopping centres. Just like individual residential buy-to-let investors, these companies generate an income by letting these properties to tenants, while also benefitting from capital appreciation on these properties.

A few more zeros Most individual investors, however, shy away from commercial property investment due to the considerable investments that are often required and a lack of knowledge about commercial property. But, as George Ross, Donald Trump’s right-hand man, reminds us: “There is no real difference between large and small real estate deals, other than the amount of zeros.”

Listed property companies acquire incomeproducing and capital growth-generating properties, although these generally entail several more zeros than properties in the residential sector. Like individual investors who would use gearing by obtaining mortgage bonds to finance the acquisitions, listed companies would gear the investments by financing the acquisitions through corporate property finance provided by financial institutions; by issuing shares or units and listing these on a stock exchange; or a combination of these strategies.

The property is then let to tenants and the income generated is used to service the finance obligations or to pay dividends to the investors.

And, as the value of the properties appreciate over time, the value of the shares or units also increase.

By fol low ing these procedures, l isted property companies maximise all the benefits November 2013 SA Real Estate Investor

13

COVER STORY of investing in income-producing and capital growth-generating property assets, including a high level of current income, inf lationhedged income growth and long-term capital appreciation.

Further benefits There are a few other benefits to investing in listed property that should be considered.

An investment in listed property will provide individual investors exposure to the commercial property sector, which may otherwise not be possible. Thus, an investment in listed property will provide individual property investors with the all-important diversification in their investment portfolio, not only across property sectors but also across geographical areas, even offshore.

Secondly, listed property investments are highly regulated and tightly managed to reduce risk and protect investors. For example, listed property companies must conform to significant disclosure levels and are managed by professionals with experience to select the best properties and manage these scientifically.

Of course, there are higher investment costs associated with listed companies, but the level of protection this option affords investors may be worth the premium.

Thirdly, the investments are highly liquid and investors can access to their capital at very short notice, should they, for example, have an opportunity to invest directly into a property.

Fu r thermore, an investment in l isted property provides property investors with an opportunity to share in the returns created by investments in income-producing and capital growth-generating property assets, but without the management responsibilities that are part and parcel of direct property ownership.

There is no doubt that, over the long term, listed property is the star performer among the traditional asset classes, which also include equities, bonds and cash.

Over the past 14 years, the listed property sector has outperformed other asset classes eight times. The average return a year, over 10 years, has been 22%. Despite the recent bonddriven share price volatility on the JSE REIT board, listed property in South Africa had a 14

November 2013 SA Real Estate Investor

“Over the past 14 years, the listed property sector has outperformed other asset classes eight times” rolled yield of over 7% for the sector as a whole by the end of August 2013. And while the sector’s short-term outlook remains cautious, with income distributions expected to grow at about 6% to 7% over the next 12 months, listed property as an asset class could deliver total returns of between 10% and 12% per annum over the next five years.

a reputable stockbroker to select and acquire shares on their behalf. Investors who do not want to pick stocks can opt for Exchange Traded Funds (ETFs), which simply track market performance, or outsource stock picking to experts by selecting a unit trust, such as the STANLIB Property Income Fund.

The reason why listed property continues to outperform other traditional asset classes is that listed property in South Africa is a defensive asset class. The listed property portfolios are tightly managed, with around 80% of leases being long-term leases containing built-in escalations of around 8% per annum, signed with large, stable multinational companies.

As the majority of rentals are underpinned by this type of long-term security, listed property is not subject to the same volatility as the rest of the traditional asset classes. In fact, listed property offers 50% of the risk of equities, as the volatility on the markets do not affect listed property as severely as it does other asset classes.

ETFs streamline investment decisions and offer investors one of the simplest, most costefficient and low risk ways to invest in the stock market. ETFs are, essentially, listed unit trusts which replicate a particular index’s performance by simply tracking its return on a passive basis.

Furthermore, listed property is a hybrid of equities and bonds, providing stable, predictable and growing rental streams due to leases signed for an average of three to four years and escalating at about 8% per year. Listed property funds or companies pay out virtually all their profits to investors as distributions, because they are not required to pay ta x on prof its distributed. Equit y companies do not, and may not even alter their dividend policies. Bonds pay a f lat coupon whereas listed property earnings grow virtually every year.

ETFs

It offers a number of specif ic features that minimise the risk of investing on the stock market, such as lower risk as a result of diversification; the simplicity of investing in a basket of shares, eliminating the necessity to conduct research on numerous companies; and a significantly lower total expense ratio (TER).

Regular dividends are paid on a quarterly or semi-annual basis, and ETFs are exempt from Securities Transfer Tax (STT) upon purchase, although subject to Capital Gains Tax (CGT) when sold at a profit.

There are investment products available in the listed property sector to suit any type of investor.

Investors can choose, for example, between the Proptrax ETF, which tracks the FTSE/ JSE SAPY index of 16 property companies, weighted according to market capitalisation; the Proptrax Ten ETF which tracks an equally weighted index of the top 10 largest listed property companies by market capitalisation; and Stanlib’s recently launched STANProp ETF which tracks the performance of the largest 21 property companies that make up the F TSE/JSE SA Listed Property Index and in this way replicates the price and yield performance of the index.

Investors can visit the JSE website for online tutorials for DIY investing or appoint

ETFs can be purchased through a stockbroker, the particular ETF provider’s investment plan,

How to invest

www.reimag.co.za

COVER STORY investor platforms such as etfSA.co.za, or through approved financial advisors.

Direct investments Investors who prefer to invest directly in shares need to be well-versed with the markets and will need to do their homework in terms of the companies’ and shares’ values, objectives and track records, by studying the annual reports and company presentations.

Investors should consider the initial yield they will be receiving relative to the medium-term

based on annualised results for the three years.

The awards focus on property fundamentals and give a fair evaluation of the quality of stock, asset selection and management performance and reflects the underlying value of a property portfolio.

This year, Resilient Property Income Fund claimed the overall IPD Direct Property Investment Award, having achieved a 19.3% total return across its entire property portfolio, compared with an IPD overall benchmark return of 14.7%.

“An unwavering determination to achieve the goals that define your long-term strategy is undoubtedly a significant key to success” income or distribution growth prospects of the company. Also consider the quality of the property portfolio, including the geographic spread and weightings to the various property types – office, industrial, retail, hospitality, residential and hospitals. Investors should also look closely at management’s track record – how long have they been managing property and how much time have they spent in the listed property sector.

Give preference to listed property funds or companies that: • offer quality long-term earnings prospects; • maintain defensive portfolios; • have a portfolio of assets with the potential to generate above average growth in their rental streams; • employ proactive management in terms of acquisitions, disposals, extensions, refurbishments and developments; • have good tenant, lease and debt profiles; • are trading at reasonable values relative to their income growth and quality prospects.

Picking the winners For investors who want to back the winners in the listed property sector, a useful resource is the annual Investment Property Databank (IPD) Direct Property Investment Awards, which highlights superior fund performance, 16

November 2013 SA Real Estate Investor

For the fourth time, Resilient also received the award for retail portfolio performance, as its portfolio of shopping centres delivered a 19.9% total return substantially outperforming the IPD retail benchmark of 14.6%.

Vukile Income Fund, last year’s winner for industrial property portfolio performance, again achieved top returns in this sector with a 19.5% total return compared to the IPD benchmark return of 14.7%.

and provide tax certainty and tax advantages for the listed sector.

Nevertheless, for property loan stock company shareholders, distributions will change from ‘interest’ to ‘rental income’ under the new REIT structure. As such, the interest exemption that previously applied to property loan stocks will not be available anymore. Investors in PUTs will not be impacted since PUTs are automatically considered a ‘Trust Reit’ and will be listed on the JSE REIT board as a matter of course.

Flexible determination An unwavering determination to achieve the goals that define your long-term strategy is undoubtedly a significant key to success. But be f lexible enough to consider a change in your short-term tactics that will help you to overcome the challenges. While obtaining finance to acquire more income-producing and capital growth-generating property assets may be a significant obstacle at the moment, do not be discouraged by it and certainly do not abandon your long-term strategy for creating wealth in a proven, tried-and-tested way.

Continue to look for opportunities to partner with family and friends in obtaining finance and continue to network with other investors who may have the cash required. Continue applying to the banks for finance so that you can take advantage of the low interest rate environment and the buyers’ market.

Investors will be aware that earlier this year the Real Estate Investment Trust (REIT) structure was implemented in South Africa.

But, in the meantime, use the monthly amount you have available or have budgeted for shortfalls on a buy-to-let property to invest in listed property, to ensure it is working for you in line with your long-term strategy. This will also bring discipline into your cash flow, preparing you for the day these shortfalls are required on a property in your portfolio, and it will contribute to building up a deposit which will always make it easier to obtain finance.

The structures previously used in South Africa - property unit trusts (PUTs) and property loan stocks (PLSs) were, effectively, REITs, but will be phased out in favour of the globally recognised REIT structure. As such, the change does not affect individual investors greatly, but rather serves to merge the listed sector in South Africa into the more recogniseable global REIT structure and name

In the end, an investment in listed property – while requiring a change in short-term tactics – will allow you to continue moving closer to achieving the strategic vision of building wealth by investing in income-producing and capital growth-generating property assets, and will keep you at the ready for a direct investment in a buy-to-let property for your own property portfolio when the banks come to the party.

Capital Property Fund recorded the highest returns for off ice property performance at an 18.0% total return, well above the IPD benchmark of 13.5%.

The REIT story

www.reimag.co.za

Make the Smartest Property Investment Decisions

PRIC STAR ING TS AT

R99 p

m

All-in-one property software for easy control of your portfolio and choosing the best properties to buy

Full Portfolio Analysis

Performance Reporting

Long Term Projections

Cash Flow Planning

Property Comparison

Get started with a 30 day free trial www.propertyfrontier.com

Rental Tracking

GUEST EXPERT

BY BRIAN AZIZOLLAHOFF

Brian Azizollahoff Talks About Corruption Associated With Government Leases

I

n addition to the thousands of leased premises housing government, the government is overwhelmingly the largest property owner in the country with at least R1.5 trillion of property in its portfolio. This figure could be significantly higher but absent a current and accurate asset register, the exact value remains a mystery. To put this in perspective, the entire listed property sector’s market cap is approximately R220 billion so the government owned portfolio is almost seven times the value. There is a perception that the PIC (Public Investment Corporation), as the government employees pension fund, is where the largest concentration of government-owned properties are held but this is by no means the case. The government owns most its real estate directly.

It is logical that the largest concentration of government spending is through the Department of Public Works since it is that branch of government that is responsible for infrastructure development and real estate matters including leases. Since the change in government in 1994, it can be argued that transparency has improved in South Africa and consequently corruption is very topical. Some of the worst culprits of corruption have been landlords who prize government leases above most others. It is common cause that a valid long-term government lease will raise maximum levels of gearing whilst increasing the value of a property substantially and hence landlords will often compromise their ethics in order to secure such leases.

The government of South Africa has an unparalleled opportunity to immediately transform property ownership in this country and in a manner that will eliminate corruption associated with government leases once and for all.

The plan works as follows. National Treasury appoints corporate advisors who are experienced in driving property company listings. An entity is established and the advisors select, say, R20 billion of property. Valuers are appointed to ensure that the properties are being injected at fair value.

The government then signs 20-year leases over all the selected properties.

A targeted initial return would determine the rental payable.

The theory is that it is not particularly relevant whether the properties are commercial, industrial, residential or service related such as train or bus stations or even libraries. The 20-year

18

November 2013 SA Real Estate Investor

Brian Azizollahoff from Capstone Property Group leases effectively transform an investment in the entity into a 20-year government bond underpinned by bricks and mortar. With an initial return of say 10%, there is a strong encouragement for savings.

Initially the government owns 100% of the new entity but then offers the shares to the market at a “discount�. The shares are marketed in a similar manner to the Telkom public offering and a mechanism of ensuring that the shares arrive in the right hands would be devised by the advisors. The man in the street has access to property ownership by walking into a post office and purchasing shares at R1.00 a share. The commuter riding to work in a taxi will look out the window and see properties in which she has ownership.

And now for the spin offs. The emphasis in terms of the employees of the company, from the CEO and executive directors through to the support staff, will be to employ black staff. This would be relevant to both the asset management company as well as to the property management company.

Opportunities would be created for cleaning and security as well as maintenance support for the portfolio addressing the issue of job creation.

Management and staff would be incentivised with shares giving them participation in the company as well as property ownership.

There is pressure on the property sector for meaningful and sustainable initiatives that would positively impact the sector and to redress the lack of competent black property practitioners. As a corporate social investment programme, listed property companies may wish to involve themselves in skills transfer activities such as mentoring programmes.

www.reimag.co.za

UPFRONT Once one or more of these entities are established, the next step would be for them to establish development divisions which would have access to the vast tracts of land and other potential sites owned by the government. Should the government require new premises, the natural development partner would be these entities.

Clearly the intention would be to create listed property entities that are not government institutions but independent, sustainable operating entities.

To this extent, once the government has facilitated the establishment of an entity, the new entity would become like any other listed property company.

Management could elect to utilise debt to grow the company and to fund developments or it could issue new shares. Management would compete in the market to acquire government-tenanted properties which would add further critical mass to the portfolio. Since these entities would be in a position to renew leases if appropriate, there would literally be no opening for “dirty dealings” in order for leases to be renewed.

The picture starts to emerge that the government’s real estate needs would be fully addressed by the new listed entities and the debate over who is entitled to sign a lease with government and for how long would be resolved. The need to negotiate with the Department of Public Works would be obviated since parameters could be set in respect of rentals and hence the potential for corruption is eliminated.

Because the “essential ingredients” belong to the government itself, the impediments to success are few and the beauty is that once the order has been

Q&A

given, the timing could be almost immediate. Whereas in the private sector promoters of listed property companies need to amass a list-able portfolio and then approach banks for debt and the market for equity, here the portfolios are available and the equity can be placed over time. In the case of government portfolio listings, the stock of properties is almost endless and new entities could be rolled out on an ongoing basis. The advantage to government is that “non-productive” assets are securitised and the coffers of the fiscus are swelled.

Although what is being set out here is simple and straightforward, many conversations have been held with Directors General and Ministers who nod their heads approvingly and then proceed to put the discussion out of their minds. One cannot but believe that there would be numerous individuals who would see their “road to riches” being compromised hence the lack of any further discussion or activity. Accordingly, to successfully implement this strategy, it would necessarily require a “top down” approach. To be more explicit, the President would need to order his subordinates to make it happen.

The unfortunate part of this is that despite the opportunity to really change the face of property ownership in this country, there is little or no chance of success for this or any other scheme of a similar nature because, firstly, it will not find a “champion” within government, secondly, it removes the availability of real “low hanging fruit” (excuse the cliché) for the select few and finally, it is simply easier to lay the blame for lack of transformation on the private sector.

RESOURCES

Capstone Property Group

Which sector is performing the best? Industrials, office, retail or hospitality?

Currently the best performers are retail and industrial.

Why do you think that is?

Large dominant centres have retained good trading. Industrial feeds off strong retail and logistics to Africa, which is growing.

What are the challenges in the commercial sector?

The largest risk is an upward movement in interest rates. Other risks are administered cost increasing in excess to inflation, and the lack of growth in the economy results in poor demand for space and increased vacancies.

What advice would you give to someone looking at investing in commercial property?

I prefer listed property as an investment as it provides investors with a liquid and tradable exposure to commercial property. Further you get the benefit of professional management, scale and improved cost of funding!

What are the best finance options available for commercial investment?

Equity, mortgage debt from banks and institutions, bond markets and commercial paper markets. The competitiveness of the various alternatives are very dynamic and depends on various factors, like for example, quantum of funding required, term of funding provided, quality of security and of the covenant.

What has the last year been like for commercial investing?

Markets have been volatile but investors have seen good growth in income with sector average distribution growth being approximately between 6 and 7% for the sector.

Estienne de Klerk Executive Director Growthpoint Properties Limited www.reimag.co.za

Where do you see the market going in 2014?

Depends on your view on interest rates….we are concerned that interest rates will start rising over the next few years, which will put pressure on the capital value of the listed property Reit share prices. Hopefully the increases in interest rates will coincide with positive/ buoyant economic activity which will support strong growth in distribution, growth which will counter some of the effects of the higher yield environment.

November 2013 SA Real Estate Investor

19

KRAAIBOSC KRAAIBOSC H KRAAIBOSC H KRAAIBOSC H H C O U N T R Y E S T A T CE O U N T R Y E S T A TME

A N O R

M A N O R

REI Residential

Purchases Prices Are Up In September, the Average Purchase Price recorded by ooba, South Africa’s biggest bond originator, was R896,258, up 2.2% on R876,717 recorded in September the previous year, although marginally down on the R905,200 from the previous month. The Average Purchase Price for First-Time Buyers was R674,590, up 2% year-on-year. According to ooba’s latest statistics, the Average Deposit recorded in September, at R126,630, is 14.1% of the purchase price, down from 17.9% recorded in September 2012 and down from 15.0% in the previous month. In September, 53.7% of ooba’s total bond applications were from first-time buyers, which is similar to the ratio of 53.9% recorded in September 2012, but 2.6% higher month-on-month.

More Tenants Pay On Time

Valuable Input Adrian Goslett, CEO, RE/MAX “The credit amnesty bill will positively affect many consumers who are currently unable to obtain credit, or in some cases jobs, due to the fact that they are blacklisted.”

Bruce Swain, MD, Leapfrog Property Group “Gone are the days when the average person could put a decent deposit on the table when purchasing a property; these days people need to borrow more in order to buy their own home.”

www.reimag.co.za

According to the latest TPN Rental Payment Monitor, the second quarter of 2013 saw the highest percentage of residential tenants in good standing since 2007. Nationally, 71 percent of tenants paid their rent on time and in full, four percent paid within a grace period of up to seven days, and 11 percent paid late.

Francois Venter, Director of Jawitz Properties, says this adds up to 86 percent of tenants being in good standing. Gauteng has the most rental accommodation, with 41 percent of South African households renting in the province. He says the report indicates that Gauteng tenants are now on par with the national average of tenants in good standing - this being the first time since the inception of the Rental Payment Monitor.

November 2013 SA Real Estate Investor

21

GETTING STARTED

BY MEYER DE WAAL

Live The Property Dream Get a bond today

T

There are three aspects that a bank will consider when they consider your home loan. These three aspects are – your affordability, credit rating and profile and then the security that you offer.

The impact of the downturn in the economy and unsurpassed growth in unsecured lending all added to the woes of a consumer to secure a home loan.

A bank will assess these three aspects to determine the risks they will take to lend you the money to buy your house. In terms of the National Credit Act, a lender (bank) can be held responsible for reckless lending if they grant you a loan that you can argue later you should not have qualified for. Just recently African Bank was penalised R50 million as they participated in reckless lending

he dream of the older generation was to pay off a mortgage. The dream of today’s generation is to get one.

Since the introduction of the National Credit Act in 2007 it appeared that the banks closed the tap on home loan approvals for a few years and only recently does it appear that it may be easier to qualify for a home loan.

22

November 2013 SA Real Estate Investor

activities and, on top of it, they had to write off many loans granted under such practices. It is much more difficult to secure a home loan (with the support of a property as security), compared to raising and unsecured loan. In the second term of 2012 only R1.5 billion was allocated to home loans for those who earn less than R15 000.00 per month, compared to R9 billion that was advanced to unsecured debt in the same income category.

The first requirement: your affordability test The first thing you need to know before you www.reimag.co.za

RESIDENTIAL even begin house hunting is to establish what bond you can afford. The National Credit Act requires lending institutions (banks) to assess your net surplus income when determining what loan amount they will offer you. You therefore need to determine what disposable income you have and then also bear in mind that the banks generally will not grant a bond for which your monthly repayments will be more than 30% of your gross income.

If you are self-employed, you may face an even more uphill battle as your income may not be supported by a regular “pay-check” and you will then have to provide the bank with more supporting documents, like bank statements for up to 12 months, balance sheets for the past two years, income and expense reports, to prove your sustainable income to the bank.

The best advice is to establish the information and supporting documents that will be required in advance to prepare all such information and documentation, before you submit an offer to purchase.

The second requirement: your credit status Before qualifying you for a home loan, the banks will assess your credit history. They will look to see if you have defaulted on debt in the past and if you are currently in arrears with any repayments. It is therefore important to obtain a copy of your credit record in advance and prior to your application to the bank to ensure that all information held on you is both accurate and up to date.

•

Cancel out of date credit and retail cards as you may not be using them, but they could still appear on your file, which make lenders wary about the potential size of your total debt.

•

Build up a track record, banks want to see that you have a record of managing your credit sensibly. Also, make sure your income is deposited monthly into a bank account.

•

Make sure all information you supply is accurate and truthful as inconsistencies can have a negative effect on your credit score.

Many credit reports contain outdated and inaccurate information.

• Always keep proof of paying any arrear debt and rescind judgments. Make use of credit rehabilitation service provider to assist you. www.reimag.co.za

The third requirement: the security you offer The bank will consider their loan to the value of the property. If you have a deposit available, it means that you also share the risk of the bank as you are less likely to “walk away” from the mortgage obligation and loan if you struggle (in future) to make ends meet. The advice is : put down a deposit. Statistics show that home buyers, who are prepared to contribute a deposit are more likely to have their bonds approved. A deposit could also result in a more favourable bond rate, which will save you on interest over the term of the loan.

If you rely on the income of a spouse – or investment partner, make sure that the affordability and credit profile of the co-applicant is also in line with the requirements of the bank.

Getting assistance to apply for a bond Using an expert bond originator will give you the best chance of approval. They will make simultaneous submissions to all the banks on your behalf, improving your chances of approval and getting a better interest rate.

If the one bank declines your application, do not give up. According to statistics released

by Ooba, the ratio of applications declined by one bank and granted by another in August 2013 was 28.8 %. It is also held that due to a proper pre-investigation and administration process, approximately 70% of all home loan applications that are received, are approved.

Through an originator you have a single point of contact throughout the entire process which cuts down on time and inconvenience for you.

They prepare, motivate and package the application for you and have an in-depth knowledge of each bank’s specific requirements for best chance of approval.

It is advisable to also enquire with your own bank what services they can offer you, as sometimes a bank can offer you a different structured package if you approach the bank directly.

Do you have a less than fantastic credit record or affordability?

In an article by Linda Ensor, 05 September in Business Day it was reported that: “The Cabinet has agreed to a credit amnesty despite the strong opposition of the banking industry,

which says it will undermine the ability of credit providers to assess risk.”

At this stage there is no clarity regarding the precise recommendations that the Cabinet has approved but it will def initely provide welcome relief for many potential buyers, who have previously been unable to obtain finance. Industry sources speculate that the amnesty will be implemented before the end of 2013, but it is already filtered through to the industry with a negative result as lenders are now more cautious in lending money, as they have less credit information to support a new loan application.

Start early and set a goal for yourself The bottom line is – get yourself “budget and credit fit” before you apply for a home loan and try to save towards a deposit. If you are not ready right at this moment, start the process to obtain your own credit report and study the information.

The credit information from a credit bureau may not always be comprehensive and it is advisable to consider a report from a company such a Credit Health, or Kudough, which companies provide a combined 3–in–1 report or a Moneysmart Credit report which provides an “easy to read” credit report as well as a comprehensive plan over nine months to assist you to improve and repair your credit profile and status.

Improve your affordability Make sure that your budget can accommodate your current expenses and trim unnecessary expenses. Pay off debt as fast as you can. For every R500.00 that you save and have available extra per month improves your affordability with an additional R50 000.00. Make use of personal finance tools to help you to manage your budget and keep track of each rand that you spend. Some of the tools available are offered by companies such as Moneysmart, 22Seven, ExpenZa, Mobile2budget and tools and products are also on offer from leading banks. Plan your budget so you are prepared to meet the additional payments that you would be required to pay, once you have taken transfer, such as rates and taxes and levies.

RESOURCES Wizard Durbell, My Budget Fitness

November 2013 SA Real Estate Investor

23

MY STORY

BY ANGIE REDMOND

Education Is Priceless

It paves the way for your future, just ask Themba

THEMBA’S TOP 9 INVESTMENT TIPS FOR YOU 1 Have no fear and know that fear stands for: false evidence appearing real.

T

hemba Ntanzi is a professional electrical e n g i n e e r, r e g i s t e r e d w i t h t h e Engineering Council of South Africa.

Themba’s life motto from the great poet and writer, Kalidasa, is as positive as his property investment mindset: “Yesterday is but a dream and tomorrow is only a vision, but today well-lived makes every yesterday a dream of happiness, and every tomorrow a vision of hope”. He is an avid property investor and a true tale of how education can really change your life.

Themba grew up in a village called KwaDlangezwa; he stayed with his grandparents who had stopped working as early as 1975.

Themba’s grandfather was a shoemaker and his grandmother was a tailor who also rented out her backrooms to university students and school teachers. “My investment and property journey started at an early age but my grandparents did this at a smaller scale,” recalls Themba.

When Themba got to university the first book he bought was the Fortune Strategy which was advertised in the Sunday Times, he also joined the Sunday Times Money Club to learn from guys like David Shapiro and David Bullard.

Themba says, “The book that changed my life and the way I saw things at the time was the 24

November 2013 SA Real Estate Investor

book titled Money Success and You by John Kehoe.

This book had a challenge that read ‘If money was not an issue what would you like to have” I wrote ten things that I would have liked to have at the time. A year later the Sunday Times ran a competition called “dream a new life”.

Every prize that was listed in the newspaper matched what I had written in my notebook.”

After several weeks of participation, Themba did indeed win the competition and those winnings were the springboard for his first foray into property investment. “I used my winnings to buy my first two properties cash. I was doing my third year and going to my final year when I won this competition. I had my first two properties while I was still at varsity. These are properties that helped me learn the property business,” says Themba.

Themba began his professional career in Johannesburg, and while there he saw an ad for a P3 Investment Group presentation for the public to educate them on property investment. “I attended the presentation and I joined the club immediately. From 2005 I have been a coachable and growing student of property. In 2009 I felt that I had enough that I could also share my knowledge with others. P3 gave me a chance to become the club’s part time representative. I

2

Stay around people who are achieving the results you also want

3

Have a clear plan of action of what you want to do

4

Avoid analysis paralysis. Most people tend to plan forever without action.

5

Don’t give up! One day I went to the bank 5 times and my request was declined 4 times but on the 5th time it was approved on the same day.

6

Don’t play low. Once your foundations are set, take on bigger deals and never stop reading really good books and attending wealth creation workshops.

7

Invest or save 10% of your gross income and also tithe in your local church. If you don’t believe in tithing you can give to charity. You will be amazed how your financial situations change.

8

Have faith and you don’t need much - but just a mustard seed size of faith to move or take on bigger deals.

9

Understand the tax system or have your own tax advisor. Understanding the basics in tax makes a huge difference in how you structure your investments.

www.reimag.co.za

am currently at the stage where I need to grow and fast track my retirement so that I can get my freedom back,” says Themba.

Themba credits the f irst t wo books he bought on investing as the first finance for his properties; they gave him the tools to make the decisions that have led him to where he is today.

“The real initial finance I have had to put in was in investing in two books by John Kehoe (Mind Power Into the 21st Century and Money Success and You). I don’t have the actual cost but they would not cost more R140,” says Themba. It was Themba’s refusal to give up that got him the finance he needed, “I had just started working when I applied for finance and all four banks declined my application due to affordability. I did not know anything about using my other properties as security. I could not understand

why banks felt I could not afford a bond of R4000 when I was paying rent for R3500 in the place I was staying in. I kept going to present myself to these banks and after three weeks my first bond was approved,” says Themba, “I have had this ‘never give up’ attitude from then and every time I approach the banks now I always know that I will get what I want based on my cash flow. It seems to me that banks just want to know that you are responsible and you know and understand the risks involved.”

Themba uses different banks for finance today, and feels that the reason property is such a great investment is that it has inherent value and banks are willing to finance the investment.

While the recession has made it slightly harder to access finance, this hasn’t stopped Themba, “I am exploring other ways of financing and attending more workshops to meet property gurus that can give me some direction,” explains Themba.

Education seems to be the key to learning and developing into a property investor: “It is really my grandparents who set the tone and P3 Investment Group taught me how to grow my property portfolio strategically. I continue to learn from books and newsletters written by gurus like Clem Sunter, Dolf de Roos and Jason Lee,” says Themba. It was Nelson Mandela who said, “Education is the most powerful weapon which you can use to change the world”. This certainly holds true for changing your world, with the right education you can use that knowledge to change your life.

Above: Themba Ntanzi

www.reimag.co.za

T hemba is a ha nds-of f investor who employs professionals to manage and run his investment properties and he in turn manages the professionals, such as rental agents. “The reason is that it gives me the peace of mind that my properties are managed by professionals,” explains Themba. Despite this, he is still very strict and runs a tight operation. “I am strict on maintenance. I need a maintenance report twice a year and I am not scared to fire an underperforming agent. Most of my properties are in high demand areas like big cities and industrial areas,” says Themba. And what has investing taught Themba? “Investing has taught me that people who take the first step to act do get good results,” says Themba. In order to achieve what you want to in life, you need to take the right steps to get there, this is especially true in property investing.

MANAGING

BY KOOS DU TOIT

Decrease Your Tenant Risk And increase your success

O

ne of the biggest myths surrounding buy-to-let property investment is that tenants are a property owner’s worst nightmare. While there certainly are tenants landlords should avoid, this myth is mainly perpetuated by a misunderstanding of the landlord-tenant relationship, by urban legends of malicious tenant behaviour and by overstated statistics quoted out of context.

Firstly, tenants are not adversaries, but the clients of the buy-to-let investor. In every business and in every industry, business owners face a risk of delinquent clients. But this is not a reason not to start a business, nor is it a reason not to invest in property. It is merely a risk that smart business owners and investors identify and manage. In fact, if managed correctly, and tried-and-tested risk management strategies are implemented, the landlord-tenant relationship can be a very mutually rewarding one.

Secondly, it is a small percentage of tenants that fuel the urban legends of malicious tenant behaviour. It cannot be denied that there are isolated incidents of malicious destruction of a landlord’s property. However, most of us have, at some time or another, rented someone else’s property. Did you wilfully wreck your rented accommodation? Do you have friends or family who have maliciously damaged a rented property? While urban legends of delinquent tenants abound, experienced property investors will confirm that they are the exception and not the rule.

Thirdly, only a minority of tenants pay their rentals late, or not at all. TPN’s latest Rental Payment Monitor report shows that the percentage of tenants in good standing with their rental payments reached a record high of 84% in the first quarter of 2013. However, even at the lowest point of the economic recession in 2009, the percentage of tenants in good standing stood at 71%. The reality, therefore, is that the vast majority of tenants nationally are 26

November 2013 SA Real Estate Investor

paying on time and in full, even under tough economic conditions.

Managing the risk There is no reason for a property investor to do business with the small percentage of tenants who display malicious behaviour, or those that pay late or not at all. To avoid such tenants, a property investor simply puts systems in place to manage the risk.

The risk can be managed efficiently with just a few simple and affordable risk management techniques, such as: • Doing thorough background checks and obtaining referrals from previous landlords; • Signing a water tight lease and collecting a deposit to cover potential damages; • Collecting a separate deposit for utilities payments or installing pre-paid electricity and water meters; • Doing proper inspections, including taking photos, with the tenant before, during and after occupation; • Obtaining the right property insurance specifically for buy-to-let property that provides cover for damages caused by a tenant and even compensates for the loss of rental following a catastrophe such as a fire or flood; • Taking out rental insurance such as the comprehensive cover provided by P3 Investment Group, underwritten by Infinity Insurance and offered in association with

Tenrisk, designed specifically to cover the risks faced by buy-to-let property investors to cover late or non-payment of rentals or evictions.

Appointing a rental management agent to take care of all these aspects is almost always the best choice. Professional, reputable rental management agents have the expertise, experience and resources to deliver a professional service to both yourself and your tenant, at a very reasonable fee – usually 8 - 10% of the rental, which should ideally be covered by the rental charged.

However, some property investors prefer to manage their own tenants. It is certainly an option, provided that you are willing to put in the time and effort to do so professionally. A complete and professional rental management process will neutralise tenant risks to a large extent.

These risk management solutions have evolved over the years as property experts identified and refined the best ways to mitigate, manage and even eliminate tenant risk. All that remains for professional property investors to do, is to implement these widely available and often surprisingly affordable risk management solutions, which not only significantly reduce the tenant risk, but exponentially increase the probability of buy-to-let property investment success.

RESOURCES

P3 Investment Group

www.reimag.co.za

MAINTENANCE

BY KOOS DU TOIT

Don’t Let Repairs Get your finances down

O

ne of the recurring pitfalls property investors step into is neglecting the maintenance on their investment properties, most often as a result of financial constraints. There are, however, numerous simple strategies buy-to-let property investors can implement to ensure regular maintenance on their properties, and that they harness the full benefits of such regular maintenance.

The recent FNB Estate Agent survey clearly showed the impact of economic constraints on the regular maintenance of properties. The percentage of homeowners “fully maintaining their property and making some improvements” reached a low of 27% in 2008. The percentage of owners not improv ing but stil l f ul ly maintaining homes” declined to between 20% and 30% around the recession of 2008/9. The percentage of homeowners attending to basic maintenance only, which FNB notes means in effect the property will “go backward” over time, reached a concerning 34% in the first quarter of 2009.

and continues for as long as the property is held.

Thorough inspections Acquiring a quality property off-plan, prov ided that the developer is registered with the NHBRC (National Home Builders’ Registration Council), should delay significant maintenance costs for two or three years.

Nevertheless, the investor should thoroughly inspect the property before making an offer.

Acquiring an older property exposes the investor to increased maintenance risk.

To manage this risk, a NACHI (National Association of Certified Home Inspectors) registered propert y inspector should be appointed to inspect the property thoroughly and provide a report detailing defects, repairs and maintenance issues, as well as the cost of attending to these, to guide the investor’s buying decision.

Cash flow considerations

Financial constraints certainly curtails a property owner’s ability to the seemingly never-ending requirements to patch, paint, repair and replace fixtures and fittings, and to deal with mould, pests and normal wear and tear. However, the long-term consequences of neglecting regular maintenance are far greater. Experts estimate that the cost of delayed maintenance can be as much as 15 times more than the cost of the required ongoing maintenance, as small repairs and routine maintenance turn into major problems.

Furthermore, poor maintenance will dampen growth in the value of the property, make it increasingly difficult to find quality tenants and collect market-related rentals and reduce the possibility of a quick sale at a marketrelated price.

Professional property investors factor the cost of regular, ongoing maintenance into their cash flow projections when considering a property, using custom-designed software such as the P3 Property Wealth Manager. This allows them to make informed decisions about the return on investment of the property under consideration, given the maintenance requirements and the expected ongoing costs thereof.

So how does an investor avoid this pitfall?

Professiona l proper t y investors ta ke a professional approach to maintenance, which commences even before the property is acquired

Disciplined maintenance schedules

28

November 2013 SA Real Estate Investor

Building up a reserve fund As a property ages, the maintenance and repair requirements increase. Recognising this risk, professional property investors build up a reserve fund for unexpected repairs or major maintenance beyond the regular, ongoing maintenance budgeted for in their cash f low projections.

Professional property investors implement regular maintenance schedules, task rental management agencies to conduct regular

inspections and maintain good relations with their tenants to ensure they are always informed of maintenance and repair requirements or potential problems. And, since they have budgeted for ongoing, regular maintenance, as well as unexpected repairs, they are able to attend to any issues swiftly, ensuring minimal disruption to the tenants and preventing delays which could escalate the costs involved.

Quality contractors Professiona l propert y investors appoint reputable, reliable contractors who will attend to the maintenance and repairs professionally, swiftly and cost-effectively and will provide the necessary guarantees and warranties on the work they have done.

Accurate recordkeeping Professional property investors ensure they keep accurate records of all maintenance and repair issues, and file quotes, invoices, g ua rantees and wa r ranties in an easi ly accessible manner. This not only prevents disputes with tenants, but also ensures that the costs are factored into their tax calculations.

Taking a professional approach to property maintenance is a simple but highly effective way to manage the cost of regular, ongoing maintenance and reduce the risk of unexpected and significant maintenance and repair costs.

It further not only ensures that an investment property appreciates in value over time, but will also ensure that the property remains rentable to quality tenants at a higher rental and that the property can be sold at a higher price, should the property asset be disposed of.

RESOURCES P3 Investment Group

www.reimag.co.za

LEGAL

BY RUI MARTO

Can You Be Fined For not building in time?

T

here have been a number of disputes between Homeowner Associations (“HOA”) and landowners arising from HOA’s levying fines against homeowners who have failed to build within the period stipulated in their original agreements of sale. The question arises whether in fact HOA’s are legally entitled to issue these fines or penalties and if so, whether there are any limitations thereto.

General scenario Ty pica l ly, a homeow ner enters into an agreement of sale of land within a cluster complex. One of the terms of the agreement, is that the homeowner is required to build his property on the land within a stipulated period.

The agreement further includes a provision that the HOA is entitled to impose a penalty should the homeowner not build within the stipulated period. Generally the period stipulated in the agreement tends to range from one to five years.

Certain complexes include further limitations including the size of building, restrictions in 30

November 2013 SA Real Estate Investor

design and even construction materials used.

The problem arises when the purchasers for one reason or another do not finalise the building timeously. The most common reasons given tend to be the following: • The purchaser failed to obtain a building loan for the construction of the property, alternatively same was granted but subsequently declined due to change in circumstances; • Change in financial status of the purchaser; • The purchaser was a speculator who intended to on-sell the land without intending to build and failed to find a suitable buyer; • A dispute arises between homeowner and either the HOA or the building contractor, causing a delay in the finalisation of the building.

The penalty As a result of the homeowner’s failure to build within the stipulated period, the HOA

imposes a fine on the homeowner. Where the agreements are silent on the amount of the fine, the value of the fine is set per resolution taken at a meeting of the HOA. The fine is usually a fixed amount charged per month from date of resolution or date of default, whichever is the later, to date of finalisation of construction.

Alternatively, the fine is set at a multiple of the levy charged by the HOA, for example, five times the levy amount.

The reasons usually given by the HOA’s for imposing these penalties are:•

• •

•

Nuisance resulting from building activity.

The objective is for all homeowners to build within a common period so as to minimise nuisance to each other; Damage resulting from building activity; Security risks resulting from continued building activity. At times this requires the employment of additional security patrols; Negative effect on property prices. www.reimag.co.za

RESIDENTIAL Legal entitlement In terms of various court decisions, courts have held that a HOA is entitled to impose a penalty.

HOAs are responsible for the formulation and enforcement of rules and regulations of the estates or complexes. Generally the constitution of the HOAs includes the power to charge levies on members.

Restrictions The power to impose a penalty on a homeowner in these instances is not without restriction. The Conventional Penalties Act 15 of 1962 (“the Act”), in essence, states that where any penalty is imposed in case of a breach of contract, the penalty cannot be out of proportion to the prejudice suffered.

Section 3 of the Act states:- “Reduction of excessive penalty: If, upon the hearing of a claim for a penalty, it appears to the Court that such penalty is out of proportion to the prejudice suffered by the creditor by reason of the act or omission in respect of which the penalty was stipulated, the Court may reduce the penalty to such extent as it may consider equitable in the circumstances:- provided that in determining the extent of such prejudice the Court shall take into the consideration not only the creditor’s proprietary interest, but every other rightful interest which may be affected by the Act or omission in question.”

Consequently, the Courts consider three matters:•

•

•

Is the penalty out of proportion to the prejudice suffered? If so, Would it be equitable for the Court to reduce the penalty? If so, To what extent?

In the case of Murcia Lands CC vs Erinvale Country Estate Home Owners Association (2004) 4 All SA 656(C), the HOA imposed a levy upon the homeowner equal to ten times the levy per erf. The Court applied the Act in determining whether this was excessive or not. The Court stated that “where one is not dealing with monetary prejudice, this requires the Court to make a value judgment in order to decide whether the penalty is unduly severe to the extent that it offends against one’s sense of justice and equity.”

The Court assessed comparative data in respect of penalties imposed by other estates www.reimag.co.za

in the area. In most instances, the penalty imposed was a value equivalent to three times the monthly levy. The Court also considered the size of the total penalty imposed and the income which was received by the HOA as a result of penalty levies in general. The Court came to the conclusion, that the penalty was out of proportion to the prejudice suffered.

“No law may permit arbitrary deprivation of property” The penalty was “out of proportion to the goal which it was legitimately seeking to achieve, namely to compel compliance with the term of the contract.” In other words, the imposition of a penalty is not there to provide an additional income to the HOA but to attempt to act as a deterrent to enforce compliance with a specific provision.

Once you decide to build you need to make sure that you hire a reputable builder. there is not point spending hundreds of thousands of rands only to have to fix the finished product.

Another important thing to check is whether your home has been built to the correct specifications. HOA’s often have a standard guide when it comes to building in a gated community, you must ensure you follow these specifications. If you are building you must also follow the specification laid out by the municipality and that means getting building plans approved before you build. There has been a number of cases recently where building has been done before approval of plans and the alterations have had to be removed. So check with the HOA and your local municipality before you put down a brick.

BUILDERS CHECKLIST 1

Never let any builder or contractor start work on your property until a legally enforceable written contract, including a detailed schedule of works has been signed.

2

Ensure that all of the contractor’s workmen are properly qualified, registered and insured and check the trade references of the contractor with previous clients.

3

Make sure the contract stipulates a fair schedule of payment “draws” and stick strictly to the payment terms. Don’t be pressured into making additional payments.

4

Ensure that the contract provides for a retention of 10 per cent of the contract value to be held for 90 days after the contractor has left site. This ensures that if problems and snags arise (and they will) there is money out to sort out these issues.

5

Check the contract beforehand and also scope the schedule of work. This helps ensure that all foreseeable works and “extras” are included and have been costed into the original contract and don’t become a later bone of contention.

Deprivation of property The penalties imposed by HOAs tend to increase to sizable amounts very quickly. There is also a tendency by HOAs to escalate the penalty imposed from time to time. Ultimately, the penalty reaches levels which are equivalent to potentially a value equal to or exceeding the value of the property. Once the penalty gets to a certain level, the homeowner has difficulty in, or is precluded from, selling the property.

In my opinion, once it surpasses a certain value, the penalty imposed acts as a deprivation of property of the homeowner. In terms of Section 25(1) of the Constitution, “no one may be deprived of property except in terms of law of general application, and no law may permit arbitrary deprivation of property.”

Prospec t ive pu rc hasers enter ing into agreements for the purchase of land which contain the above penalty provisions should consider the possible consequences. HOAs are entitled to impose penalties should a landowner not build timeously. Whilst the value of the penalty is limited by law, prospective purchasers should take all necessary precautions to ensure that they are able to comply with the building restrictions prior to signing agreements of sale to avoid possible disputes.

RESOURCES Marto Lafitte & Associates Inc

November 2013 SA Real Estate Investor

31

ACQUIRING

BY ANGIE REDMOND

Auctions

Are they a bargain or a bad idea?

I

n July this year, the total value of properties that were under the hammer was down 75% in an 18-month period. “The market was worth an estimated R6bn/year before the Auction Alliance fallout early last year. It’s down to R1.5bn,” says High Street Auction Co joint MD, Lance Chalwin-Milton.

Is this the slow demise of the once booming auction industry or merely a sign of the hard economic times coupled with the scandals and sense of mistrust that surrounded the auction industry?

The drop in sales volumes seems to be largely due to the banks keeping their distressed properties off the auction floor following the allegations of collusion that Auction Alliance embroiled the auction industry in. Banks are instead using their own online sales portals and real estate agents to sell off the distressed properties in their portfolio.

Despite this, the auction industry is still a vital part of the property market.

CEO of Claremart, Jonathan Russell Smiedt, says: “In general terms the auction industry seems healthy and active and we really can only talk from our perspective. We are finding that buyers are attending our auctions in great numbers (both on-site and at our multiple property auctions) and we are selling property generally at prices that reach the Liquidators’, Trustees’ and Executors’ expectations. There will always be those who will remain with traditional selling structures but many of them are indicating a scepticism with these methods and ultimately are prepared to consider auction as an alternative rather than close the door on selling.”

Auctions are still a viable and fast way to sell a property, despite the past scandal and the struggling economy, there are still deals to be had at auction, and the scandal of Auction Alliance has ensured that the auctioneers left behind in it’s wake take honesty and integrity serioulsy. “Let’s tackle this head on: there is no doubt that the auction industry’s reputation was damaged by the Auction Alliance ghost-bidding scandal. It’s inevitable that allegations of collusion between auctioneers, banks, liquidators and attorneys affect public perception of the industry as a whole.

32

November 2013 SA Real Estate Investor

In the wake of this, comments by Tirhani Mabunda, chairman of the South African Institute of Auctioneers, that South Africa’s auction profession is ‘riddled with corruption’ have left sellers and buyers alike uncertain as to the ethics within the industry.” “So, can you trust us? The short answer is a resounding yes.

We are completely in agreement with Mabunda’s insistence that our industry be properly regulated and that there be entry level educational requirements for all members of our profession. We fully support any initiative that adds to the existing regulations - anything that brings transparency and credibility to the auction industry can only be seen as positive,” says James Dall of High Street Auction.

So, where are the opportunities at auctions?

Justin Clarke from Private Property says, “The ultimate source of great value property is of course the sheriff auctions. Where the bank is unable to rehabilitate the bond holder and they see no chance of recovering their funds, the bank applies to the court to attach the property and sell it to the highest buyer as it stands, called a sale in execution. The sheriff of the court executes these transactions.

They are not well advertised with poor turnouts and often postponed. In most cases the only party at the auction is the bank. The bank will let the property go at a big discount, often around 50% of value, and this is where the real opportunities lie.” Having found his love for the property market at an auction of an old house bordering on a commercial node that was part of a deceased estate, Clarke recalls, “I knew there was a lot of interest but I had a tenant lined up already. I remember watching the bidders at the auction from my seat and when they were exhausted fighting it out against each other and the hammer was going to fall, I put in my first bid.”

Andrew James, Director and Ceo of Michael James Organisation, which has been operating for over 50 years, says, “auctions are still the best way to sell your property, to get the most value and making use of reputable auction houses can add value to your sale.”

RESOURCES

Claremart, High Street Auction Co, Private Property

6 TIPS FOR AUCTION BUYERS 1

Do your homework. Request an investor’s pack before the auction for essential information on your chosen property.

2

View the property. Nothing beats a real life inspection to find out the finer detail - these inspections are usually arranged by appointment or at scheduled times designated by the auction house.

3

Remember the “voetstoots” clause.

Under this clause you agree to buy the property with whatever defects it may have at the time of sale. Know what you are getting into before you get into it.

4

Make sure your finance is in place. Decide on the highest price you are willing to pay, build in extra for fees and commissions, and then make sure you have the funds available at the time of going to auction.

Plan ahead if you need to bond the property.

5

Prove who you are. Provide your barcoded ID, proof of residence and, in the case of property purchased in the name of a company or trust, a resolution by the members, directors or trustees giving signing powers to the bidder. Make sure you are FICA registered.

6

Put emotions aside when you bid.

Remember, auction sales are final: don’t go over the price you can afford no matter how badly you want the property.

www.reimag.co.za

PROPERTY FORUM

DOES THE AMERICAN WAY WORK IN SOUTH AFRICA? JT FOXX JT Foxx is a serial entrepreneur and real estate investor and is known worldwide as one of the top speakers and coaches in the wealth creation, real estate and business sectors. He has also been a radio personality over the last seven years. Originally from Canada, he started eight years ago with $974 and a very old Ford Ranger pick up truck. His areas of expertise are marketing, branding, sales, strategic thinking and investing. He is also the founder of the world-renowned events Mega Partnering and Mega Partnering Africa.

W

ell, after my eighth visit in six months, after teaching thousands of clients all around the country, and after personally doing business there myself, the answer is yes and no. There are three characteristics that define any successful property investor in today’s new real estate economy. The first characteristic is knowing how well you are branded, the second is knowing how good your marketing is, and the third is knowing how good your relationships are. After visiting a property auction to view 20 properties up for sale and to see only two of them available at the time of auction, I quickly realised that success in property in South Africa is not what you know, not whom you know, but who knows you. If the property is on the market for everyone to see, I and many other successful investors have probably already seen it first.

The market here in South Africa, as it did in the United States, took some very huge hits in 2007-2011. The reality is that only just now, both countries are finally getting out of their hole though many homeowners are still owing more to the banks than what their property is worth. Now that the market is coming back strong in both countries, I am seeing people repeat the same mistakes they did five years ago. Here are someone of those mistakes.

Mistake 1: Relying on the banks too much for capital Whether you are in SA or the US, banks will rarely lend for more than 1-4 properties if you are a small investor. Banks are afraid of making the same mistakes they did before and are much more likely to lend to people who have a track record This is where the American way comes in: creative real estate. I have heard far too many people here say things like owner financing, lease options and flipping properties don’t work. Well I believed it myself until I decided to try it myself. It’s actually easier here than it is in the US. The only challenge I faced is educating the attorneys, brokers and homeowners of the benefits of doing deals creatively and that it is legal.

Mistake 2: Using all of your own money to buy properties I bought my first 500 properties without using any of my own money. Mr. Trump once told me, “It doesn’t matter who you are, the better you are at investing, the more likely you are to run out of money”. This can often be the kiss of death for many property investors. On one hand, it can freeze you out from buying other properties or if you are in the middle of projects, you can run out of money.

Something I have often seen happen here, where wannabe investors ventured out and ran out of money in the middle of their real estate project. The key to long-term growth for investors who not only want to invest here in South Africa but also globally, is building partnerships. You are only as good as the people you surround yourself with. This is something I have heavily focused on to teach at my property tours across the country. Use your cash for amazing once-in-a-lifetime deals and use partnership capital to grow your business.

34

November 2013 SA Real Estate Investor

Mistake 3: Gambling on your investments There are trainers here in South Africa that are teaching you the way to make money in properties is... you have to buy them, find a renter, hold them for three years, have negative cash flow, and then in three years sell it. The American way has always been “you make money when you buy real estate, not when you sell it”. If you have to take money out of your pocket every month to make the deal work, it’s not a good deal. Where American’s went wrong is that we become too greedy. The market got hot, it got very competitive, money was cheap, and we started buying properties hoping the price would go up. That is not any better than gambling and in the end the house always wins, and usually its not yours.

The American way is realising that unless you are solving problems or finding solutions you won’t make money in property. The American way is about doing whatever it takes creatively to get a deal done and have it funded by someone else. The American way is about making leads come to you through clever marketing and branding. The South African way on the other side is about doing deals with integrity and honesty, it’s about having care for the other person you are helping and it’s about realising the market is big enough for all investors and there is enough room for all of us to make money.

In the end, don’t change who you are. Be proud to be South African, one of the best countries I have ever done business in. While on the other hand, when it comes to making money, put on your Yankees hat because if you don’t, you will be left out of many great deals. Come see for yourself how creatively I am doing both property deals and business deals at one of my live events at www.

JTFoxxLive.com/sa. It’s ironic how many people here are complaining about the market, while more and more Americans are bringing their American dollars here to buy properties. What they don’t realise and what I did from day 1, is that they don’t think the market here in South Africa will shut them out. Happy investing!

RESOURCES JT FOXX Organization

www.reimag.co.za

­

­

­ ­ ­ ­

­ ­

IMPROVING

BY ANGIE REDMOND

o h r u o y Update

Y

ou don’t have to spend a fortune to increase the value of your house. If you are looking to sell or rent your home, there are a number of simple steps you can take to ensure you get the best deal for your house. So don’t break the bank, just borrow from the piggy bank and watch the value of your home increase.

Repainting cabinets and cupboards A fresh coat of paint can make all the difference when it comes to your home, while repainting the walls can be costly, it doesn’t take much to put a fresh coat of paint on all the cupboards and cabinets in the house. Instantly these look fresher and new.

If the walls of your property are smudged, dirty and look like they were last repainted in the 80’s, then giving them a fresh new coat is a must. When you are thinking of shades, stick to neutral, you want the person who is looking at the house to imagine themselves in the house and garish green walls might make them run away.

What you will need • Paint – enamel (white or cream) • Roller brush and paint tray • Turpentine Black garbage bags if you are painting the walls, (tape these to the floor to ensure you don’t get paint on the carpet or bare floors) 36

November 2013 SA Real Estate Investor

y a d me to

Top painting tips

Fixing cracked and broken tiles

Using primer is a good way to save some paint, since you’ll need to use fewer coats of mixed paint, which is more expensive, and it will also help give your walls a truer colour.

If the tile isn’t too badly damaged, you can try to fill in the chip or crack and then paint over it.

You can buy tile epoxy or adhesive at most home improvement stores. Simply apply it to the crack, let it dry and then paint over it.

•Before you use a new roller, dampen it very lightly. Then gently shake it or run your hand down the roller to get rid of all the moisture.

•Paint in a “W” or “M” motion, without lifting the roller from the wall. This will help disperse the paint evenly, and on walls with some texture, it will make sure that problem spots are covered from multiple angles.

•Start your first stroke with an upward motion, because if you roll down on the first stroke, the paint can puddle under the roller and run down the wall.

•Paint one wall at a time. Tempting though it may be, don’t paint all the eye-level surfaces in the room and then come back with the extension pole. This can create visible lines in the painting.

•Leave at least two hours for drying between coats, especially with deeper, richer colours, even if it seems like the paint is dry, it probably isn’t.

If the damage is too big to fill in, you can simply remove the tile entirely and put a new one in its place. First, you’ll have to get rid of the old tile.

Place a cloth over it and shatter it with a hammer.

You may want to wear protective goggles in case any errant tile pieces go flying. Clean the area where the tile used to be well. You may need to use a chisel to get the old tile pieces all out.

Once the area is completely clean of debris, you can apply the new tile. Use a trowel to apply adhesive to the new tile piece. Try to coat the tile evenly. Follow manufacturer’s instructions for how long the tile should set to dry. Once the adhesive is dry, outline the new tile piece with grout.

Blinds Window blinds are easy and simple and they add much more character to a room and value to your property. If perhaps you are slightly old- fashioned you can still have the best of either worlds with perhaps Venetian blinds, Roman blinds or a roller www.reimag.co.za

RESIDENTIAL

blind which are still classics in style. By using an antique looking material, plain or patterned, can easily add an “old” air to the room. For the modern type of house the choice of window blinds or curtains is limitless in colour and material.

Aluminum, wooden and even bamboo window blinds are proving popular choices today.

impression is true. So, make the interior of you home shine from the moment someone walks through the door. Hire a cleaning service for a thorough topto-bottom scrubbing. Even if you clean your home regularly, there are nooks and crannies that you may miss or overlook. Let a cleaning service do the dirty work to really make your home sparkle.

Taps and showerheads

Kitchen

Modernising your taps and showerheads in your bathroom and kitchen are a quick and easy way to update your home and add value without breaking the bank. There is a large range of taps and showerheads you can choose from, just make sure that the new fittings are the correct ones for your home’s water pressure. If you have very old plumbing and put a modern showerhead in your shower, your water pressure may not be high enough and you will end up with a dribble of water instead of the glorious stream you imagined.

You don’t have to start from scratch to create a winning recipe. For maximizing your home’s value, kitchen updates are key. Start by swapping out just one item, such as a stained sink or ancient microwave for shiny new stainless models. Even small kitchen updates will add big value to your home.

Keep it clean and tidy Overgrown or patchy lawns and outsized bushes will cause your home to stand out in a bad way. The good news is that taming your jungle is an easy fix.

Hire a lawn service company to trim your lawn and shape your hedges. Your curb appeal will go from messy to maintained without blowing your budget.

The old adage that you only get one shot at a first www.reimag.co.za

Maintenance Walk around your home and make a list of all the little things that are broken or in need of repair. Individually, small repairs might not seem important, but if every room has just one thing wrong, those small things will add up to create the impression that your home has been neglected.

If you don’t feel comfortable tackling the repairs yourself, hire a handyman for a day and watch your “to do” list disappear. Staying on top of maintenance today eliminates problems down the road when you decide to sell.

There are a number of quick and easy fixes you can make to your home, to improve the look and feel and add value, either for the resale value or to attract tenants.

AUTOMATIC IMPROVEMENTS 1

Lighten and brighten interiors with curtains and windows

2

Clean and remove clutter with furnishings

3

Repair any faulty or cover up unsightly looking plumbing

4

Repair electrical wiring and fittings and cover

5

Landscape the garden

6

Upgrade the kitchen

7

Upgrade the bathroom

8

Upgrade the flooring

9

Paint the exterior

November 2013 SA Real Estate Investor

37

REI Commercial

Gautrain Will Provide Exciting Opportunities Unlike the scepticism that met the announcement of the initial 80km of Gautrain’s routes, the additional 140km announced by Gautrain, as part of the 25-year Transport Plan for Gauteng has been excitedly received, even though building is only likely to being in several years’ time. And this immediately begs the question about whether there are any investment opportunities that this announcement creates?

Funders Can Make Returns Banks’ limited ability to finance long-term projects opens up opportunities for other types of funders to make returns and help SA implement its R3.4 trillion infrastructure programme. As infrastructure development is critically important for South Africa’s economic growth‚ it cannot be left for governments and the banks to “go it alone”‚ Mergence Investment Managers portfolio manager Mark van Wyk said.

Valuable Input

Morne Wilken, CEO, Attacq “Listing Attacq has provided an opportunity for investors to share in a unique long-term sustainable real estate capital growth fund with a successful track record.”

www.reimag.co.za

Marna van der Walt, CEO, EPS “Our ongoing strategy is to continue to increase our presence and activities in the retail property management sector on the African continent and we are committed to securing the best strategic retail letting skills in the region.”

Gielie Visser, Director, JHI Properties in Africa “Developments on the continent are increasing in size and sophistication, which is not surprising given the size of the market.”

Don't Blame Rising Bond Yields High volatility in SA’s listed property sector over the past year has largely been blamed on rising bond yields, which conventional wisdom says is bad for property returns.

But more and more research shows that there is little empirical support for this thinking and that in some cases, rising bond yields and improving property returns can take place in parallel.

November 2013 SA Real Estate Investor

39

GETTING STARTED

BY JOHN ROBERTS

The Right Information Will lead you to the right investment!

I

NVESTING in property has always been about location, whether the purchase is commercial, industrial or residential.

However, getting value from the estate agent or broker and thus securing the best return on investment means also knowing and asking the right questions - and pushing to get the answers, particularly if that means digging for information akin to seeking out diamonds.

in their deeds of sale that any outstanding transportation development levies become the seller’s responsibility.

Commercial real estate investments include office buildings, strip malls, restaurants and any other real estate in or on which people can conduct business. Among them is found singleunit main street buildings in small towns to skyscrapers in urban settings and landlords usually charge rentals based on the square metre of space rented.

Due consideration also needs to be given to prospective developments within the area.

If an airport is going to be built within the vicinity and the building under consideration houses a spa and outdoor cafĂŠ, the value will likely decrease because of the noise from the new airport.

That calculation is substantially higher than residential rentals on houses or apartments.

Investors seeking a commercial property investment must principally establish the rental income that can be received from that property as well as the lease terms and conditions, namely the expiry date, annual escalation rate and the strength of the tenants currently holding those leases.

Following closely behind are questions relating to the expenses on the property, because only then can potential investors establish a market related purchase price as well as the cap rate at which they become prepared to sign on the dotted line. If the property is part of a shopping centre, having a cup of coffee in that centre to observe the foot traffic may be the first step in getting a handle on the potential investment.

The next question that needs raising is zoning. Often the records reflect the property is zoned for business, but the owner has failed to pay over the transportation development lev y to the municipa lit y. Consequently, avoiding that pitfall means buyers should state 40

November 2013 SA Real Estate Investor

They also need to examine the municipal plans and surveyor general’s diagrams of the property to ensure there are no servitudes, while lease agreements have to be scrutinised to ensure the details provided are correct.

However, if the building has the potential for warehousing and logistics, its location close to the airport could prove to be the x-factor in its value.

Many commercial buildings are leased sometimes to more than one party. Potential buyers should ask their broker for a rent roll and copies of the current leases, particularly if the purchase is for a building with multiple store fronts.

generally those less than 10 years old; B-grade ones would be between 10 and 20 years and C-grade buildings are over 20 years old.

However, upgrading a C-grade building could raise the rental levels to being roughly in the bracket typical of a B+ grade one, while allowing a B-grade building to deteriorate could cost the owner in terms of rentals tenants are prepared to pay.

Generally, A-grade industrial premises command rentals of R45-55/m; B-grade industrial premises are in the region of R25-35/m2 and C-grade between R15 and R20/m2 - but every one of these rates will depend on the yard availability to the specific units, so these become further key questions potential investors should enquire from the broker.

The rent roll reflects the lessees; how much rent they pay; whether they contribute to the common area expenses; what the lease terms are and when they expire. Also included is information on rental increases with commercial leases usually spelling out the increases either linked to the consumer price index (CPI) or as a set percentage.

However, one key benef it to ow ning commercial propert y, particularly as an investment vehicle, remains the return on investment. Typically these investments are paid off more swiftly than residential property investments - in a decade rather than 20 years - and the commercial property market is more stable than the homeownership one. Leases are based on longer periods - three, five or 10 years at a time - with steady escalations.

However, determining a realistic return on investment is difficult and depends on the strength of the tenant occupying the property, the location (that word again) and the length of the lease. A rule of thumb is a 10% return on investment, but there are always variations.

Purchasing a property in the right position offers investors good returns for years and once the propert y is bond-free and fully tenanted, it also places the owner in a position to acquire an additional commercial property through leveraging.

Part of the variation can be attributed to the building grading. A-grade buildings are

RESOURCES Just Property Group

www.reimag.co.za

MANAGING

BY SAXEN VAN COLLER

Managing And Maintenance Is essential to your industrial property

P

roperty management covers certain practical areas of responsibility. These include tenant management; financial and marketing solutions and facilities management as well as overall operational systems. These areas of responsibility are fundamental in ensuring that properties generate continuous revenue streams through timeous rental collections from value adding tenant groups; are maintained through seamless facilities management; and that risk factors are identified and mitigation measures adopted at infant stages in the process.

It is therefore necessary to understand and appreciate needs, preferences and the core business of tenants. In order to deliver value to tenants and visa versa, strong Customer Relationship Management (CRM) is therefore critical.

This assessment is crucial to the preparation and management of tenant contracts and prov iding c lea r communication on the business response to new developments in their industry. Similarly, another key factor to tenant management is the prompt response to facilities maintenance request, with updates on progress. Precise implementation of these tasks allows the business to monitor and measure tenant satisfaction which, in turn, contributes to business improvement by offering an operational indication of how properties are performing in comparison to similar industries in the surrounding vicinity of the business precinct.

Creating a solid understanding of the performance of similar industries in the surrounding vicinity of the business precinct is also important to ascertain how the market is influencing rental rates and service provision to tenants. This in turn provides a competitive advantage for the organisation by demonstrating understanding of its own value chain. In addition, this provides a good platform for marketing, promotional and advertising 42

November 2013 SA Real Estate Investor

opportunities to capitalise on achieving 100% occupancy and rental recovery.

However, in order to keep tenants satisf ied and generate continuous revenue streams it is essential for the business to ensure that building structures and fixed installations are not only operating optimally but eff iciently by reducing downtime and providing a proper Operational Strategy for all the precincts. This component of facilities management is therefore crucial in achieving the abovementioned objectives.

Dube TradePort is a 2 040-hectare masterplanned development. This world-class passenger and airfreight hub, encircling King Shaka International Airport, has become a highly competitive business-operating environment, comprising four development zones, one of which is the sprawling Dube TradeZone which is a specialist precinct with premium fully-serviced airside real estate, ideal for newgeneration warehousing, manufacturing, assembling, air-related cargo distribution, hightech aerospace services, automotive industries, clothing, textiles and cold storage. The crucial lessons at Dube TradePort have been that managing and maintaining industrial property centres on customer relationship management.

At Dube TradePort contracts/service level agreements (SLAs) are concluded with third party service providers along a wide range of hard and soft services. Cleaning and hygiene, waste management and pest control form part of the soft services group and these services are conducted daily, across the precinct. Hard services relate to the maintenance of generators, elevators, fire systems, roller shutter doors, utilities and HVACR systems. These services are scheduled and delivered monthly, quarterly, bi-annually and/or annually depending on the legislative and business requirements.

General building maintenance is catered for

under a facilities maintenance contract, which is a more reactive response to achieving the overall facilities management targets. This further provides the platform for identifying opportunities for improvement of maintenance processes and practices to produce more successful performance. Against this background, it provides opportunities for strategic alliances and training for internal personnel.

An active planned, preventative maintenance schedule is linked directly to the business performance targets and it is therefore imperative for the facilities and operations contracts management division of the business to ensure that all planned maintenance exercises are conducted timeously and meticulously. Key to this function is stakeholder management and management of relationships with service providers; budgeting and budget forecasting for the duration of the contracts/SLAs; monitoring the levels and quality of service provision and compliance in regard to legislative requirements.

Well-maintained properties through optimal facilities management - maintenance of all hard and soft services - are therefore fundamental to retaining tenants and establishing a continuous revenue generation streams.

Key to this is use of Enterprise Resource Systems or Electronic Dashboard for logging in queries. The organisation should look at the feasibility of capitalising on its IT infrastructure as this has more benefits in terms of Customer Relationship Management.

RESOURCES Dube Tradeport

www.reimag.co.za

03 MINUTES

FROM AN OFFICE AT DUBE CITY TO KING SHAKA INTERNATIONAL AIRPORT

120 000 SQM

OF BULK TO DEVELOP

60 YEAR PLAN MASTER

ZONED FOR

300 SEATER

FULLY EQUIPPED

CONFERENCE CENTRE

30 MINUTES

FROM DURBAN CBD

BUSINESS RETAIL AND HOSPITALITY

& RESTAURANT

3

HOTEL COMING SOON

10 BLOCKS TO DEVELOP

1GOAL TO MOVE YOUR BUSINESS FORWARD

CUBE/36900

Dube City is the next generation retail, hospitality and business precinct – a purpose-planned airport city close to King Shaka International. And a city built to connect you to the world … and move your business forward. www.dubetradeport.co.za

STRATEGIES

BY XOLANI MEVA

Establish A Turnaround Strategy For your struggling shopping centre

D

isappointingly perhaps, there is no blue print or ‘one size fits all’ approach to turning around a struggling shopping centre. The reasons a shopping centre may be struggling may be due to myriad factors, among others, general economic downturn, strategic downsizing by chain stores, over-concentration of shopping centres (or overbuilding in same area or vicinity), the decline in the turnovers of existing tenants, or even an increase in online shopping among consumers.

According to Parento Limited, a shopping centre investor in South Africa, although regional shopping centres should generally continue to perform reasonably well, landlords are currently being challenged with vacancies and resistance to rental increases as shop tenants feel the squeeze of limited economic growth and rising consumer costs.

In order to establish a turnaround strategy, a thorough analysis of the specific circumstances surrounding a particular shopping centre should be conducted. It should analyse factors such as the competition, tenant mix, rental rates, centre physical layout / design, parking availability and the profile of customers (ie If the shopping centre is located in a township and the majority of shoppers do not have their own vehicles, is the shopping centre public transport friendly?). This strategy is essentially a form of ‘re-researching’ the surrounding community, as well as the shopping centre facilities.

44

November 2013 SA Real Estate Investor

Parento has reported that the most notable shift in development activity in the past 12 to 18 months in the local shopping centre industry has been towards the “RE” concepts of RE-brand, RE-furbish, RE-design and RE-tenant.

Upon completing an analysis, a plan can be developed around how to remedy the identified shortcomings. The remedial plan may often necessitate redevelopment a nd ma rket repositioning of the shopping centre. This will almost always require more funding, ideally, lower debt and more equity capital to invest.

A new re-leasing campaign may also need to be undertaken by an underperforming centre, which could include focusing on new or improved anchor tenants, at better terms to the shopping centre as the better quality of an anchor tenant is a draw card for visitors to the centre. It is highly important to secure a good anchor tenant, but it is also just as important to note that there should be a second or third anchor tenant, such as a clothing anchor, or an entertainment type anchor tenant, which will assist in fostering repeat customer visits. It is also worthwhile to secure a destination type tenant, such as sporting goods retailers or specialty goods retailers.

The above-mentioned analysis will have also had to include research around what the surrounding community would be interested

in. Often the temptation for the centre management is to let out retail space as quickly as possible, or to the tenant promising to pay the highest rent per square metre. This tenant may however not necessarily be the type of service the surrounding community needs, and may therefore struggle, which will have a negative result on the shopping centre’s financial performance.

A balance needs to be struck when it comes to the re-letting of retail space between larger tenants and smaller tenants, as while bigger tenants are generally more financially secure, if they do make the decision to close the store, the shopping centre could be severely impacted.

It is also very important to consider aspects such as the visibility of tenants inside the shopping centre, the improvement of access to the centre by building extra and more convenient entrances, or the implementation of methods to improve shopper circulation.

All of these efforts will also need to be communicated to the general shopping community in order to inform them of the changes and improvements which will be made. Marketing initiatives, such as events and entertainment, are crucial to assisting in re-launching the centre to the surrounding community and existing customers.

RESOURCES Business Partners Limited

www.reimag.co.za

RELOCATING

RENOVATING

RE-FINANCING

COMMERCIAL PROPERTY FINANCE FROM BIDVEST BANK Whatever you have in the pipeline, get the specialist financial solution for commercial properties up to R200 million. And take your business where it needs to be.

Email property@bidvestbank.co.za and your personal consultant will contact you.

Call 0860 11 11 77 or visit www.bidvestbank.co.za Bidvest Bank Limited (Reg No 2000/006478/06) is a licensed financial services and registered credit provider, NCRCP17. BlastBC 123478

PROPERTY FORUM FIVE TRENDS THAT WILL INFLUENCE WHAT HAPPENS NEXT IN THE SA PROPERTY MARKET

PROFESSOR FRANCOIS VIRULY Francois Viruly is a property economist with over twenty years’ experience in the analysis of the South African property market.

Professor Viruly lectures in Urban Economics, Property Development and Portfolio Management at UCT in the School of Construction Economics and Management.

W

hile attempting to guess market trends is never an easy task it is nevertheless possible to suggest some drivers that will influence what happens next in the South African commercial and residential property markets. These trends invariably have social, technological, environmental, economic and political dimensions.

First, global property markets are starting to strengthen, and it is likely that the South African property market will do likewise in the next two to three years. In the period 2002 – 2007 the South African property market went through a major boom with property values rising well above the inflation rate. In 2005 residential property values were rising by some 30% per annum. A similar trajectory was experienced in the commercial property sector with the Investment Property Data Bank (IPD) recording returns of some 30% in 2006. The oversupply of stock in both the residential and commercial property markets, hand in hand with the effects of the global financial crisis which tightened debt funding, resulted in a downturn of the South African property cycle in 2008. Although the performance of the commercial and residential property markets continue to be tampered by a sluggish macro economy, there is growing evidence that the number of investment transactions are rising and that vacancies are declining the commercial property market.

The second trend is closely related to the growth of the South African middle class and the urbanisation of South Africa. Recent research undertaken by Unilever points out that South Africa’s black middle class has more than doubled over the past eight years. Demographic forecasts also suggest that over the next twenty years the population of the Gauteng City region will have increased by 10 million people. The greater densification of South African cities, combined with a wealthier African middle class, not only provides opportunities in the affordable housing market, but also provides opportunities for the growth of inner-city retailing and the revitalisation of older parts of cities that have suffered from urban decay.

The improvement in South Africa’s urban transportation system provides a further important trend. Arguably this is linked to the growing urbanisation and densification of South African cities. Effective public transport systems alter the way the built environment is able to combine home, work and play. It also offers development opportunities at stations and promote different uses linked between stations. Added to this, a well-functioning transportation system can significantly

reduce the amount that households spend on transport which means that these funds become available for expenditure in other spheres.

The fourth trend relates to the growing impact that the Internet is having on the built environment. One can to a degree increasingly speak of a scenario best described as” Clicks and Mortar”. In a growing number of cities across the globe information technology has influenced the way that cities are managed. This includes fine-tuning transportation systems and the ability of city managers to provide households with critical data and warning systems. Information technology has also altered the manner that retailers interact with shoppers. For instance, information technology has redefined the way that books and music are acquired by shoppers and is now starting to influence the sales of clothing and groceries. As a result, shopping centres are finding new ways to attract shoppers - for instance retailers are offering price discounts on items that are acquired on the Internet but collected at a physical store.

Finally, investors are rapidly appreciating the benefits derived from green rating of buildings. Recently, the rise in electricity and other operating costs have eroded investment returns, and as a result it is something that investors are tackling through the adoption of appropriate technologies. Investors are also seeing the merits of “Green Buildings” in the marketing of buildings. It has not become uncommon for large “Blue Chip” tenants to sign “green Leases” which require the property owner to perform according to certain green benchmarks.

As property investments tend to be long-term in nature, it is of importance that investors understand the parameters that may influence the medium to long-term performance of these markets. It means paying attention to the unraveling of social, technological ( including public transport ), economic, environmental and political trends.

RESOURCES

Viruly Consulting

For answers from the Prof email your questions to angie@realemedia.co.za 46

November 2013 SA Real Estate Investor

www.reimag.co.za

INVESTMENT IN FIXED PROPERTY CAN BE FOR VARIOUS MOTIVES, INCLUDING:

Personal occupation and use Site assembly Demolition and reconstruction Income return (that is, purely for the income stream that is derived from one month to another from the investment) Capital return (that is, for the difference between the purchase price and the sale price of a property) Risk diversification (that is, to allow the investor to spread his or her invested monies between two or more investment opportunities)

PROPERTY Investment in fixed property, whether via direct holdings or indirect holdings, is the fourth investment alternative within an economy.

Direct investment is less tradable than indirect investment, as will become apparent later.

THERE ARE THREE FACTORS THAT MOTIVATE THE INVESTOR TO MAKE AN

INVESTMENT IN INCOME-PRODUCING FIXED PROPERTY

THE AIM OF

PROPERTY INVESTMENT

RISK DIVERSIFICATION

NET INCOME

Firstly, there is the net income to be made from rent collections after operating costs have been paid.

Thirdly, investors hold commercial property to achieve diversification.

Diversification results in lower risk across a portfolio of investments.

RENTAL INCOME

The return that investors in fixed property hope to achieve is termed rental income.

CAPITAL GAIN

CAPITAL APPRECIATION

The additional value, net of inflation, which accrues to a property during the holding period, is termed capital value appreciation.

FINANCIAL LEVERAGE

If the rate of return on a property exceeds the cost of financing the property, it is probable that the financial leverage that can be obtained through ownership will be beneficial.

SECURITY

Because the use of property is fundamental to modern society, it is regarded as a secure investment, provided that the risks associated with the ownership of property can be successfully mitigated.

48

INFLATION HEDGE

Provided one can ensure that the rental income and capital appreciation exceeds the inflation rate during the investment period, investment in property can act as a method of reducing inflation-related value erosion.

November 2013 SA Real Estate Investor

Secondly, there is the capital gain to made from the increase in value which a commercial property achieves in an inflationary environment.

The challenge which investors in the share market face is that the directors of the company into which they have invested their money manage their funds.

EXAMPLE

An example, if you bought shares in Facebook in 2012 and they cost you R10 per share, and you bought 10% of the shares, you will receive a payment at the end of financial year based upon how many shares you bought and how well the company did financially. Your shares can also become more valuable, so if you decide to sell you can make a profit.

If in 2012 your shares were worth R10 and you had 100, and in 2013 those same shares were worth R15, then when you sell, you will get R1500, but you first invested R1000, so you have made a R500 profit.

BY JONATHAN SMITH

Your Mind Map Pick the best investment for you

R

CASH

The return which investors who place their money in the bank or the money market receive is termed interest.

Interest returns are largely dependent upon the rate at which commercial banks borrow money from the public and the central bank as well the amount invested.

START HERE

That is, as the amount invested increases, so the interest rate earned will increase.

Investment should always be understood as the foregoing of an amount of money so as to earn a potential future return thereon from the proposed investment. This means that investors within a business opportunity – including property investors – allocate their cash resources (from equity and debt) towards such investment opportunity in an effort to receive a future benefit, which, over a period, is anticipated to be higher than the original outlay.

So if you invest R50 in the money market at a return of 8% per annum, at the end of 12 months you will have R54. If you leave that R54 in the money market account, at the end of a further 12 months, you will have R58,32. So you have gained 32c on your investment from the interest the previous year, as well as R8 over the last two years.

4 TYPES OF INVESTMENT

bonds, including treasury bills cash holdings equities (via the stock exchange or privately owned) property.

BONDS

Bonds are long-term debt instruments used by business and government to raise large sums of money, generally from a diverse group of lenders. Typically, a bond will have a stated (semi-annual) coupon interest rate and an initial maturity of from 10 to 30 years at which time the par (or face) value of the bond must be paid to whoever is holding the bond at the maturity date.

If the credit standing of the ultimate payer of a bond is considered intrinsically sound, the anticipated payout of the bond is considered to be risk-free. In South Africa, one of our risk-free bonds is the RSA 186.

The contemporary rate that a risk-free bond pays represents the risk free rate used to discount future earnings to a present value and adjusts periodically in accordance with market sentiment as to future inflation and business risk.

EQUITIES

(SHARES)

The purchase of shares in a private or public or public listed company means paying one’s money into a company in return for the right to receive a dividend, which dividend is normally dependent upon the success of the company so invested in.

A bond is a long-term loan, which the initial bondholder makes to the issuer for which the bondholder receives a bond certificate. The bond certificate is a promise to pay periodic interest at the coupon rate as well as the loan value (par value) of the bond to the bondholder at a point in the distant future. The initial bondholder – as well as several bondholders thereafter – will trade their certificates (often termed “paper”) by selling their right to the future interest income for a discounted, up-front balloon amount. The subsequent bondholder then becomes entitled to the cash benefits of the bond until (s)he on-sells the bond to another person for a further discounted, up-front balloon amount.

RESOURCES Courtwell Consulting

SMART MOVES

BY IAN ANDERSON

Despite The Tough Economy Listed still delivers results

S

hare prices in South Africa’s listed property sector have declined by about 15% since May. The sharp decline was sparked by fears that the US Federal Reserve (Fed) would ‘taper’ its bond purchase programme.

The threat of reduced bond purchases sent US Treasury yields soaring and placed upward pressure on bond yields throughout the world. The Fed’s actions also impacted South Africa’s listed property sector, as many investors value listed property on a yield-relative basis.

Listed property companies exhibit equity-like characteristics as they produce profits (rental revenues less expenses less borrowing costs) that grow over time at a rate above inf lation.

However, they also offer a high initial income yield, comparable to the yield of a government or corporate bond. If bond yields rise, the yieldrelative investors start demanding higher yields from listed property. This is achieved through lower share prices, but ignores the fact that, unlike bonds, listed property companies produce income streams that grow over time.

Despite the tough economic backdrop of the past five years, listed property companies in South Africa have delivered remarkably robust earnings growth.

Distribution growth bottomed out in the second quarter of 2013 at approximately 5.3%, but has since accelerated to 6.8%. The prognosis for 2014 and 2015 suggests further acceleration in distribution growth rates towards 8%. Listed property thus offers investors a current income yield of more than 7% AND growth in that income of between 7% and 8% per year.

Most l isted proper t y companies have delivered distribution growth in excess of market expectations over the past six months, primarily due to lower borrowing costs, cost containment, proactive property management and income-enhancing acquisitions.

With interest rates having stayed lower for longer, the listed property sector has enjoyed historically low borrowing costs from traditional lenders like banks. Listed property companies are also accessing the debt capital markets through domestic medium-term note programmes, which makes accessing capital easier and cheaper. The recent rise in bond yields is likely to place upward pressure on borrowing costs, but interest rates are likely to remain unchanged for the next year.

Increasingly, South African listed property companies are internalising their management

SA Listed Property Sector Distribution Growth 25% 20% 15% 10% 5% 2004

50

South Africa’s listed property sector has been able to attract highly-skilled and talented property managers and asset managers. This has resulted in innovative strategies to retain and attract tenants, driving vacancy rates lower.

Brand awareness and advertising campaigns are also helping in this regard.

Over the past three years, the sector has raised a signif icant amount of new capital to fund acquisitions, developments and redevelopments. With lower borrowing costs and most companies able to issue new equity capital at a premium to net asset value, the cost of funding the sector’s expansion has been lower than the acquisition or development yields achieved. This means each acquisition or development has increased the income base from day one, driving inf lation-beating distribution growth in the sector. With lower share prices and higher borrowing costs, this is likely to be less of a factor going forward, but should nevertheless contribute to distribution growth over the medium term.

The reasons for the recent sharp sell-off in listed property have nothing to do with the fundamental driver of long-term capital growth. Distribution growth is expected to accelerate towards 8% in 2014 and 2015 and, coupled with an initial income yield in excess of 7%, listed property continues to look attractive relative to other asset classes.

Year - on year % change

0%

teams. By doing so, staff overheads can grow at rates substantially below that of the rental revenue in an ever-expanding proper t y portfolio, allowing for profit margin expansion and operating leverage.

RESOURCES 2005

2006

2007

2008

November 2013 SA Real Estate Investor

2009

2010

2011

2012

2013

Grindrod Asset Management

www.reimag.co.za

SMART MOVES

BY NEALE PETERSEN

“The Greatest Real Estate Deal – Ever!”

Lessons that put Trump on the map

D

onald Trump’s purchase of 40 Wall Street in New York City is considered as one the most successful real estate deals ever concluded. This is mainly because of the ridiculously low price paid, the incredible growth and returns in capital value and the high yields it produced. The way the deal was structured is not only a valuable lesson for any potential investor, big or small, but also a strategy which can be applied by anyone who has the desire to be a successful real estate investor.

Today, 40 Wall Street is the benchmark of how real estate deals should be done. The transaction played a part in Trump’s rebound from the brink of bankruptcy to the success he is today and is also one of the reasons why he is recognised as a modern celebrity in real estate investing. Learning, adopting and applying some of the negotiation principles Trump applied when he bought 40 Wall Street will give you a powerful advantage on your own investment journey.

The main key to success was the ability to negotiate the deal intelligently after having done a thorough due diligence.

Background A landmark in downtown Manhattan, New York, 40 Wall Street was built in the 1920’s and was once the tallest building in the world.

Unfortunately, numerous previous owners had been unable to manage the property successfully.

Ferdinand Marcos, the infamous president of the Philippines, owned the building and ran it into the ground before it went into foreclosure.

52

November 2013 SA Real Estate Investor

It was then sold to a member of the Resnick family. Despite their extensive real estate experience, they also could not make it work. The property was foreclosed again.

It was then acquired by the Kinson Group from Hong Kong who planned upgrades worth millions of dollars. However, the tenants had to vacate the building during the renovations and the company then failed to pay the contractors. As a result, the building was left almost vacant and in bad shape, with no services. Furthermore, the contractors filed several mechanic liens amounting to almost a million dollars. (A mechanic’s lien is a security interest in the title to property for the benefit of those who have supplied labour or materials to improve the property.)

The building was totally mismanaged, almost entirely vacant and in a state of total disrepair.

As a result of this, and its troubled past, no one wanted the building as it seemed no one could make a success of it.

But Trump saw potential others could not see: the property offered more than 1 million square feet (around 100 000m2) of f loor space in an excellent location.

Problems turned into opportunities The main problem contributing to failure of the previous owners actually lay in the structure of the ground lease or land agreement with the owner of the land on which the building stood, the wealthy German Hinneberg family.

The agreement was antiquated and contained hostile provisions for potential tenants. This www.reimag.co.za

COMMERCIAL made it difficult to obtain finance and to invest in building renovations profitably.

Pre v ious ow ners, work ing t h rough a representative of the German landowner, could not get the ground lease modif ied.

Applying a basic principle of successful sales - getting around the gatekeeper and talking directly to the decision-maker - Trump flew to Germany to meet the Hinneberg family and to negotiate directly with the owner.

Trump and the landowner discussed the failures of the previous building owners.

Trump offered to renovate the building to make it feasible for office and/or residential lease, in return for a review of the troublesome land lease and a rent-free period of one year to complete the renovations. This would make it possible to finance the building.

Abe Wallach, one of Trump’s advisors at the time who also played an instrumental role in the acquisition of 40 Wall Street, believed the only solution was a conversion from an office building into residential co-operative apartments. In fact, the city was offering developers incentives to convert vacant office space in the downtown area to residential units. However, there was a major challenge in this regard: before any work in respect of a conversion could commence, a deal had to be made with the law firm that occupied the entire seventh floor. Ross, given his extensive legal experience and knowing the principals of the law firm, knew that this was going to be a time-consuming and expensive process.

So, it was back to the drawing board. With much out-of-the-box thinking and in-depth analysis, Ross came up with a fresh solution: three office buildings, situated on top of each other.

The biggest deal in numbers

The building in rental returns

Having renegotiated the land lease, Trump was ready to acquire the building. Given the condition of the building and the state of the property market at the time, the Kinson Group readily agreed to give Trump an option to buy the building for $1 million, and he also assumed the $1 million liability for the mechanic liens.

Ross calculated that the top portion of the building offered 400 000 square feet of small office space. This, he believed, could be rented at $19 per square foot ($2 over the average rent of $17 per square foot), given the prestige of renting an entire f loor with a fantastic view of the New York harbour. At this rental, the acquisition and renovation projections would reach breakeven.

At one million square feet, the price tag of $1 million dollars meant that Trump bought the building for a dollar a square foot - a ridiculously low price.

Key lessons Trump then exercised his option to buy 40 Wall Street. He now owned a building with fantastic potential in a great location, with wonderful views of the New York harbour.

But the real work had just begun.

At the time, there was a glut of office space in the area and, as a result, no demand from tenants for office space downtown. Even George Ross, Trump’s right-hand man, believed that the building had little chance of success, even if the office market recovered. Furthermore, numerous brokers had analysed the building and confirmed that the higher floors were too small for commercial office use and that the lower floors, which contained huge columns that interfered with efficient office space usage, were equally unsuitable for commercial office use. www.reimag.co.za

Trump then paid $60 000 of the $1 million mechanic lien on the building and gave the contractors involved the first option to do the renovations, provided they gave up the liens.

In this way, Trump successfully refurbished the building.

The first lease was concluded with a major financial firm at a rental of $23 per square foot, significantly higher than the $17 per square foot projected.

When the off ice market rebounded, the building became extremely popular and eventually even the 400 000 square foot lower floor was leased to American Express at $24 per square foot. Given the tenancy rates, Trump could replace the original mortgage with a larger mortgage at a reasonable rate.

Today the building is worth between $350 million and 400 million and is, aptly, called the Trump Building.

LESSONS ON BUYING 40 WALL STREET 1

Insist on negotiating directly with the decision-maker, not with a representative or broker.

2

On the next level down, the floors are larger and consist of 300 000 square feet without the views, which Ross believed would achieve rentals of $17 a square foot. This would ensure a profit.

Long-term investment is based on strong personal relationships with key people.

3

Given these projections, the lower 400 000 square feet of space would not even have to be rented out.

Establish an aura of exclusivity to create a desire for ownership, as Trump did by splitting the building into three sections.

4

Don’t be misled by apparent legitimacy - every document is negotiable under appropriate circumstances.

5

Every negotiation requires maximum pre-planning time.

6

Take time to prepare and negotiate - quick deals may lead to omitting important aspects.

7

According to the invested-time principle, the more time spent on a transaction, the more likely the parties will want to complete it.

Renovations To achieve these rentals, the building required a complete makeover, including a luxurious lobby in true Trump style on the ground floor; modern infrastructure including elevators, air-conditioning, and electrical and plumbing systems; and state-of-the-art telecommunication and data systems.

To fund the renovations, Trump borrowed $35 million from Union Labor Life Insurance Company - the only loan he could obtain at the time. The company bought into the idea of renovating the building, because it would put many of their union members back to work.

RESOURCES Trump Strategies for Real Estate, Trump Organisation, George Ross

November 2013 SA Real Estate Investor

53

International Money Transfers Sable FX specialises in foreign exchange and international remittance.

We will help you negotiate the regulatory minefields and assist you with sending money to and from every major global destination, in line with exchange control regulations and Reserve Bank rules.

Why use Sable FX: Worldwide transfers No transfer fees Better exchange rates than what your bank can offer you Regulatory form advice and completion SA tax assistance Secure online payment portal Unrivalled customer service

Sable FX United Kingdom Castlewood House 77/91 New Oxford Street London WC1A 1DG t: +44 (0) 808 141 5535 info@sable-group.com www.sable-group.com/forex

South Africa Regent Square, Block B1 Doncaster Road Kenilworth 7708 t: +27 (0) 21 657 2153 info@sable-group.com www.sable-group.com/forex

Sable Forex is a Money Service Business registered with Customs and Excise. Registration No. 12148630

SABLE FX a professional edge

REI Offshore

Valuable Input

Pierre Van Tonder, CE, Spur Corporation “Countries in the rest of Africa offer a good opportunity to enter higher growth markets although each market brings its own particular challenges.”

Affordable Housing Pays Off

Ian Hawksworth, CEO, Capital & Counties Properties “While the national UK real estate outlook is still fairly weak, the prospect for the London market is positive across all property sectors.”

The vision to invest in the development of affordable housing in Africa is starting to pay off handsomely for pioneer private equity investors.

Strong returns achieved with the first South Africa Workforce Housing Fund prove the success of affordable housing as a solid asset and augers well for ongoing investment in the sector.

Record Rentals In The UK Near record rental values in the UK coupled with the rise in house prices will generate average returns of 13% in the next twelve months, more than £22,000 per property, a report found.

It also revealed rents are within £1 of their alltime high at £743 a month in England and Wales.

www.reimag.co.za

November 2013 SA Real Estate Investor

55

GETTING STARTED

BY MIKE SMUTS

Important Questions You Need To Ask

Before you buy a property overseas

W

herever in the world you decide to purchase an investment property, chances are you’ll use the services of an estate agent, buyer’s agent or property finder.

But the level of commitment and services you receive from an overseas agent can vary hugely.

With this in mind we look at the important questions you need to ask your agent when investing offshore.

Who do you represent, the seller or me?

It’s important to understand where your agent’s loyalties lie and what their obligations are to you. The offshore property market, like the SA market, is primarily a service for the vendor, which means most agents represent the seller and not the buyer. Many firms who sell offshore property under the guise of being “investment specialists” are unfortunately nothing more than glorified estate agents and make more money from their commission from the developer than they do on fees from their clients. As a buyer with little or no local market knowledge it’s important that you have someone in your corner whose sole responsibility is to you. When you spend the greatest amount of money on the biggest deal of your life you don’t want to go into it with the odds stacked against you.

How familiar are you with the country and in particular, the local area in which the property is located?

The principle of letting out a property to paying tenants does not change, wherever you buy in the world. But the details do. It’s therefore important that the agent assisting you has first-hand knowledge of the country and the area he/she is selling in. And by firsthand I mean someone who has lived and invested in the UK for some time. I often meet agents at trade shows and networking events who passionately brief me on the wonderful aspects of Florida, Spain or some other exotic location. Yet after some detailed questioning it quickly becomes apparent that 56

November 2013 SA Real Estate Investor

the information they are giving out is not from personal experience, but rather what they have learned on a quick inspection tour, what they have read in a book or what they have been told by others.

I’m not saying that the agent must have personally visited each and every property t hey a re involved w it h, but f i rst-ha nd experience and a detailed understanding of the factors that govern the market you are buying in is essential.

How do the properties you market compare to others in the local area, based on price, size and potential rental return?

What you are looking for here is detailed facts, not just sales hype or a list of features. It’s often true that new developments come with all the latest bells and whistles but don’t accept this as justification for overinf lated prices. After all, a high specification kitchen with marble worktops is irrelevant when you are paying £35k more than the ceiling price in the local area.

Pay attention to what you are told, take notes and then be sure to do your own research to ensure the agent’s being upfront and honest.

At the time of writing, the best online property portal is Rightmove.co.uk. This is not only a great resource for finding out what similar properties are worth, but you can also use it to check what such a property may fetch in rent.

Be sure to compare apples with apples but you have reason for concern if the price you are paying and the rental figure you have been quoted is at the high end of the market.

What due diligence do you do on the properties you sell?

Agents are often quick to hand you a glossy brochure full of lovely pictures but are less forthcoming with a due diligence report detailing what checks have been done. It’s important that this contains a valuation report and structural survey, if appropriate, from an independent sur veyor who is a member of The Royal Institution of Chartered Surveyors (RICS). If the property is new, ask whether the developer has NHBC insurance www.reimag.co.za

OFFSHORE or similar in place. This will mean that the development was inspected during building and that you are covered by a warranty should the developer / builder become insolvent before the development is complete and a 10 year warranty against major defects after the property is built.

Also look at the due diligence done on the local area, if any. Are you buying in an area with a high unemployment or crime rate? Are major businesses moving into the area or closing up shop? Look for a balanced, informed report and not just a thinly disguised sales brochure talking up the value of their own properties.

Could you explain how the buying process works?

The biggest challenge you face as a South African investor is the fact that the buying process in other countries differs dramatically from the process used in South Africa. Those who invest in a foreign country for the first time often find the process frustrating and confusing, mainly because they try and apply the same principals and structures they have learned from investing in South Africa. It’s important that the agent you are working with is fully aware of the buying process and is able to describe it openly and honestly with you. Even if you are already aware of the ins and outs of the process, getting the agent to explain it should reassure you of their knowledge and experience.

And how you will help me throughout?

You also need to be clear on just how far your agent is prepared to support you. Different agents offer different levels of service. Some can’t do enough to help you and will assist with every detail such as setting up your bank account, setting up your tax structure, securing lending and even help you f ind a tenant. Others though are simply there to market and sell a property and are likely to bid you farewell once contracts has exchanged. As long as you know from the start what level of service to expect, there should be no problem.

Do you sell to many South Africans and could I speak to a couple of previous clients?

As with any business transaction, asking for testimonials is always useful. Have an informal chat to the client and establish if the agent actually delivered the service as promised. Ask www.reimag.co.za

the client to explain the whole process to you in their own words and also if they would use the agent again.

Do you own any offshore property yourself?

Does the agent actually walk his or her talk? It’s easy to have a detailed knowledge of how things work and what makes a good offshore investment. However, things change dramatically when you practically apply such theory and put your own money on the table.

It’s important that you work with someone who has experienced this first-hand and who can guide you through it confidently.

Just as you would when you buy property in South Africa, you have a responsibility to inform yourself and protect yourself when buying property overseas. Be diligent in your research, and utilise the questions above to align yourself with a knowledgeable and effective agent. With the right support you will certainly be able to develop a profitable offshore portfolio.

JENNY ELLINAS OF CYPRIOT REALTY GIVES YOU 5 TIPS FOR OFFSHORE INVESTING

1

Chose your property type carefully, choosing which type of property to buy depends on lifestyle requirements, budget and long-term plans. It’s important to look for a home that suits you best.

2

Chose your developer/agent carefully. Ensure you deal with a registered agent, as you will not have any recourse if someone is trading illegally and runs off with your money.

3

Buy to rent with a medium-term view; in this recovering global crisis there are currently no guarantees on rental returns.

4

Take advantage of the attractive foreign exchange allowances, many countries are offering foreign exchange rates and citizenship to investors, so make sure you are getting the most out of your offshore deal.

5

Deal with local people with a solid reputation, there are many fly-by-night individuals that enter the market with many seemingly attractive offshore deals and offers.

Buyers beware! It makes sense to research with whom you are dealing, get referrals and recommendations from existing clients and if possible meet the local representatives in their place of business – that way you are assured that you are dealing with a reputable company.

Can I choose to use my own independent UK solicitor and/or mortgage broker?

Most agents will have strict timelines to adhere to and are likely to recommend that you use a solicitor and mortgage broker they have worked with before and found to be competent and responsive. There’s nothing wrong with this as long as you are confident that the solicitor and mortgage broker will work exclusively for you and act in your best interest. Do independent checks on these service providers as you would with the agent.

There are many horror stories however of dodgy solicitors and brokers who gets paid by the developer or agent to ensure things go their way so beware. If the agent insists you use only their people, alarm bells should ring.

What happens to my fees when things go wrong?

It’s quite common for agents to ask that you sign a reservation contract with them once you have decided on a property and pay over either part or all of the finder’s fees. There is a substantial amount of work that goes on behind the scenes to ensure that each investment completes successfully and the agent needs to be sure that they are working with a serious buyer so that they can take the plot off the market.

Things do not always go according to plan however and in some cases, through no particular fault of the agent the sale will fall through. It is important to check in which instances your fees are refundable, or indeed if they are refundable at all. Once again, as long as you know from the start where you stand on this issue there should be no nasty surprises later on.

RESOURCES Smuts & Taylor, Cypriot Realty

November 2013 SA Real Estate Investor

57

STRATEGIES

BY SCOTT PICKEN

The Successful Four Dimensional Investment Model Make the right decisions

W

hat distinguished us in our success from our competitors is how we eliminate as much as possible the uncertainty of any investment through Clem Sunter’s scenario system, my own probability calculations, which further refine the chances of success for any investment, and our four-dimensional investment model: our Global Property System (GPS), which is a proven scientific way to help you make the right decision for you and your family.

58

November 2013 SA Real Estate Investor

That is what defines us and points the way to our and your success.

A motto I live by is “Your destiny is determined by the decisions you make and the actions you take.” As I have mentioned, for years I have been attending Clem Sunter’s presentations. I will be honest, I actually had to watch them many times until I properly understood the different scenarios globally and locally and what the flags

were to watch. Then, once I understood them, and based on my motto, I thought I had better build a model to take his research and turn it into something tangible that could help me take the right decisions and the right actions. You see most people listen, understand at a level what Clem is teaching, and then continue on with their lives as normal. This does nothing and is certainly not allowing them to create options no matter what happens. www.reimag.co.za

Brought to you by

STRATEGIES I basically had to build a 4-dimensional model, as there are four variables which are all changing and which influence each other directly.

I built two models to make the right decisions: 1. Probability Calculator a. This gives the answers to the first 3 variables 2. Global Property System (GPS) a. This takes the information from the Probability Calculator and integrates it with the property fundamentals and shows us where the best places are to invest globally.

The four variables are: 1. The four scenarios for the global economy from Clem. a. Basically where to invest, based on the scenarios and the probabilities.

2. What asset class to invest in globally, based on Clem? a. Basically what to invest in, based on the scenarios and the probabilities.

3. The three scenarios for South Africa from Clem? a. Whether to invest locally or offshore based on the South African scenarios and the probabilities.

4. Based on the fundamentals of property, where to invest?

Probability calculator – where is the best place to invest? we have explained why we only like to look at first-world countries to invest, if we are investing outside of South Africa. I personally am investing or have invested in South Africa, the UK, Australia and the USA. For this reason we built the calculator around these countries.

Global property system results taking everything into account, one has the

ability to adapt the variables and ultimately get the answers as to the safest investments with the best returns. See Figure 1 for the results for 2013, based on the facts as they are today.

This allows us to plot the figures onto a graph, so that it makes logical sense. See Figure 2.

It leaves us with four quadrants. High return, low risk, which is obviously the best investment quadrant. The only country, which falls into this quadrant at the moment, is the USA. Australia is sitting at low risk, low return along with the UK which is on the border of risk. South Africa is showing higher return (still in the bottom quadrant), but also higher risk. The worst quadrant is low return, high risk and many countries currently fall into this quadrant including India, China, France, Japan and Cyprus.

RESOURCES

IPS Invest

Global Property System Results

Figure 1

Risk vs Value / Discount

Return Property Fundamentals

Country

Economic

Value of property

Population

Supply and

Risk

discount

Growth

demand

Rule of Law

GPS Risk

Yield

Rating

%

%

60%

40%

%

70%

30%

South Africa

60%

10%

70%

100%

30%

59,50

8%

6%

7,40%

Australia

40%

0%

100%

90%

100%

36,00

5%

3%

4,40%

UK

65%

5%

100%

90%

80%

46,00

5%

2%

4,10%

USA

50%

50%

90%

60%

90%

33,00

12%

10%

11,40%

France

75%

0%

0%

10%

50%

80,25

2%

0%

1,40%

Cyprus

80%

30%

0%

0%

30%

80,00

5%

0%

3,50%

India

20%

0%

100%

100%

0%

55,00

0%

10%

3,00%

China

40%

0%

70%

0%

0%

74,50

2%

0%

1,40%

Japan

60%

20%

0%

0%

100%

60,00

2%

0%

1,40%

Index

Capital

GPS Return

Growth

Index

Yield & Return with capital growth

Global Property System High Return

Figure 2

High Return - Low Risk

High Return - High Risk

USA

Low Return - Low RiskL

ow Return - High Risk South Africa Australia Cyprus

India Japan

Low Return Low Risk

China

France High Risk

Risk vs Value / Discount 60

November 2013 SA Real Estate Investor

www.reimag.co.za

AFRICA

BY ANGIE REDMOND

Annual Europe 1% growth in labor 1.5% U.S productivity, 2.8% 2000 to 2008 Africa Economies of sub-Saharan Africa ranked amongst the lowest in the World Bank’s 2010 Ease of Doing Business report

$1.6 $1.4 trillion trillion Africa’s consumer spending in 2020

20

Compounded annual real GDP growth, 2000-2013 Number of African companies with at least $3 billion in revenue last year

2.0%

Latin America

4.0%

Africa

4.9%

40%

8.3%

1900s

22%

2000s 8%

Percentage of world’s reserves in Africa

M

ore and more companies are choosing to invest in countries in Africa, from property companies to JSE listed funds and retail giants. Investment into Africa has taken off and the pace doesn’t seem set to slow any time soon, so what is driving this expansion into Africa?

“While it was a relatively untapped region over a decade ago, with economies too badly managed for there to be any real opportunity for companies with integrity, there has been a massive shift towards encouraging foreign investment in Africa and the continent is on the move. Today many large businesses are seeing the potential that the continent is currently yielding and are eager to expand into the region and take full advantage of the opportunities that are presenting themselves,” says Adrian Goslett, CEO of RE/MAX of Southern Africa.

There are a whole host of south African developers and investors focused on the rest 62

Developed

Emerging Asia

The Race To Invest In Africa

Ready, set, go

Africa’s collective GDP in 2008, roughly equal to Brazil’s or Russia’s

Africa’s number of telecom subscribers exceeded 450 million in 2009, up from 52 million in 2003

November 2013 SA Real Estate Investor

of A frica, which include JHI, Pam Gold ing, Actis, OilG oldC hromiumP latinum RMB Westport, Stanlib, Resilient Property Income Fund, Standard Number of cities with Bank, Atterbury, population over 1 million Hyprop and many up Africa. Last year, Latin America 63 more. One la rge South Africa was the factor that is driving single largest investor in Europe 52 t h is e x pa nsion into foreign direct investment Africa 52 Africa is the retail sector; in Africa, outside the country.

North America 48 many retailers are forging ahead and looking to markets Retail giant Massmart recently in A frica to expand and announced its aim to expand its diversify and for good reason. footprint in Kenya, with ambitions in food Retailers are responding to increased retail in West and East Africa. It reported demand from consumers in Africa, and in that in West Africa the group is trying out particular expanding operations on the continent several food stores in different formats. In East from South Africa, reports Malcolm Horne, Africa it has held discussions with supermarkets CEO of Broll Property Group. Horne notes including Kenyan chain Naivas, but no deal has South African retail is driving development materialised yet. In total the group plans to open

10% 40% 84% 88%

www.reimag.co.za

OFFSHORE 15 new stores outside South Africa in the next three years. Towards the end of the period Grant Pattison, CEO of Massmart, expects the ratio of new openings to shift away from South Africa and towards the rest of the continent.

for more than half the total revenue increase that all businesses are expected to generate in Africa by the end of the decade according to a report by McKinsey & Company on the rise of the African consumer.

Its focus on African expansion joins the likes of Shoprite Holdings, which already trades from 192 stores in 16 countries outside South Africa.

It opened 19 new supermarkets outside South Africa in its 2013 financial year and has a further 20 confirmed for 2014. Similarly, The Foschini Group plans to double its 104 stores outside South Africa in the next three years.

Tax treaties

“In sub-Saharan Africa, growing customer demand is coupled with an increasingly well informed customer base, making it easier to position retailer brands, especially as far as fashion, supermarkets and electronics are concerned,” says Horne. This move into Africa marks an important shift in property investment, opening the borders to more back and forth investment opportunities and will see mutually inclusive growth. Africa’s consumerfacing industries are expected to grow by more than $400 billion by 2020. That would account

South Africa currently holds tax treaties with the following African countries, making investment into that country all the more attractive and is certainly one factor at play when it comes to investing in Africa.

Countries in Africa with tax treaties Algeria, Lesotho, Nigeria, Tunisia, Botswana, Malawi, Rwanda, Uganda, Egypt, Mauritius, Seychelles, Zambia, Ethiopia, Mozambique, Swaziland, Zimbabwe, Ghana, Namibia, Tanzania According to Goslett another draw card for investment is the fact that a large portion of the African population is below the age of 20, which means that within the next thirty years, Africa will have a larger working-age population than China. “A growing work force will in turn result in more money being spent and more opportunities for investors wanting to break into the African

market. As more people become of working age and move out of their parents’ homes, there will be a greater need for infrastructure, transport and housing,” says Goslett.

He says that the opportunities and potential are there, but what Africa lacks is the financial resources, which has largely opened up the continent to foreign investors seeking a far better return than what they can achieve in their home countries. “As the country with the continent’s biggest economy, South Africa has always been seen as the gateway into the rest of Africa. But, the current rate of growth locally is also a lot slower than some of our neighbours, which has led to many South African companies expanding into the rest of the continent,” says Goslett.

Chief executive of Buna Group, Caswell Rampheri says there’s never been a better time to enter certain African markets but cautions investors to do their homework. “The starting point is identifying countries with sustainable stable democracies and the absence of war.”

RESOURCES

Broll, RE/MAX, Buna Group

CAPE TOWN Ground floor, Liesbeek House, River Lane, Mowbray PO Box 23644, Claremont, 7735 Tel: +27 21 680 5272 | Fax: +27 86 670 6490 Official South African marketing agent for LEPTOS ESTATES | www.LeptosEstates.com

Contact: Jenny Ellinas | +27 83 448 8734 | jenny@cypriotrealty.com | www.cypriotrealty.com

LESSONS

BY ANGIE REDMOND

Be A Billionaire Learn to invest like one

W

ho wouldn’t want to be a billioniare? While most people think this is just a dream, the following examples of people just like you and me, who became billionaires, will show you that it can be done. Not one of these people were rich or geniuses, they just didn’t let failure or adversity stop them. So look at the lessons their lives offer you and the next time you think you can’t do something ask yourself if any of the people on this list would have given up? The answer is no, so you shouldn’t either. If you want to be a billionaire, start thinking and investing like you want to be one.

1. David H Murdock

David Murdock only got a Std 9 education, and after serving in the army he returned to Detroit homeless. A loan from a good samaritan changed all of that and he moved to Los Angeles and got involved in real estate. After seeing some success in sales and acquiring some properties of his own, Murdock began to acquire businesses. One would prove to be a standout investment.

Castle & Cooke was a bankrupt real estate company, which is how it caught Murdock’s eye. He developed their real estate portfolio and the rest is history, today at 90 his net worth is $2.4 billion. The lesson here: you can go from homeless to billionaire in a few years with the right investment strategy.

2. Mark Zuckerberg

If you have a Facebook profile, then you know who Mark Zuckerberg is. He launched the social networking site from his dorm room in Harvard, and dropped out in his sophmore year. At the age of 23, he became the youngest billionaire. His net worth is $16.8 billion. The lesson here: sometimes you just need the right idea and a little bit of innovation to change the world and your life.

3. Steve Jobs

If you haven’t already seen the Steve Jobs movie, then it’s definitely worth watching. Steve dropped out of college and continued to go to classes, just to gain knowledge. At 21 he and Steve Wozniak started Apple Computers out of his father’s garage. He didn’t play it safe, he threw in all his cards on his projects, and he wasn’t afraid to say what he thought, which is why Apple is as successful as it is today. Despite being voted off his own board, he turned Apple around and made it the brand it currently is. Steve’s net worth at his death was $10.2 billion. The lesson here: don’t be afraid to take risks, if you don’t take risks, you will never see rewards.

4. Tommy Hilfiger

Tommy Hilfiger began his fashion career while he was still in high school and when he was 18 he opened a store, which soon spawned a chain of stores, but the economic downturn saw him filing for bankruptcy in 1977. In 1979 he moved to New York and pursued his fashion career, despite his failed attempts in his hometown. Today Tommy has a net worth of $250 million. The lesson here: perseverance pays off, don’t let failure stop you.

5. Sir Richard Branson Richard Branson was not a good student, he struggled with dyslexia and nearly failed out of the schools he attended. At 16 he left school and started a youth culture magazine called Student, he then began a mail-order record company called Virgin to fund the magazine efforts. He was able to expand and add a record shop to his business and from there add a recording studio. Today Richard Branson is worth $4.6 billion. The lesson here: it all start with a single step and it never hurts to diversify.

64

November 2013 SA Real Estate Investor

www.reimag.co.za

Commercial Real Estate Finance with a solid foundation.

There’s nothing we like better than an ambitious client. At Sanlam Properties, we put our wide experience into all aspects of finance to assist the realisation of your commercial real estate ventures.

development Finance

Re-financing

Lay the foundation of a successful financing transaction by calling us on 011 778 6000.

Acquisition Finance

www.sanlam.co.za SAnLAm PRoPERTiES iS A diviSion oF SAnLAm CAPiTAL mARkETS LimiTEd SAnLAm CAPiTAL mARkETS iS An AuThoRiSEd FinAnCiAL SERviCES PRovidER

Properties

TJDR (CT) 38645/E