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Letter from the editor PRIOR to Covid hitting our shores, the buy-to-let market was a thriving one. Airbnb was the flavour of the month and house swapping was a growing enterprise for holidays abroad. When lockdowns became a global phenomena as a way to deal with the pandemic, investors who had put their money into these types of properties were hard hit. Foreigners were not coming to our shores – because they could not – and many Airbnb properties sat languishing. Those who were earning big bucks BC (before covid) had to turn to offering their properties as long-term lets at a fraction of the income they had been making in the Airbnb market. And those who had already been letting out their properties long term were faced with tenants who could not – by no fault of their own – meet rental agreements. It was a hot mess. And investment properties became a noose around the necks of many of those who had hoped to make money by being landlords. So, why are we asking whether it is time to invest in the buy-to-let market again? Partly because the low interest rates mean that those who can buy property probably are right now and those with some spare cash might be looking for worthy investments that can grow faster than the low interest rate on fixed deposits in a bank. However, we are warned by the experts that the time is not ideal for such investments. And, if you are going to take the plunge, do so more in the lower end of the market than in the luxury market. In other words, buy a cheaper investment property as it will have more legs. While we are all still grappling with what a new normal might look like – will Airbnb once again thrive and will renters again be able to meet rental agreements – we are also seeing the rise of other ways of acquiring property. This, for me, is the most exciting development. FNB, for instance, has launched an industry-first property lending solution that allows up to eight members to buy property for residential purposes as a collective. And, I know I carry on about tokenization – the division of a property into tradable shares or digital assets on a blockchain network – but it too is a reality. Many countries and regulatory bodies are in fact making legislative changes to create a friendly business environment for the tokenization of real estate assets. In effect, our usual way of investing in property is changing, and I believe there are great new opportunities available. Warm regards
Vivian Warby vivian.warby@inl.co.za
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Unsexy is the new sexy for investors If you’re thinking of purchasing a buy-to-let property, choose an ‘ordinary’ home rather than a luxury one BY BONNY FOURIE bronwyn.fourie@inl.co.za
Affordable and basic three-bedroom houses or two-bedroom cluster homes are most in demand by tenants. PICTURE: FRANCESCA TOSOLINI/UNSPLASH
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HEN it comes to investing in residential buy-to-let property, “unsexy is probably the new sexy” – in other words, stick to a simple three-bedroom, full-title home or a two-bedroom cluster unit. The wiser choice in the current economic climate may be to stay away from investing in property at all. FNB property economist John Loos says, generally speaking, while there will always be a bargain property or two to pick up, the investment market is “not wonderful” at present. And it will be a while before that changes. He says the current environment for property investment is “mediocre at best”. “There is no sufficient sign of meaningful structural reform in the economy yet to anticipate higher economic growth rates. It is not really an environment that is going to make the property market shoot the lights out, even with very low interest rates. “Yes, there was a surge in demand but that is starting to taper off. The South African Reserve Bank is hinting that the next move in interest rates will be up and that probably continues to cool the market down.” With a cooling residential market in the near term, interest rates likely to rise, albeit it gradually, and an economy that is not really growing, property investors should not expect to see strong returns any time soon.
Paul Stevens, chief executive of Just Property, agrees somewhat. Industry commentators are seeing early indications of a slowdown in the residential sales market and, in the rental sphere, there is an oversupply of vacant properties which is driving rents down. “However, these are broad trends and there are plenty of opportunities for savvy property investors.” While there will be some cases of investors picking up stress bargains and making money, Loos believes that, generally, real property values will be correcting and coming down over the coming years. “The ideal time to buy is at the bottom of the big cycle and the last big buying opportunity was, with hindsight, probably around 1998 when interest rates were astronomically high and property values, in real terms, relatively low. I think we are some way from there. “It is not the big buying opportunity of the late 1990s after which there was a massive property boom and many people made a few hundred percent capital growth.”
OPPORTUNITIES Loos advises those who insist on taking advantage of the low interest rates to invest in residential property to stay away from luxury homes. “In a tough economic environment it is all about affordability. There are people who want to live in suburban areas that they consider good but they will want more affordable homes in
those areas. So, it is the non-sexy, non-luxury, under-capitalised homes that are probably going to perform best and be in demand. “It is the very basic, primary homes that will predominantly be in demand – simple, secure, threebedroom family-type houses and two or even three-bedroom cluster homes,” he says. Stevens adds that mixeduse developments will become increasingly sought after and valuable, especially in sprawling cities like Johannesburg and Cape Town where commuting can be time consuming and difficult. “Homes close to transport nodes are also likely to offer exceptional returns on investment.”
CHALLENGES The residential buy-to-let market is, however, under pressure, particularly in the rental range below R7 000 a month, he says, a pressure that will continue for “some time”. “The poor credit-worthiness of most tenants is also a major problem and not something that is going to be resolved quickly.” Echoing this, Loos says managing tenants, vetting them, and keeping good tenants is “crucial”. “It is a challenging environment for landlords and they also need to look at the operating costs. Eskom continues to escalate its electricity tariffs well above inflation, so municipalities and other utility providers are doing something
similar. You need to do your homework as municipalities differ in approach. “If a property is located in a dysfunctional municipality, with escalating rates and tariffs well above inflation, that is probably not the place you want to get excited about... Property in well-managed municipalities probably comes at more of a premium as that is where people want to live.”
RETURNS Investors should always ensure their returns align with their investment goals, Stevens says, explaining they should unpack their return on investment by asking these questions: • What buying costs will I have to account for? • What running costs will there be? • What contingencies do I need to make provision for? He adds: “Property investment is a long game – not something you do for the short term. “It is difficult to conceive what the future will look like, let alone bank on it. This is evident in the market sentiment, right now, which is starting to show reluctance – a wait-it-out approach – as the socioeconomic and political impact of the pandemic play out.” Loos says buy-to-let rental yields are still relatively low, financial times are tough and tenants are not performing well. This means this market is “not wildly attractive” at the moment.
DISCLAIMER: The publisher and editor of this magazine give no warranties, guarantees or assurances and make no representations regarding any goods or services advertised within this edition. Copyright ANA Publishing. All rights reserved. No portion of this publication may be reproduced in any form without prior written consent from ANA Publishing. The publishers are not responsible for any unsolicited material. Publisher Vasantha Angamuthu vasantha@africannewsagency Property and Environment Editor Vivian Warby vivian.warby@inl.co.za Features Writer Bonny Fourie bronwyn.fourie@inl.co.za Design Kim Stone kim.stone@inl.co.za
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