JUNE/JULY 2019
PROFICIO NFB FINANCIAL UPDATE FROM THE CEO’s DESK
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s I write this, the elections have just concluded, and I paused to consider the remarkable place it is we live in. Thankfully, South Africans remain focused on a future almost wrestled from us by a corrupt and desperate minority, hellbent on the theft of the dream made possible by democracy, and the sacrifice of others. While many journalists earn a lot of money to opine on such matters, I am never short of amazed at how negative a bunch they can be. It seems the adage that “no news is good news” has an equal and opposite iteration - which is no good news ever sold a newspaper! At this juncture, it appears as if our President has a mandate and the intention of following through on his proposed fix, and won't be bullied by the baddies! It is also true that we, as South Africans, need to develop a common identity. This can easily be rubbished as impossible - but taking a small step back into my own home and the various folk who make up the 'Republic of Mike', we realise the bonds, the interdependence, the care and all of the dynamics which already exist. We had a long-serving domestic helper pass away recently. The impact of this news on our boys, who shared their entire young lives under her care and coaching, was devastating. Her culture, colour and home language were irrelevant in the candid and painful reaction I witnessed. The loss was that of a close family member. I like to believe that many of our subscribers have similar tales to share. Building relationships like these take years; changing this as a nation is a whole different game. This
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will take remarkable leadership, constructive media and a nation less encouraged or inclined to blame! Winners are typically owners. If the winners are a team, they don't blame. They simply can't. Typically, they are brave, take calculated risks and celebrate as progress is achieved. Looking for the good in anyone or anything is a habit, and can be cultivated if the willingness is there. Living and prospering as a person, family, business or nation is not to be taken lightly! We are confronted by issues, politics, economics, both here and more and more overseas. This, in a globe which has shrunk and borders that have become less relevant. The time has come for the Ayoba nation to arise. South Africa simply can't, if the next few months deliver more 'subtle resignations', instances of legal and fiscal action being seriously taken against our politicians, bureaucrats, business acolytes, cigarette smugglers and scoundrels at large, while they can still afford to relax and celebrate the fix. We need to act as one, changing some rather hardwired habits and perceptions. Think no further than about my anecdote above. We are so used to being disappointed, capitulation is an almost therapeutic option. They say attitude breeds altitude, so - let's start flying. Being a decent person costs nothing. If you need help, ask. If you recognise someone misbehaving, legally, morally or otherwise, call it out. Otherwise, we are doomed to pass from one crisis to another, surviving by the slightest margin, gradually slipping down a slope from which there is no comeback.
The time has come for the Ayoba nation to arise.
One often hears radically negative opinions from ex-South Africans who opted to leave. Those who remain fear the worst but hold hope for the best. This is not an action. More needs doing. I have recently written an article, soon to be published by our marketing team via all of our online channels, and it suggests something quite radical; I suggest this type of thinking is what will change our world. Both for us making S.A.Inc. the paradise and remarkable kaleidoscopic wonder it is, proving the very audible (and recently spot-on cynics) wrong, and critically giving hope and potential, as well as resources, to the millions of previously marginalised folks. Giving people self-respect, belief and opportunity will come at a price. This is not the responsibility of government alone. With a little luck, we have SARS doing good by their clients, courts getting teeth and both criminals and those considering this previously lucrative alternative, realising that actions create consequences. We also have a job to do. I don't want my children having to recommend to their children and grandkids to “Go and build a life somewhere safe”. This is it! We are the stewards. It is incumbent on us as the voters, citizens, business people and families, to support good and make bad more difficult for the minority. What our grandchildren of the kaleidoscope inherit is currently in our hands. Let us make them proud!
Mike Estment CFP® BA / Chief Executive Officer NFB Private Wealth Management JHB
IS THERE STILL A PLACE FOR PROPERTY IN YOUR
INVESTMENT PORTFOLIO?
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s financial advisors, we’re always looking for the best investment options for our clients. Property as an asset class will always form part of the overall portfolio of a welldiversified investment portfolio. We've been having more frequent conversations with clients around property investment, and how to approach it, given today's property market and with so many different avenues to follow, it can be quite a complex decision - which is why getting the correct advice is crucial.
The main disadvantage is that 100% of the risk falls on the investor. Some other disadvantages are initial large capital outflow, bond repayments, maintenance costs, sourcing, vetting and management of tenants. Property is also a relatively illiquid asset and many investors have firsthand experience of how difficult it can be to realise a property when markets are depressed. This can be very challenging if you suddenly need funds due to an emergency, or an attractive business or investment opportunity.
Investing into your own home is probably one of the most significant investments most people make today, and if you do have a mortgage bond on your home, then consider using extra funds to pay off your bond sooner.
Many investors still opt for direct investment into property, but it does take a skilled and experienced property owner to earn a good return.
Owning your own home is just the tip of the property investment iceberg; there are many ways of buying into real estate as an investment - without owning the property itself.
Indirect investing into unlisted real estate typically involves buying shares in a privately held company which specifically manages or owns properties - mostly commercial and/or industrial types of properties.
Let’s explore the different property investment options available:
This can also include purchasing shares in share block schemes and property syndications (one can also buy into listed property syndicates), but these investments should be handled with care as they are not easy to exit. If things go wrong with a property syndicate, it is difficult to get your shares sold.
DIRECT INVESTMENT Investing into direct property means purchasing real estate with the intention of earning a return on the investment - either through rental income streams and/or the future re-sale of the property. This is where you purchase a property where you personally own, maintain the building, and pay all the costs associated with the building. This ranges from residential property, sectional title units, commercial or industrial property.
INDIRECT INVESTMENT (UNLISTED)
Investing indirectly into property comes with more advantages than disadvantages. =
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Rental income earned from the asset is taxable if you lease it out. However, there are certain expenses that can be deducted from the income to reduce the income tax liability, such as: - Bond interest - Garden services - Rates and taxes - Repairs - Property levies - Security - Estate agency fees - Homeowners insurance (excluding household contents insurance) It is likely that the value of a fixed property investment will appreciate over time - this means it will yield a capital return in the form of profit once sold. The cost of the asset, plus the cost of improvements, will form part of the base cost of the asset, which can be deductible from the sale proceeds to reduce the capital gain, and actual CGT payable to SARS. The advantage of holding sole ownership of a property - and not in partnership - is that it's yours, and you can gear a portion (subject to bank limits) of the investment (which means you own property without equity). You earn all the future rewards that the property has to give and make all the decisions relating to that property. Further to that, because it's a tangible asset and not listed, property is fairly resilient to volatile market fluctuations compared to other asset classes as short- term value is less susceptible to market changes.
A potentially broader range of property that the investor has access to, including bigger buildings in better located areas. Risk is shared among shareholders. It is a passive form of investment, which means the investor does not have to get involved in the day to day hassles like rental collection, maintenance, etc. A property fund will be managed professionally.
The only real disadvantage is that you usually cannot borrow much against shares. Suggested only for “professional investors” who are well versed in property, and with a moderate slice of an overall portfolio.
INDIRECT INVESTMENT (LISTED) Traditionally, listed property fell into two categories, being Property Loan Stock and Property Unit Trusts. Property loan stock companies (PLC). Investors purchase shares in a property loan stock company (PLC) and share in the nett income stream from properties owned. The income is taxable in the hands of the investor Property unit trusts (collective investment schemes) which carry significantly less risk and are generally worthwhile investment propositions. Returns from the property unit trust are generally in the form of dividends which are nett of DWT (Dividend Withholding Tax) and interest, which is taxable as income.
For many years the number of property collective investment schemes available where limited, however new listed property investments have come onto the market. Real Estate Investment Trusts (REITS) were introduced into South Africa in 2013 and can take the shape of a company or a trust and are heavily regulated in comparison to normal property management companies. A real estate investment trust (REIT) is very similar to a unit trust. Instead of investing in a pool of equities or bonds, you’re investing in a pool of properties. REITs are broken up into shares, which can be bought and sold on investment platforms including various stock exchanges like the JSE. The REIT structure is generally quite popular amongst investors due to its liquidity, low entry costs, diversification between property types and geographies - and it’s low admin requirement. Investors pay tax on the dividends which are treated as interest for tax purposes and are liable for capital gains or losses on the disposal of their holdings. Further avenues would be in the form of investing into Listed Property Companies and Listed Property Indexes (eg: FTSE/JSE All Property Index, FTSE/JSE Tradeable Property Index, SA REIT Index). In contrast to direct property investment, listed property funds and listed property index funds allow investors easy access to their money, plus the same cash flow benefits of owning property, without any of the drawbacks incurred when legally owning property directly. It’s also possible to make small, and even regular investments in listed property - with low minimum investment amounts required. Additionally, listed property offers risk management through well-diversified property pools, whereas direct property investments are often dependent upon the relative success of a few properties.
Property has always been considered a good long-term investment for any portfolio, but is that still the case? Over the period depicted in the graph below, the South African Listed Property Index has provided the greatest overall return when compared to the All Share Index (ALSI) and All Bond Index (ALBI) over the same period:
already been cleared, and investors are eagerly awaiting the results of the remaining investigations to be finalised and released. The impact of the risk from these allegations has probably already been priced in - but the overhang remains. Who knows what else will get unearthed in the investigations? Hopefully, transparency and investor trust will return to the listed property sector once the investigation is finalised. Factors that will continue to influence the property sector include the uncertainty surrounding the post-2019 election, government policies on land rights, global economic performance, as well as Brexit (and its impact on UK property valuations). The table below reflects the asset allocation into the property sector by specific fund managers, including NFB Asset Management, which should give you an indication of how fund managers are positioning their funds for the foreseeable future:
NFB Ci Managed Coronation Balanced Plus Prudential Balanced Allan Gray Balanced
Apr-18 8.00% 13.50% 2.20% 1.40%
Oct-18 8.00% 11.02% 4.70% 1.90%
Apr-19 10.00% 8.70% 4.20% 1.50%
What you need to remember when adding or removing property from your portfolio Diversification - Although diversification doesn’t guarantee against loss, it’s the most important component of achieving long-term financial goals while minimising risk. It also provides for a more consistent overall portfolio performance. Risk - The price of listed property can be volatile from time to time as we’ve seen over the last 12 months - and therefore appropriate to have a medium- to high-risk appetite with a long-term view. You should expect short-term volatility - but over the long-term, prices should increase in line with the rental growth. Liquidity - Basically, liquidity is your ability to quickly convert a unit or property into cash. Going into an investment, consider the liquidity constraints of the property in question, and whether you would have access to cash elsewhere in your portfolio should you need to raise capital in a hurry. Ask your advisor about an “Access Bond”. Tax - As mentioned earlier, rental income is included in taxable Income, and a portion of the nett growth on the asset at the date of sale will be included in taxable income. Investors earn dividends and interest from listed property investments. Ensure that your investment portfolio is invested as tax efficiently as possible.
Source: NFB Asset Management However, this has changed over the last 12 to 18 months. The property market suffered a 25% drop over the year due to several factors including, a weak economy, political risk and the controversy surrounding several large REIT companies at the start of 2018. As such, prices have remained under pressure for most of 2018 and 2019 as investor confidence has eroded. The Financial Services Conduct Authority (FSCA) is in the process of investigating allegations regarding specific REIT companies. Some have
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Property has always been considered a good long-term investment for any portfolio, but is that still the case?
Offshore - Several offshore property companies have, however, listed on the JSE in recent years, and investors are now able to invest into larger offshore properties without using their foreign investment allowance.
Careful consideration should be given to any investment portfolio. Consulting a financial advisor regarding your own portfolio helps to make well informed decisions. NFB and NVest Stockbrokers can assist you in structuring a property portfolio that meets your needs considering your unique financial situation and future goals.
Lydia Byrnes Postgraduate Diploma in Financial Planning (PGDFP) Senior Administrator / Representative Under Supervision NFB Private Wealth Management JHB
WHAT HAPPENS TO MAINTENANCE CLAIMS
AFTER DEATH?
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hen it comes to planning for your financial future, it's important to take your child's future into account. As an advisor, I look after my clients' financial needs during their living years - but also ensure their financial legacy will continue, with expert advice on things to keep in mind if you have, or are planning on children. Recent statistics show that for every child born in the past decade or so, over 63% of the birth certificates filed did not have the father's details. That's quite a shocking statistic. While clerical error may be a factor, the harsh reality is that a vast majority of these children will be raised by a single parent, while the other parent is absent. This results in the one parent having to shoulder the responsibility of raising the child, while the other party sheds all responsibility - both financial and parental. Legislation (Maintenance Amendment Act (Act No.9 of 2015) states that both parents have a responsibility to financially support their children in an apportioned manner, dependent on their means. Some recent changes to legislation state that if a parent defaults on financially supporting their child or children, the court has the power to demand payment from that parent's pension or provident fund benefits, but the buck doesn't stop there. Parents are still required to provide maintenance to minor children, even after
death. This maintenance obligation accrues to the deceased's estate. Creditors will still have a priority when the parent has passed away. Maintenance obligations disrupt the distribution of assets if one has not made the necessary provisions to maintain his/her children born within a marriage, illegitimate children, and adopted children. The child's claim on the estate will rank higher than any other claim against the deceased parent's estate. Any other maintenance order already in place at the time of death will be binding on the estate. A child may still have a claim against a parent's estate even if he/she has received an inheritance. This is usually the case if the inheritance is insufficient for the maintenance of the child going forward, taking into account items that could potentially fall under maintenance. Pre-1990, the right of a surviving spouse to claim from the estate of their deceased spouse wasn't enacted in South Africa because it contradicted the principle of freedom of testation. In 1990, the Maintenance of Surviving Spouses Act came into effect. The Act states that a surviving spouse has a claim against the deceased spouse's estate in respect of her maintenance needs - insofar as she cannot meet those needs with his/her own
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means and incomes. This only applies to marriages that are dissolved by the death of a spouse - former spouses, ie: those from marriages which ended in divorce cannot claim maintenance from the estate of ex-spouses after death. The surviving spouse's claim on the estate originates from the duty promised by both parties to support each other. As soon as a marriage terminates, this duty falls away. Divorce orders make provision for spousal maintenance; the divorce settlement will state that the agreement is binding on the estate of the respective parties. Furthermore, if the divorce order makes provisions for spousal maintenance, the order can be enforced against the estate of the deceased former spouse. This maintenance will continue until the surviving spouse's death, or when they remarry. There's no order of preference between a surviving spouse's claim and a child. If both claims are lodged at the same time and are competing, both can be reduced proportionately if necessary. NFB offers fiduciary, drafting of wills and estate planning. We advise that anyone with assets, and especially with children, have an up-to-date will drafted, which we do free of charge. Should you require assistance or advice in this regard, please do not hesitate to contact one of our NFB Private Wealth Managers on one of the below numbers.
Lonwabo Simbi B.Com Financial Paraplanner NFB Private Wealth Management EL
Parents are still required to provide maintenance to minor children, even after death. This maintenance obligation accrues to the deceased's estate.
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