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By Moneyweb

Moneyweb: Journalists

Challenges faced by South African investor in Joburg property market

A lesson in throwing good money after bad.

Imagine, if you will, you’re a South African living in London. It’s 2015. The mid-2000 buy-to-let boom is a distant memory. Some of your friends made a small fortune, but for various reasons you missed out.

You’ve still got family in Joburg. The rand is at about R18 to the pound and you’re scouting around for investment opportunities.

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Buying a modest two-bedroom apartment in a complex in the heart of Fourways in Johannesburg seems like a good idea.

Property investment

Residential property isn’t exactly shooting the lights out. The country is stumbling through the second term of Jacob Zuma.

The Gupta family had a plane of wedding guests land at Air Force Base Waterkloof two years prior, but things are looking okay. Load shedding is a regular feature, in the first half of the year at least, but the worst is Stage 2.

And people need a place to live. Joburg is too big to fail. Plus, the bank will lend you most of the money.

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You find a ‘middle unit’ in an estate built in the early 2000s by a developer with a household name. It is well run and secure. You’re chuffed as you knock down the asking price a little and the seller settles on R850 000.


Fast forward six years. The economy has been battered by the Covid-19 pandemic. You’ve had mixed luck with tenants – some good, some bad.

The problem now is you’re battling to find any good quality prospective renters. It stands empty for months.

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Eventually, family members are able to move in due to a change in their circumstances. They pay market rentals and life goes on, until they tire of the rather cramped 70m2 unit. So it’s empty again.

All this time, you’re funding the bond repayments, levies and property rates.

Finally, you decide to sell. But 2023 is firmly a buyer’s market.

You get no offers for months, even though the property is listed for what you paid for it! Not only is the market depressed, but your unit is in a thatched complex which means levies are 30% to 40% higher than in adjacent non-thatched schemes (more on that in a future Moneyweb article).

Exasperated, you sink R50 000 into revamping the kitchen. You’re still paying the bond, levies and rates.

You drop your asking price to R799 000 and accept an offer of R750 000. You’ve managed to get rid of this albatross. You haven’t done too badly, you tell yourself.

At least you aren’t spending R12 000 a month on home loan repayments, levies and rates for something standing vacant. And its ‘only’ a knock of R100k. “Manageable.”

Except that using just these two prices – what you bought and sold the property for – is ignorance (at best).

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Factor in the transfer and bond registration costs when you bought the house in 2015 and suddenly the ‘actual’ purchase price jumps to R900 000 (transfer duty wasn’t payable as the price was below the threshold).

It’s easy to lose track of these in the process and even easier to forget about them nearly a decade later. A few thousand to this attorney, a few more to that one, an initiation fee charged by the bank, etc.

Estate agent commission

So, instead of a 12% loss, it looks more like a 17% one. But what of the estate agent commission payable on the sale? You’re only going to net around R700 000 – a very far cry from the R900 000 you paid for the property. Now your loss jumps to 22%.

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Oh, and that R50 000 spent on redoing the kitchen to get the place sold? You’re effectively only getting R650 000 out, meaning a loss of close to 30%.

That’s bad enough for a seven-to-eight-year investment in anyone’s books.

This calculation, however, neglects to include the impact of the exchange rate. You’re earning pounds and elected to switch hard currency to rands to buy a property.

That R900 000 purchase price (all in) was £50 000 in 2015. Today, at R23 to £1, the R650 000 is just £28 000 (not £36 000 at R18: £1), thanks to the weaker rand. So, your loss is actually close to 45%.

But you also haven’t factored in inflation, which in the UK has averaged 3.99% annually since 2015. That means that the 2015 purchase price of £50 000 in today’s money would be £68 000.

Your inflation-adjusted loss? Practically 60%!

None of these calculations factor in the hundreds of thousands of rands you’ve stumped up over the years.

First, you needed to ‘top up’ the bond repayment and pay the levies. Rental income simply wasn’t enough to cover it.

Maybe this was costing you around R2 000 a month. Increases in administered prices meant this crept up and has been closer to R3 000 now.

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That’s easily R200 000 since 2015, not including the months on end that the unit was vacant. There, you effectively stumped up the ‘rental’ of, say, R8 000 a month. That’s another R100k!

Add all of this in and your loss in rand terms is over 60%. In sterling, it’s about 80%.

Had you simply taken the £50 000 and invested it an exchange-traded fund that tracks the S&P 500, you’d be up over 150%.

This article was republished from Moneyweb. Read the original here

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