Beware the pitfalls of property investment

THE two fundamental aims when investing in property are still, as in any asset purchase, to achieve capital growth and to create an income stream. Although property investors should, however, clarify in their minds as to which of these is their primary aim and which is their secondary aim, says Bill Rawson, chairperson of the Property Group, these days, even though looking for capital growth, they may well find it possible to achieve good rentals from day one.

“Assuming that the investor puts down a 10 or 15% deposit and in a sense writes this off on his accounts, it is today sometimes quite easy to achieve a positive flow, i.e. one that covers the bond payments from the start,” says Rawson. “When this is not possible, there have been cases where this type of parity is reached within 12 to 24 months.”

Rawson comments that he has often been told that finding the data on which to work and identify the areas giving the best returns is difficult. In practice, he says, five or six telephone calls to the agents in the area in which the investor is interested and a careful perusal of the data banks, such as Lightstone (who use Deeds Office statistics), will give a clear picture, and there can be little excuse for making a bad decision.

Property holding costs in South Africa today, says Rawson, are generally in the 7to 9% bracket, but there are many properties which will give better returns.

Rawson warns new investors that there are dangers lying in wait for the less experienced.

“Sometimes,” says Rawson, “a property will give a very high rental in relation to its holding costs. The reason for this however is not that it is in a high demand area, but that the cost of the unit has fallen because demand is, in fact, very low, and the area is not performing. Such areas should be avoided because once a downward trend begins, it tends to carry on for several years.

“Furthermore, in such areas, it may be difficult to find tenants and if one does, they are more likely to be unreliable payers.”

Sometimes, says Rawson, an already tenanted property will be put on the market with a “guaranteed” rent for a specified period. Such guarantees are however fallible because they are based on the tenant’s lease. Should the tenant, as quite happens, run into financial trouble, he or she may be forced to break the “watertight” agreement and if the property is in a low demand area, it may be difficult to find a new tenant.

At the moment, says Rawson, the best returns – often giving a positive cash flow from the outset – are to be found in those suburbs conveniently sited in relation to the CBD.

These are now throughout South Africa, often zoned for high density and they have therefore been able to attract developers who by and large create the affordable multi-unit stock which has proved a particularly good investment of late.

However, says Rawson, those investors who take matters really seriously seldom confine to these obvious high demand areas. They tend to find opportunities in areas not yet experiencing a boom and not yet recognised as likely to be up and coming. These may very often be in areas.

The future success of such areas, says Rawson, will possibly be due to a steady but noticeable upsurge in tourism or to the initiation of a new industrial area (e.g. as at Saldanha Bay in the Western Cape) or by the advent of a well-priced development like the Sitari project near Somerset West, which is already influencing all prices in its vicinity.

“Many outlying towns, for example Riebeek Kasteel also in the Western Cape, were hit very hard by the recession because a high percentage of the property owners there were investing in second homes. However, such areas are very often now experiencing a comeback and in three or four years’ time, will be recognised as having been an extremely good investment for those buying now.”