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Is residential property a good investment?

19 Mar 2015

Is it a good idea to invest in residential property? Can it help you diversify your investment portfolio and grow your wealth? These are questions that many South Africans ask themselves.

This Bryanston apartment has three bedrooms, three and a half bathrooms, underfloor heating, a patio with built-in gas braai, double automated garage and 24-hour security. It is on the market for R2.85 million – click here to view.

Pam Golding Properties’ (PGP) Hyde Park joint area manager, Jonathan Davies, says these are questions well worth considering as there are rewarding investment opportunities available in the residential property market. 

He says the nature and diversity of residential property in South Africa can make it difficult for those who are not familiar with the market to come to grips with its dynamics.

He says this is one of the reasons that most residential acquisitions are made for the purposes of private residency or leisure. However, many astute investors have done well by including residential property in their portfolios, especially in the buy-to-let market, which offers both income and capital appreciation returns, he says. 

“As with any other sector, investors will obviously be best placed to take advantage of the residential property market if they do their homework and thoroughly acquaint themselves with it as well as be clear on their objectives before making any investment. Fortunately, plenty of good advice from property professionals is on offer for those who are interested in further exploring this fascinating and most rewarding sector of the economy.” 

Situated in Dainfern, this apartment offers three bedrooms, two bathrooms, an open plan lounge and dining area, kitchen, balcony, carport and access to a communal swimming pool. It is on the market for R15 000 per month – click here to view.

Interestingly, as economic recovery becomes more established, more and more wealthy individuals are securing residential properties not only for use as luxury primary homes but also for investment purposes and as a means to enhance the value of their wealth portfolios. Indications are that the wealthy are shifting their focus from the preservation of capital in cash, gold and fixed interest to capital growth through equities, real estate and business interests. 

Davies says investors obviously have their own reasons for making investment decisions. However, he says a number of individuals are turning to residential property not only for its potential to offer good returns, but it can offer less risk, or at least a different risk profile than other, more volatile, types of growth investments. 

It is not so much whether one asset class offers a better rate of return than another, but rather that a combination of asset classes in various mixes offers an investor access to acceptable price appreciation, income return and risk mitigation, explains Davies. 

Situated in Melrose Arch, this 118sqm apartment has one bedroom, one and a half bathrooms, a fitted kitchen, lounge and dining area and a large balcony. It is on the market for R27 000 per month – click here to view.

He says the proposition today is that including residential property in your portfolio of investments makes a great deal of sense in the light of all of these criteria. He says one advantage offered by the residential sector is that it not only offers the opportunity for sound, long-term capital growth but also good returns through rentals. 

While South Africa’s economic growth prospects deteriorated steadily throughout 2014, and the prospects for 2015 are only expected to improve moderately, the residential property market has outperformed the general economy. 

Stimulated by considerable infrastructural, commercial and industrial development and increasing urbanisation, Davies says many centres within Gauteng are growing rapidly. He says these developments have in turn served to stimulate the residential property market in these areas. 

This Bryanston home offers five bedrooms, three bathrooms, an open plan lounge, family room and dining room, a kitchen, staff accommodation, storeroom, wine cellar and double automated garage. It is on the market for R45 000 per month – click here to view.

“Our own experience within the residential property market has shown year-on-year sales turnover up by more than 23% and unit volumes up by more than 11%. We expect the remainder of 2015 to exhibit a similar trend due mainly to stock shortages, demand exceeding supply, a favourable interest rate prognosis, more first-time home buyers, the re-emergence of the investor market and a stable, if not generous bank lending policy. Of course we can’t predict the unpredictable, and international trends or events, as well as local socio-political factors, can have a material impact.” 

Real estate as an investment class has historically not been as popular in South Africa as it is internationally. Davies says some investment managers do not offer residential property as part of their portfolios because it is not so easily tradable, the time to transact is long and the transactions costs can be high. To date, there are no residential funds available to facilitate transactions and so it is largely left to the individual investor to make the decision on including residential property in their portfolio. 

He says interestingly, however, they have noted that there are a growing number of foreign investors who are buying property in South Africa for investment purposes rather than for their own use. Davies says many of them are wealthy individuals from other countries on the African continent, and the weaker rand has assisted them to acquire property at relatively good values compared with property prices in many of their own countries. 

The rental market is more robust than ever in many residential areas of Gauteng, reinforcing property as a sound investment vehicle. Security and easy access to facilities remain paramount to the people of the province with homes in secure complexes, apartment blocks and estates being particularly popular. 

“There are different avenues to enter the potentially lucrative rental market. Some investors prefer to buy freestanding, townhouse, cluster or estate homes available throughout Gauteng’s residential suburbs. There are a number of mixed-use developments which will be completed over the next few years that are grabbing the attention of potential investors, including the impressive Steyn City Lifestyle Resort in the Fourways area, where the first homes went on sale recently.” 

There are also a number of upmarket, high-rise apartments being developed in centres such as Sandton, Rosebank, Melrose and Menlyn. These are being built in an effort to keep up with the pent up demand for quality accommodation close to the vibrant centres of Gauteng. The next phase of Melrose Arch, Park Central in Rosebank and The Regency in Menlyn are just a few such residential developments that hold great potential for those looking to make good returns on their investment. 

Trish Luthuli, new business executive at PGP Gauteng, says the rental market is doing well within the higher priced areas of Johannesburg’s northern suburbs. As is the case generally across the country, the strongest demand for rentals is in the below R10 000 per month segment, which is a function of affordability and the large volume of consumers in this segment.  

In general, Luthuli says the lower the purchase price of the property, the higher the yield. She says the rental yield is currently estimated at 9.75% in the lower- and middle-end property segment. This is higher than that of upper middle-income properties, which have a rental yield of 8.06%, she says. Just to clarify, the lower-end home value is below R600 000, while the middle-end includes those properties valued at between R600 000 and R900 000, she says. 

The fact that the highest proportion of demand lies in the market below R3 million does not imply that upmarket homes do not represent a good investment. Pam Golding Properties Fourways/Dainfern office recently secured a long-term rental in Dainfern Golf Estate for a record R120 000 per month. And that does not include levies, services and utility costs. 

“Dainfern regularly achieves rentals above R30 000 per month and we have plenty of examples around the country where rentals in excess of R50 000 are attained, notably the Southern Suburbs of Cape Town and the Atlantic Seaboard but also examples in the northern suburbs of Gauteng as well as Pretoria, which caters for the consular and ambassadorial market.” Luthuli says it is worth noting that the demand from multinational companies and foreign missions provides an important stimulus for the rental market in areas such as Sandton, Sandhurst, Bryanston, Dainfern, Fourways Gardens and in a number of Pretoria suburbs. 

While a buy-to-let property can be lucrative, Luthuli warns landlords not to attempt to overcharge tenants. She says tenants can be price sensitive and you do not want your investment to sit empty because you have priced it out of the market. “In the past we have seen certain residential areas lose popularity because they are just considered too expensive and we sometimes find it necessary to undertake some price counselling with certain clients.” 

Luthuli says residential property and especially sectional title apartments, offer an opportunity for investors to meaningfully diversify their wealth portfolios into a strong alternative asset class. She says making the right investment requires careful and thorough forward planning. 

While there is generally a strong demand for rental property and good rental returns, these are only achieved through the right homes in the right areas, she says. Those who are new to the market would do well to consider finding an advisor who is an area and market expert, she says.

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