There are two main reasons why we believe that 2020 through 2021 offers an excellent window of opportunity to acquire investment-grade properties. The first of these is that South Africa is at the bottom of the property cycle, and the second is the remarkable opportunity that a historically low interest rate presents. We will also consider the highly attractive returns and yields that can be accomplished.
Changes in property values, like commodity prices, tend to cycle between periods of slow growth where properties lose their shine and seem stuck in the doldrums of poor returns, and periods of rapid above-inflation growth that creates quick wealth. The reasons and factors behind these cycles are complex, as is accurately describing and predicting them. What is important is to recognize their existence and to have some idea of where in the cycle one finds oneself at a particular moment in time. We believe that we are currently at such a low point.
Ideally an astute investor will always make the bulk of their acquisitions when the market is low and make disposals when the market is high. Although this concept sounds alluring and obvious, in practice it takes real courage to invest at a time when naysayers abound and the desire to have ample cash reserves is strong. By the time many awake from this winter, the best time to invest is already distant in the rear-view mirror.
The second reason is the unique opportunity that current low interest rates offer to investors. The prime interest rate is down from 10.0% a year ago to the current 7.0%. The impact of this, for example, on a R1m bond monthly installments are down from R9650 to R7753 (20%), and the total amount repayable down from R2.3m to R1.86m (20%). Although interest rates are bound to climb again, there hasn’t been an opportunity to like this to invest in many, many years.
Buying an investment property usually requires either a substantial deposit to ensure that the rental income is adequate to cover all expenses, or a number of years during which the owner has to supplement the rent from his own pocket to cover the expenses. With the current low-interest rates both deposit and/or personal contribution is significantly reduced. By the time interest rates start to climb rental income will also have increased to hopefully offset any rise in installments.
Then of course the number one reason to invest in property is the remarkable return at very low risk when the property is financed. For a typical R750k 2-bedroom townhouse that requires the investor to pay a 10% deposit and all transaction costs, the investor will be out of pocket with R120k to acquire the property. With nominal capital appreciation of 5% per annum, the property will be worth R957k in 5 years’ time, offering a return of 172% on the R120k invested. This is a simplified view to convey the point, but even after factoring other facets expenses the return is still highly attractive. If the investor bought well – e.g. one of the properties on offer through the Altiru Investors Club – then the property will be cashflow positive at this point.
Investors also need to consider both capital growth and net income from a property when comparing property investments with other options. In other words, if the property delivers a net yield of 8%, and capital appreciation of 5%, then the investor will experience a 13% return. Often punters of other financial products conveniently forget about this and only fixate on capital growth when comparing properties to their products.
Finally, not all South Africans can or need to own the property in which they stay, but all need a roof over their heads. By acquiring in the South African property, you are also rendering an essential service to our economy who needs private individuals to own and let investment properties to ensure everyone has a place to call home.