The recent instability in the JSE securities exchange prices has reinforced a suspicion in the minds of some investors, that South Africa’s share prices have become over-valued and that a five to ten percent or possibly greater correction was overdue.
While he would not necessarily agree with this thinking, says Bill Rawson, Chairman of the Rawson Property Group, it is noticeable that this mindset has increased the number of enquiries that his group is receiving about the potential for building property portfolios as an alternative asset class.
“The thinking behind these enquiries appears to be based on the belief that the JSE will probably no longer experience the highly satisfactory value rises seen in the last two to three years.”
Financial advisers have traditionally calculated, said Rawson, that South African equity based unit trusts can be expected to give a return of 8% plus the inflation rate, e.g. 14% at present. Last year, of course, they performed far better than this according to the Cape Town financial consultants, The Financial Coach: they achieved a peak growth of inflation plus 24%.
“Now many investors suspect that these bullish conditions will begin to slow down — so they are beginning to look at what the property sector can offer. According to the respected analysts, TPN, residential property has “ploughed its own furrow” and performed above expectation. Returns on high density urban areas being anything from 6,5% to 10% with annual value increases of the same order.”
Rawson was asked if residential property is a safe investment in a slump period and if it does follow downward economic trends in the same way as the JSE?
“It is true that in a downturn the number of defaulting tenants will rise,” says Rawson, “but it is also true that defaulters can be made to leave their premises (although with some difficulty) and that in today’s market it is seldom difficult to find a replacement tenant. It is worth noting, too, that in the second quarter of this year, TPN were still reporting that ± 70% of tenants were paying on time, while 22% paid within the grace period, late or in partial installments.”
If it does become necessary to evict a tenant by resorting to legal procedures, it can be expensive and the landlord may have to accept a total lack of rents for as much as half a year. However, good prior checking before accepting a new tenant can greatly prevent the risk of this happening.”
Rawson added that the actual return on a property investment will very seldom be equal to that of a well-chosen share portfolio but, he said, unlike shares property can be acquired with geared capital and in a really unstable market will usually be less affected by fluctuations than shares.
“Property,” he said, “has a reputation for suiting a more cautious investor and for such people tends to form a 30 to 40% base to their total investment portfolio.”