Advice and Opinion

Sectional title vs freehold sees sectional title still more popular

A recent report from FNB property economist John Loos compares major property types, residential freehold and sectional title, and figures show that there is a rise in demand for sectional title property, after freehold had been performing better from 2013 to the beginning of this year.

The report says: “This is witnessed in the year-on-year growth rate for the Sectional Title Market Strength Index, which peaked at 10.2% in the 1st quarter of 2014, whereas the Full Title Market Strength Index peaked at a lower 5.2% growth rate.”

While there are certain benefits to owning full title property, the benefits of owning sectional title can possibly outweigh freehold ownership, says Michael Bauer, managing director of the estate agency IHPC.

There are pros and cons to each type of property ownership, he says, which can be weighed against each other to see which would suit the buyer better.

It has to be remembered that buying and selling a property incurs transaction costs of up to 10% of the market value each time a transaction is completed, so the less one moves, the more cost effective it is, as “sunk” costs in selling properties too quickly cannot often be recouped.

The first thing to consider when looking for a property to buy is that this should be a longer term purchase, no shorter than ten years, and what might be needed from the property in that time, he said.

While the buyer might be a young professional, newly married with no children, the consideration that this might be a possibility in the future should be taken into account and the buyer should then consider the best two or three bedroom unit he can possibly afford in an area that is centrally located and close to amenities as well as schools.

Other things to consider and compare are whether living in a sectional title scheme would suit the buyer or whether he cannot live with certain constraints such as conduct rules or smaller outdoor areas. Sectional title property offers the benefits of often having security included as well as sharing the cost of maintenance, whereas a freehold property is just that, the owner is responsible for the walling of his property, and security within it, said Bauer.

Other “extras” that often sway buyers to buying sectional title are lifestyle options that often cost much more in a freehold property, such as a swimming pool, a gymnasium, a tennis court, possibly a clubhouse and a fully equipped laundromat. The costs of having all of these available are shared among the owners of the sectional title scheme in the form of levies and often make them much more affordable. Then too, is the maintenance of all of the above, as well as communal gardens, parking areas, full fencing, automated gates and the like, he said.

The FNB report corroborates this. It says, “it may be very much about affordability not only of home values, but also home running costs. Perceptions that crime may be getting worse again, despite official crime stats suggesting to the contrary, could be fuelling greater demand for “secure” cluster living, which is often Sectional Title and lowers the average cost of somewhat expensive security measures and communal amenities. And of course the Municipal rates and tariff increases continue strongly with no end in sight.”

“While there will always be demand for freehold property, sectional title has more pros than cons, and the only thing holding this segment back at present in some areas is lack of land to develop (which is the case in Cape Town but certainly not in Gauteng)”, said Bauer.