Advice and Opinion Partner Content

How to expand your property portfolio using equity release

Nqobi Malinga.

By Nqobi Malinga, uMaStandi Portfolio Manager.

Building a stable, successful and income generating property portfolio is a journey, with much for the new and continuing property entrepreneur to learn about. One of the most frequent concerns for property entrepreneurs is around raising capital. Property entrepreneurs working with us may not initially know that we offer an option of equity release that may be used to support in funding their next project.

It is essential, however, to first define and understand equity. In simple terms equity means value. Equity release, therefore, is about releasing the value of an existing property asset which is calculated by looking at the difference between the value of a property and its liabilities. For example, if you buy a property for R1 million, but it is valued at R1.5 million, then that property provides you with an equity of R500 000. This equity can be released – or used – provided the property equity is released from is performing well and generating ongoing cash flow, to invest in another property and to grow your property portfolio.

The option of equity release becomes particularly viable when, as a property developer, you already have a successful first property under your belt and want to expand your portfolio. Typically, financial institutions will provide you with finance of up to 80% of the value of the project – and thus equity release may be used to cover the remaining 20% needed to purchase or construct your next property.

Returning to the earlier example, if you have R500 000 equity that can be released and you want to buy a piece of land on which to construct your second property and that property, when completed, will have an estimated valuation of R2 million; a financier will likely offer a loan of R1.6 million (80% of value) and you will then need to inject R400 000 of your own capital. As you may not have that as cash on hand, you could opt to release equity from your existing property which would cover the outstanding amount needed.

There are two critical criteria for equity release to work as a mechanism to access capital. Firstly, your existing building must be fully compliant with all municipal regulations. Secondly the property must be a multi-let structure which is income generating and performing. If that property has a bond with another financial institution, we will look to take over that loan before equity can be released. This is because home loans or mortgages and our refinance/equity release product are both regarded as senior bonds and cannot run concurrently.

We provide a single facility over fifteen years to cover the investment needed in a property, and this makes it easier for property entrepreneurs because it enables them to service one loan for construction and the purchase of the land without having to manage two or more loan obligations. This also improves the property’s cash flows.

For many entrepreneurs, equity release offers a viable option to fund building up their property portfolio, and over time increasing their income and wealth.

We currently operate across Gauteng, KZN, Western Cape and the Eastern Cape. We encourage property developers who have a project in mind in any of those four provinces to reach out to us. Whether it is your first or second development, we look forward to working with entrepreneurs to continue to build and revitalise townships in South Africa.