A quick drive around South Africa’s major cities such as Johannesburg, Cape Town, and Pretoria reveals one unmissable feature: amid shiny, high-rise buildings, towering cranes compete for attention as they transport hefty loads up and down new under construction buildings. It’s a familiar sight that greets you in many metros across the continent. The growth of Africa’s cities is driving demand for more commercial and residential property.
For South Africa, this growth has persisted for years as the country’s urban middle class expands, creating a need for new houses, shopping malls, and office blocks. Despite the Southern African nation’s current economic and political distress, real estate remains an attractive opportunity for investors.
Before you jump at the opportunity to invest in property in South Africa, here’s a quick guide to help you prepare for your venture.
Consider Buying to Let
The buy-to-let strategy is one of the easiest ways to invest in property. It’s no wonder it seems to be a favourite for many investors in the South African real estate market. While it has its risks, like any other strategy, purchasing property to rent out is a sound investment choice whose benefits far outweigh its shortcomings. One person who believes in this strategy is Jason Lee, the best-selling author of Making Money Out of Property in South Africa, and two other property books.
“Buy-to-let properties make fantastic retirement products if you buy right and have patience. The tenants contribute or cover your mortgage payments so they essentially pay for or assist in paying for an asset that you own,” Lee shares.
He adds, “Over time, the balance on your mortgage becomes lower while the value and rental income from the property increases. This gives you options in retirement. You can either sell the property to access the capital gain or keep the property and collect cash flow in the form of monthly rent payments.”
Before you commit to buying property, it’s important to calculate the potential yield on the property. You can simply do this by calculating the annual rental income minus expenses – such as maintenance – and divide it by the price you pay for the property. Also, find out the yield of other rental properties in the same area to avoid paying an unfair price for the property. Doing sufficient research can mean the difference between having a sound investment and a botched venture.
When buying property to rent out, one other key factor to consider is housing affordability, says Lee. “Affordability is always an issue and that is why I like to concentrate on the middle-income bracket that low income buyers can aspire to and high-income buyers can downsize to,” he explains.
Choose the Type of Property That Delivers Best Returns
If you’re looking for an investment opportunity in the residential market, it’s always critical to know which types of property are best performers. In South Africa, data reveals that one bedroom and studio apartments have been the best-performing for over 12 years. Investors who choose a one-bedroom apartment receive better returns than those who invest in a two or three-bedroom flat. However, more South Africans continue to purchase two-bedroom apartments despite lower returns.
One-bedroom apartments are entry-level choices for most young professional first-time home buyers, says CEO of Landsdowner Investment Properties, Jonathan Kohler. “The thinking behind this is that two people could rent the property together or two people could perhaps purchase the property. However, this has simply not been the case, and investors in this market are not reaching their maximum return. Investors looking to purchase a property must keep two of the key principles in mind – rental return and capital appreciation,” explains Kohler.
“Whether you’re a student, living away from home for the first time, a young professional renting your first apartment that you’re paying for yourself, a first-time homeowner or a first-time investment property buyer with buy-to-let aspirations, the one-bed-one bath is generally a good place to start,” says Kohler
To illustrate the different returns investors fetch from the different apartments, Kohler uses the example of two apartments located in the same complex in Johannesburg’s northern suburbs. If you buy a one-bedroom ground floor apartment for R740,000 (US $57,045), you can receive up to R7,000 (US $540) a month in rent and spend roughly R977 (US $75) on levies and R320 (US $25) on rates. You can expect this apartment to appreciate at 8% per annum, which means you could get a net rental return of 9.25% per annum, a remarkable overall return on investment of 17.25%.
On the other hand, a two-bedroom ground-floor apartment that costs about R980,000 (US $75,538) would bring you about R8,250 (US $636) in monthly rental fees. It would cost you R1,50 (US $127) and R420 (US $32) in levies and rates respectively – bringing you a rental return of 7.25% per annum and a total return on investment of 15.25%.
It’s All About Location!
As the saying goes, “The three most important aspects of real estate are location, location, location!” It’s vital to ensure the property you’re buying is in a desirable place to keep its resale value rising. The location is also a determining factor in how long a property takes to sell.
In South Africa, the Western Cape province continues to outperform all other areas, with Cape Town remaining the most lucrative city in the country. The strength of its housing market and house price inflation, which has risen by over 10.35%, make the Mother City an attractive property investment destination for investors.
Several factors make the coastal province king of South Africa’s property market. Dr. Andrew Golding, Chief Executive of the Pam Golding Property Group, explains: “The outperformance of the Western Cape housing market relative to both Gauteng and KwaZulu-Natal began in mid-2013 – which more or less coincides with the start of the “semigration” of buyers to the Cape. Factors fuelling movement to the Cape – the appeal of a proven record of service delivery, access to excellent schooling and the attractive lifestyle – are showing no signs of slowing down.”
Dr. Golding adds: “Over and above this Cape Town metro trend, buyers relocating to the Western Cape are also settling in other urban areas such as Paarl, Somerset West and Stellenbosch, as well as along the coastline. A further noteworthy trend is an ongoing increased demand for agricultural property for lifestyle as well as for commercial use. Most sought-after among lifestyle buyers are small scale (8-20ha) farms in the Elgin and Grabouw Valley priced between R7 million and R20 million.”
While Cape Town ranks as the most expensive city in the country, there are still some areas where you can find a good deal. These include the likes of Goodwood, Richwood, Bothasig, Edgemead, and Monte Vista.
Residential Property Remains Strong in South Africa
The question of whether to invest in residential or commercial property can be a tricky one, especially if you’re not armed with information to back your decision. While both property types offer different advantages and disadvantages, residential real estate remains sturdy in South Africa. It’s also the better option for the less experienced investor with limited property experience.
However, while residential property retains a positive outlook, its performance is slowing down thanks to consumers’ wavering sentiments. Properties are remaining longer on the market, with this year’s average being 15 weeks compared to 11 weeks in 2016 – according to South African bank, Absa. The bank also reports a drop in 2017’s asking prices, with 92% of the houses selling below market price versus 2016’s 88%. This may prove to be a good time for foreign investors to enter the South African market.
In fact, recent years have seen the country attract more foreign direct investment into property. In 2014, R9,7 billion worth of foreign investment poured into the economy. The depreciation of the South African rand over the past two years has also made the country’s real estate more attractive to foreign investors.
Listed Property Is an Alternative
If you’re looking to invest in real estate but don’t want to deal with the rigours of managing tenants, listed property is the route to go. Instead of buying physical property, you can simply put some money into a property fund, which invests in publicly-listed real estate companies.
The advantage of a property fund is that it exposes you a diversity of assets, including residential, industrial, retail properties. By investing in a fund, you can have stocks in different properties types such as shopping malls, office blocks, and townhouses.
“For a small investor, a buy-to-let property comes with a concentration of risk. You are spending a huge amount of money on one single asset and if the tenant goes wrong, you take a big financial knock,” explains John Loos, household and property sector strategist at FNB Home Loans. “Yes, the share market can be volatile, but if you bought into one listed property fund, you have already spread your risk into a number of properties, so the concentration risk isn’t nearly as much as with a buy-to-let property.”
South Africa boasts numerous real estate funds that have dominated the unit trust space over the last ten years. Some of the country’s top-performing property funds are the Absa Property Equity Fund (which was awarded the 2017 Raging Bull Award for Best South African Real Estate Fund), Stanlib Property Income Fund, and Prudential Enhanced SA Property Tracker Fund. There’s also Catalyst SA Property Equity Prescient Fund, Investment Solutions Property Equity Fund, and many others.