Michael Bauer, general manager of IHFM, a sectional title management company in Cape Town, outlines what factors, benefits and pitfalls need to be taken into account when an investor chooses to go down this route.
“The better managed a sectional title scheme is, the more its value will appreciate - and values in such schemes will always tend to rise faster than those of other residential property.
He says this is due to the shortage of supply in the city centres and popular suburbs and the increasingly strong demand in this sector, particularly at the lower end.
“Conversely, a poorly managed sectional title scheme can actually end up losing value rapidly – and when this happens the downward spiral can be almost never-ending.”
Bauer says the obvious way to arrive at a realistic price is to find out what similar units have been selling for in the same complex or in the neighbourhood. “It, however, is also useful and wise to relate the value to the rental the unit earns or could earn.
“Let us assume that your property is worth R400k. On properties valued at under R1m, the rent is usually 0,7% to 0,8% per month of the total value of the property. This equates to 8,4% to 12% per annum and property investors here can, therefore, expect units in this category to deliver R3,500 to R4,300 per month net rental. If, therefore, you can borrow at 9% and can achieve a 10% or more income yield per annum, you can break even in the first year.
The net rental, Bauer explained, is what is left over after paying the levies, rates and insurance. If it is possible to bill these separately, the tenant in most cases remains responsible for the more direct municipal costs such as water, electricity, refuse collection and sewerage, many of which depend on his consumption.
On properties above R1m, the return typically drops to 0,5% to 0,65% of the market value. Serious property investors, he said, should, therefore, take note that the lower priced units are currently the best to be in if you wish to maximise your return.
Obviously, said Bauer, such returns are seldom sufficient to cover the full bond repayment unless a very high deposit has been paid. Full bond repayment is typically achieved only after five to six years of rental increases.
Nervous investors, said Bauer, should consider taking advantage of low interest rate periods such as those which currently prevail to fix their bond interest rates for 12, 24, 36 or 48 months to protect them in future against rising interest rates.
Property investment, Bauer warned, is not for the faint hearted. Nevertheless, he said, it is increasingly attractive to South Africans who right now are returning to the buy-to-rent market in the belief that the current housing shortage, partly caused by the difficulties in getting bonds and the lack of new developments, will result in rentals rising fast in the near future.
“The danger is that when the market begins to appreciate, as it is now doing, the less experienced will leave their purchases until the price cycle is nearing its peak. This inevitably means that they will get a lower percentage return and may have to ride out a period in which there is very little appreciation at all.”
Bauer warned again, as he has done previously, that property is not for the quick-buck, in-and-out investor. It is true, he said, that in the past investors made profits on new property developments bought off-plan and sold shortly after completion, “but those days are past”.
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