This article first appear in Personal Finance Magazine 3rd quarter 2017
If you’re looking for another way to prepare for retirement apart from pension funds, or for a way to hedge against inflation, investing in property could be your best investment. Property is one of the largest asset classes in the world and investing in it may be the best way to take advantage of what is widely considered to be one of the most reliable and profitable investment vehicles.
Property is known to appreciate in value over time. There are various factors that influence property value. Yes, location is the most obvious. If you own a property in Sandton (known as the richest square mile in Africa), the value of your investment will grow faster than would be the case if the property is located on the outskirts of Ermelo in Mpumalanga.
Oasis chief executive Adam Ebrahim says investing in property is the way to go because:
- Property is one of the largest asset classes in the world;
- It is a tangible asset;
- Property is immovable;
- In theory, because it is a real asset, it is a hedge against inflation; and
- It is an important building block to creating wealth.
Successful property investing is about buying a property that will appreciate in value and deliver capital growth.
Ebrahim says there two ways to invest in property:
- Directly: you buy a house, a block of flats, or even a factory building; and
- Indirectly: you invest in a listed property fund that owns the V&A Waterfront, for example (although you can’t afford to buy the Waterfront, you can buy shares in the company the owns it).
One of the largest asset classes
Investable assets fall into two broad classes: growth and defensive (we are interested in growth). Growth assets are designed to grow your investment. They include shares, alternative investments and property. They tend to have higher levels of risk, but have the potential to deliver higher returns over the long term. However, these returns can be strongly influenced by market fluctuations and can, therefore, vary considerably over shorter time frames. Property is one of the largest growth assets.
A tangible asset is an asset that has a physical form. Tangible assets include fixed assets, such as machinery, buildings and land. Intangible assets are non-physical, such as patents, trademarks, franchises, goodwill and copyrights. Wouldn’t you rather spend your money on something you can see and touch?
Property is immovable
This is an asset that cannot be moved without destroying or altering it. Property, such as land or a house, is fixed to the earth.
An inflation hedge asset in theory
An inflation hedge is an investment with intrinsic value. Thus, it holds its value and purchasing power during inflation. Typically, most real assets are an excellent inflation hedge. Real assets have a value of their own, and inflation does not erode their value.
An important building block in creating wealth
The essential building blocks for wealth creation through investing in property are knowledge, structure, finance, location and potential growth.
Sounds interesting, but when should you start? Ebrahim says the sooner, the better. Your property investment journey begins the day you start saving for a deposit towards buying your home. It’s never too late to start investing. Owning a home, rather than renting, is often a good way to save money and set yourself up with a valuable asset in the future. Some university graduates have raised a deposit and bought a two- or three-bedroom flat and rented out the rooms. In this way, their accommodation is paid for, while their tenants pay off the home loan. So as soon as you are able to, do the following: check your finances, get pre-approval, set your goals and start budgeting.
One of the other reasons you should invest in property earlier in life is because the demand for it is growing constantly. Why wait until a flat is priced at R1 million before you buy it when you could have bought it 10 years earlier for a fraction of the price?
Ebrahim says the world’s population is constantly growing, but the landmass is not. According to the basic principles of economics, if the rise in demand outstrips the rise in supply, the price will go up.
The world’s population is growing at about 1.11 percent this year – down from 1.13 percent last year. The average population change is estimated at about 80 million a year. There is no data to suggest that the landmass is growing at at similar rate.
You may argue that the planet has more than enough land to carry the world’s population, but there are other factors that affect property prices. Property is not limited to land, but also includes housing. Then there is the issue of where the house is located: is there a school nearby, are there shops, can one make a living in the area ... the list is endless.
Ebrahim says South Africa has a young, growing population that is increasingly productive. He says that, as people become productive and the economy grows, they become wealthier and they need homes, offices and shopping malls. Rural areas can meet few or none of these demands, whereas they are in abundant supply in urban areas.
When people leave rural areas, the demand for property in those areas declines. Meanwhile, the demand for property in the urban areas rises. Hence we see higher growth in property prices in the metropolitan areas compared with the rural areas.
Another reason property values tend to rise faster in urban areas than in rural areas is that far more land is available in rural areas, whereas the supply is more limited in urban areas. If a large number of people are scrambling for a limited supply of land, the price will go up. Johannesburg and Cape Town have the fastest house price growth rates in the country, and both cities have the highest rates of inward migration.
Investing in property is not as simple as buying a piece of land and waiting for it to appreciate. However, if you do your research properly, you could double your investment before the term of your mortgage bond ends.
Ebrahim says many factors come into play when choosing an area in which to invest in property. Ebrahim uses the example of Cape Town, which, he says, had the highest property price growth in South Africa in the first quarter of 2017.
He says urban Cape Town can be divided into three categories: global unit, global periphery and the rest of Cape Town.
- Global: Ebrahim says this is the part of Cape Town that has a global attraction, and includes areas such as the Waterfront and Atlantic Seaboard. The city has reported annualised property price growth rate of 33.9 percent.
- Global periphery, which are the areas that border the global unit. Examples are the City Bowl and Woodstock. The city has reported annualised property price growth rate of 20.9 percent.
- Rest of Cape Town, which, as the term suggests, are the areas beyond the global periphery. The city has reported annualised property price growth rate of 12.14 percent.
So it is important to do some research into the property price growth in certain areas before investing. If you invest in an area with very slow growth, you it could end up costing you, because of inflation.
Real estate is one of the few assets that reacts proportionately to inflation. As inflation rises, the value of property increases and rents go up. This is why property investment is considered an inflation hedge.
However, if the area in which you invest has little property price growth, you will see very little or no return on your investment.
The key is to look at what you can afford. Even if you start with bedsitter, if you rent it out and the bank sees the rental payments as income, this will help you to qualify for another home loan, but that’s a discussion for another day. For now, crunch some numbers and get investing.
- PERSONAL FINANCE ONLINE