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Fifteen years ago South Africa was in the grip of a property boom. Individuals who could persuade banks to provide home loans to cover the cost of buying a property were snapping up flats and houses to rent out to those who did not have the finances necessary and were paying off mortgages for the others. But, the wheel has turned. You have to wait much longer for your property to look like it is showing a return. Tenants are more bothersome, too, with the laws weighted in favour of those who can’t afford to buy their own homes. Industrial, commercial and retail properties have been attractive for investors, too, but even those have their challenges in an era in which the global economy is under pressure. Johannesburg-based money expert Dawn Ridler assesses whether it is still worth taking a big punt on property. – Jackie Cameron
By Dawn Ridler*
Having another look at property as an asset class in your portfolio.
With the JSE bumbling along for 5 years and the rest of the global economies cooling, investors are looking all over for some returns, any returns, but where can we get them from? Back in the good old days, a (lost) decade ago we assumed that stocks/shares would return at least inflation plus 7%, with property around CPI plus 4-5%, Bonds at CPI plus 1% and cash (on fixed deposit) at CPI (at best).
These assumptions have been turned on its head, and five years on we can’t consider it a ‘temporary’ aberration, but a trend that may stick around for some years yet, and our portfolios have to change to reflect that.
Just a quick recap: Stocks grow in value and yield dividends (mostly, not always). Property can take a number of forms from pure stocks, to REITs and physical property. They may grow in value and also produce dividends or rental income. Bonds have a ‘coupon’ which is usually paid out once a quarter and is treated as interest by the taxman. The Capital is repaid at maturity. Cash yields interest and the Capital is also repaid at maturity.
For many years, “property” was the darling of many wealth portfolios but in the last decade property has lost its lustre, and it probably is never coming back to its former glory. The phrase ‘safe as houses’ no longer applies to property investments. It used to be a nonvolatile asset class and in the ‘prudent’ asset allocation for pension funds (called ‘Regulation 28’ – where not more than 75% of the investment may be in stocks) but you can allocate an additional 10% to this asset class.
The ‘prudent’ regulation is normally a good idea, nobody wants a pension to be reduced to zero – but with an effective 85% in very volatile asset classes, you can lose a chunk of it anyway. Retirement funds, especially coming into retirement and in retirement, need to preserve and grow capital and one not allow it to be eroded by the vagaries of the market. While 85% in stocks and property is ‘allowed’, very few of my clients, irrespective of age, have anything like this asset allocation.
Why is property (specifically listed property) no longer the jewel in the investment crown? Online retail trends are decimating the bricks and mortar stores. This has been a slow burn for years, but it is reaching a critical mass and as leases in malls end, you’re going to see more and more empty stores.
Having spent a good number of years in retail myself, I have watched this trend from the sidelines with interest. When Amazon started with their digital books, there were considered ‘interesting’ and it was acknowledged that it might impact bookstores but little more – but look at it now. Amazon took years to even break even, and in the fourth quarter of 2017 make as much profit in one month as it had in every single quarter for the previous 14 years. That is critical mass in effect. The trend took on a life of its own and has spawned thousands of copy-cats.
Property leases usually last 5 years and have built-in rental escalation clauses. These escalations are usually way above inflation, in the last decade averaging a good 10%, which when compounded becomes onerous. Is it little wonder that the rentals are not being renewed? Physical/ Bricks and Mortar retail is never going to disappear completely.
Customers will always want to look and feel certain merchandise, even if it is just to research before buying online. The good news in this, for customers, is that without those heavy overheads, staff costs etc. price increases can be contained. Amazon (and others) have also created a marketplace for hundreds of thousands of small businesses. In RSA, those retailers not big enough to build their own online store are using online outlets like Zando and Takealot.
There is another trend that is coming down the pike and is likely to impact supermarkets specifically. The sheer volume of single-use plastic generated by a family in a year is astounding, and in the past, this was dumped in landfills or shipped off to third world countries, who are increasingly rejecting the stuff, once an easy source of income. As concern over the environment (not so much the climate change but sheer pollution) gathers momentum, and as millennials start exercising their powerful voice, this will have to change the way supermarkets sell and manufacturers package.
Property woes don’t stop with retail, only 66% of office place in SA is currently let. This is probably due to a number of factors, including a poor economic environment in the private sector. The growing incidence of ‘hot-desking’ and ‘freelancing’ around the world is also starting to creep into the South African workplace. Artificial intelligence is still in its infancy but it will impact work as we know it.
What about your own rental property portfolio? Theoretically, you get a double bonus, a property that appreciates and rental income. Property prices have been subdued over the last 5 years, barely keeping up with inflation. (There is a nice interactive graph HERE). If you have a rental property and you sell it, you’ll have to pay Capital Gains Tax. A diversified property portfolio, in carefully research areas can still give a reasonable return and is best built up over decades.
Putting all your savings/investments in one asset class, however, is not recommended, and property is no different. Don’t be fooled that this is a ‘passive’ income. Not only does it have to be managed closely but there are plenty of additional costs that you incur. The current legal environment is not ‘landlord-friendly’ and it can take up to two years to get a defaulting tenant out.
At the moment, the asset class that has been bolstering portfolios is bonds or cash. These two asset classes have been giving hassle-free returns well in excess of inflation – in other words, they have been giving a ‘real’ return. Bonds, as expected, have been outperforming money-market with returns north of 8%, or inflation plus 4%. Unfortunately, this asset class isn’t easy to access unless as a Unit Trust, except for the RSA retail bond, which is 8.25% (5 year fixed). The Bond Unit Trusts from ‘popular’ investment houses have high fees (over 0.8% and lacklustre performance – you’d be better off in money market).
Personally I am not a fan of government bonds at the moment, thanks to the government’s cavalier use of funds in the last decade, and the potential for ‘sovereign default’ which you don’t usually get with high-quality corporate bonds. The ideal portfolio will contain a good percentage of high-quality corporate bonds, but this sort of ‘bespoke’ portfolio has a ‘critical mass’ of around R3m-R5m.
Action: Aggressive or high stock exposure portfolios at the moment are for the very young or high-risk takers. Property needs to find its ‘new normal’ before it becomes an attractive asset class again.
- Johannesburg intermediary Dawn Ridler, MBA, BSc and CFP ® is founder of Kerenga.
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