Fixed property vs unit trusts

Property price growth has slowed down sig­nif­i­cantly from the bumper growth it saw about 10 years ago; yet the idea still per­sists that property is a ‘ sure bet’. RISKSA looks at why in­vestors are bet­ter off in eq­ui­ties than in­vest­ing their money in a sing

RISKSA Magazine - - CONTENTS - Neesa Mood­ley- Isaacs

Ac­cord­ing to the Absa House Price In­dex, house price growth has con­tin­ued to slow down on the back of poor house­hold fi­nances and de­creased con­sumer con­fi­dence. Absa’s property an­a­lyst, Jac­ques du Toit, says sin­gle- digit nom­i­nal house price growth is fore­cast for 2014, while real price growth will be con­strained by con­sumer price in­fla­tion, which is ex­pected to be just be­low the six per cent level for the year. “Con­tin­ued low in­ter­est rates will sup­port the hous­ing mar­ket and the de­mand for mort­gage fi­nance,” he says. Berry Everitt, man­ag­ing di­rec­tor of es­tate agency, Chas Everitt, says South African property mar­ket val­ues are ex­pected to grow by around 10 per cent this year in the most sought- af­ter ar­eas, and less in ar­eas where there is less de­mand or no real es­tate hous­ing stock short­age as yet. “Rev­enue growth, which has been very strong for the past two years, will con­tinue to come mostly from in­creased vol­umes of sales,” he says. Property specialist and chief ex­ec­u­tive of Rode and As­so­ciates, Er­win Rode, says that as with all in­vest­ments, tim­ing is para­mount. Sec­ondly, lo­ca­tion is im­por­tant, es­pe­cially when ac­quir­ing a new property at re­place­ment costs. This risk is less when buy­ing an ex­ist­ing property, as the price should re­flect the good and the bad of the lo­ca­tion. Ac­ces­si­bil­ity is be­com­ing cru­cial in light of the wors­en­ing traf­fic con­ges­tion in some nodes ( like Sand­ton CBD) and the plac­ing of e- toll gantries.

Lastly, if you lack the tech­ni­cal ex­per­tise, get a con­sul­tant to ad­vise you on the tech­ni­cal health of the struc­ture. You al­ways would need an elec­tric­ity com­pli­ance cer­tifi­cate, rates clear­ance cer­tifi­cate from the mu­nic­i­pal­ity ( and a levy clear­ance cer­tifi­cate from the body cor­po­rate if sec­tional ti­tle). In the case of a sec­tional ti­tle scheme, be sure to study the lat­est fi­nan­cials of the body cor­po­rate; you do not want to buy into a scheme that is nearly bank­rupt, or which is poorly man­aged. Shaun Lat­ter, di­rec­tor and founder of Quaestor Wealth Man­age­ment, says if you look back as far as 1980, house prices lagged in­fla­tion for many years be­fore a huge uptick in 2003. How­ever, over a 30- year pe­riod from 1980 to the end of 2009, res­i­den­tial house prices only beat in­fla­tion by 0.75 per cent a year. The Absa House Price In­dex shows that over that same 30- year pe­riod, res­i­den­tial property as an as­set class pro­vided re­turns of 11 per cent a year. The JSE All Share In­dex, on the other hand, pro­vided an­nu­alised re­turns of 18 per cent over the same pe­riod. An in­vestor needs to take three fac­tors into con­sid­er­a­tion: risk, taxes and liq­uid­ity.

Risk

Res­i­den­tial property is less risky than the stock mar­ket but there are other risks that most in­vestors fail to take into ac­count. Con­cen­tra­tion risk is the main one. In­vestors ideally want to have di­ver­si­fied in­vest­ments to re­duce their risk but an in­vest­ment in a sin­gle property – in one street, one sub­urb, one city – is risky if you are pin­ning all your re­tire­ment sav­ings on that in­vest­ment. There is a ten­ant risk to take into ac­count. Ac­cord­ing to the Na­tional Credit Reg­u­la­tor, in March this year, the num­ber of credit con­sumers with im­paired ac­counts num­bered 19.74 mil­lion. “This means that these con­sumers are likely to be de­nied home loans by the banks and will be forced to rent. As a land­lord, the in­vestor may be ac­cept­ing risk that the banks find un­palat­able. This, cou­pled with strength­ened ten­ant rights when it comes to evic­tion, is a cash- flow risk that should not be over­looked,” Lat­ter warns. Shaun Ruiters, the head of strat­egy and po­si­tion­ing at Sanlam In­vest­ments Re­tail, points out the other risks as­so­ci­ated with in­vest­ing in a sin­gle property: • In­ter­est rate risk: Property prices are highly sen­si­tive to in­ter­est rate changes. Once in­ter­est rates start to rise, the growth in property prices be­come sup­pressed. • Area/ de­val­u­a­tion risk: Property re­turns are very de­pen­dent on lo­ca­tion. Re­turns dif­fer widely across lo­ca­tion. So­cio- eco­nomic changes in the neigh­bour­hood could re­sult in lower or even neg­a­tive cap­i­tal growth. • Reg­u­la­tion/ regime risk: Govern­ment can amend in­come tax, cap­i­tal gains tax, es­tate duty and other leg­is­la­tion af­fect­ing the value of the property. • Main­te­nance cost risk: Main­te­nance costs could es­ca­late by more than in­fla­tion and could be sub­stan­tial if prop­er­ties are rented out. • Rates, taxes, elec­tric­ity and other ser­vices- re­lated risks: Property own­ers need to con­sider the im­pact of un­ex­pected rates, taxes and ser­vice cost hikes. • Mu­nic­i­pal reval­u­a­tion risk: Re­lated to the pre­vi­ous point, the in­vestor is ex­posed to the risk of mu­nic­i­pal reval­u­a­tion which could re­sult in rate hikes.

Taxes

A property in­vestor has to pay cap­i­tal gains tax ( CGT) at 33 per cent of the gain when he sells the property. He will also have to pay in­come tax on any rental in­come he re­ceives. If the in­vestor in­vests in unit trusts, he will still have to pay CGT on dis­in­vest­ment but tax is with­held on div­i­dends. In­ter­est is taxed at the in­vestors’ mar­ginal in­come tax rate, but the first R23 800 of in­ter­est earned each year is ex­empt for in­vestors un­der 65. A re­tire­ment fund, which in­vests in unit trusts, of­fers tax- de­ductible pre­mi­ums, no tax on cap­i­tal growth, and the fund is ex­cluded from the in­vestor’s es­tate when they die, so they do not pay any es­tate duty tax on the money in their re­tire­ment fund.

Liq­uid­ity

In­vest­ing in a sin­gle property poses a high liq­uid­ity risk. “Prop­er­ties are rarely dis­posed of at the de­sired sell­ing price within a few days,” Ruiters says. Unit trust in­vest­ments, on the other hand, are fully liq­uid and an in­vestors is able to make part or full with­drawals at any stage. The max­i­mum amount of time an in­vestor would have to wait for their money is five days while sell­ing a property could take any­thing from a few weeks to a few months.

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