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
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.
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.
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.
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.