Tenant Behavior (The Bugle)

As a new landlord there are two risks that I would typically have to consider. The first is the rental payment risk - not getting paid, on time or at all. The second risk is that of a tenant damaging the property. I have recently upgraded the two-bedroom apartment I have purchased and it is now in show room condition and ready to be marketed. As an experienced rental agent I am familiar with the pitfalls that unsuspecting landlords can be exposed to. Without this insight, I would be at a disadvantage and would therefore encourage every landlord to use the services of a respected and experienced rental agent. The tools we have at our disposal are exceptional and are used to mitigate the two risks I am exposed to. 

Tenant Profile Network (TPN) is a credit bureau, which every professional rental agent should subscribe to. It provides the most rigorous credit check that can be performed on a prospective tenant by bundling three national credit checks into one – Experian, TransUnion and TPN. The level of detail provided on an applicant is impressive. It shows all previous enquiries, supplier details, all prior addresses, and where the prospective tenant rented a property through a TPN subscriber, detail on all prior rental payments. The date the tenant paid each month is recorded and this information provides an excellent guide as to what can be expected from future payment behavior. The “Credex” Score generated from these credit bureaus reads like a report card, with the final score ranging from poor to excellent, a rental affordability rating provided and even a probability of the prospective tenant squatting in the premises provided. Big brother is watching you like never before. This can work for or against you if you are a tenant. Good payment behavior will reflect for at least five years and your rental application will be considered ahead of others who may not have the same positive profile. However should a tenant’s historical payment behavior be recorded as negative, it will be unlikely that any new landlord will want to consider the lease application. 

TPN publish an interesting quarterly rental monitor that tracks the payment behavior of over 50,000 tenants within South Africa. For the 4^th quarter of 2012 the figures indicate that tenants in good standing ranged from 81% in Gauteng to 89% in the Western Cape and Mpumalanga. In KZN 84% of tenants were in good standing.  Tenants paying on time ranged from 69% in Gauteng and KZN to 80% in the Western Cape.  Tenants recorded as not having paid ranged from 5% in the Western Cape to 10% in Gauteng. KZN reflected 9% of tenants who did not pay. On a national basis and over the calendar year for 2012, 83% of tenants were in good standing, and 72% paid on time. What is really interesting from the TPN report is that when divided across rental value categories, the lower bracket (below R3,000 p.m.) and the upper bracket (above R25,000 p.m.) have the worst performing tenants with 16% not paying in both. The mid rental brackets have “not paying” statistics of between 6% and 10%. The best performing tenants are in the R7,000 to R12,000 p.m. rental bracket, with 76% having paid on time, 7% not paying and 87% being in good standing.

(Author: Andreas Wassenaar, published in The Bugle, 27th Feb 2013)

Emigration Selling Update (The Bugle)

It was five years ago that we experienced the Eskom Crisis and “load-shedding” became a new word added to the collective national vocabulary over-night. The introduction of the National Credit Act shortly before had immediately impacted on property transfers by almost halving the numbers. The winds of recession were blowing at the time and consumer confidence plummeted. What did shoot up, and actually peaked in the first quarter of 2008 at 20%, was emigration selling of residential property. This is measured by FNB in their regular nationwide estate agent surveys. It is interesting to review where we stand today relative to five years ago. 

From a general economic perspective 2012 was not a great year, and although GDP growth started off well, the 3^rd and 4^th quarters were particularly hard hit by disruptive industrial action across more than just the mining sector. Credit rating downgrades to our sovereign debt at the same time further impacted on business and investor confidence, and precipitated a weakening of the Rand exchange rate as concerns about South Africa’s future stability and prosperity were raised. Sentiment can weigh heavily on residential property owners and the decision to emigrate is often fueled by these negative news bulletins. A weaker Rand can impact home-owners indirectly by impacting on their disposable income. Imported goods, of which a typical home has many, become immediately more expensive. Through its impact on consumer price inflation, higher local prices of imported goods, exert pressure on domestic interest rates, making the cost of home finance more expensive. 

The good news so far, is that there is no evidence as yet of higher rates of emigration selling. The measure of emigration selling in the 2^nd quarter of 2012 was 4% and this dropped to 3% for both the 3^rd and 4^th quarters of 2012. For the 2012 year as whole emigration-related home selling was estimated at 3.4% of total selling, down from 4.1% in 2011. This does not however mean that all is well at home. The relative situation, given a recession in Europe and uncertainty in most of the favoured destination countries for departing South Africans, indicates that the grass is not quite as green in the alternate options. Foreign home buyers in South Africa as a percentage of total buyers is currently estimated at 3.5% as at the 4^th quarter of 2012. The one area that has seen steady growth is the percentage of foreign buyers from other African countries. Buyers of South African residential properties originating from the African continent, as a percentage of the total foreign buyers, is estimated at 22% as at the 4^th quarter of 2012. This is an easy statistic to believe when considering the increasing number of enquiries we deal with in Ballito from buyers north of our borders.

(Author: Andreas Wassenaar, published in The Bugle, 20th Feb 2013)

Vanishing Domestic Staff Accommodation (The Bugle)

Whatever happened to the domestic staff quarters in residential properties?  As realtors we have noted the distinct absence of live-in staff accommodation across many price categories of the residential property market. The institute of Race Relations recently published estimates of the number of people employed as domestic workers in South Africa since 2001 using Stats SA survey data. It shows that there were 1,288 million workers employed as at 2006, following the economic boom years, which had increased the numbers from 1,188 million in 2001, but that by 2012 the number had dropped to 1,153 million. This is despite the number of homes increasing significantly over this decade. FNB recently published an insightful analysis of this issue and provided four reasons why we have seen this relative decline in the employment of domestic workers by households when allocating the typical household budget on overall expenditure relating to the business of owning and running a home.

Firstly, we have witnessed a fundamental change in property characteristics. Properties have become increasingly smaller. The percentage of homes built with domestic worker’s quarters has declined from a peak of 57,7% in the 1955-59 period to 14,3% in the period 2010 to date. The average size of full title stands has declined from 1,171 sqm in the 1975-79 period to 506 sqm in the period 2010 to date. In addition to the average erven sizes shrinking by more than half, there are a greater number of sectional title homes in the market. The average size of built home has also declined from 212 sqm in the 1975-79 period to 143 sqm for the period 2010 to date. Smaller homes mean less area requiring maintenance and upkeep. As designs have been rationalized over time, the staff rooms became the obvious casualty. 

Secondly, the “crowding out effect” is used to explain the shift in spending allocation by households on items regarded as more essential than domestic worker services. Four major and measured household expenditure categories, namely Health Products & Services, Education, Household Fuel and Power and Transport & Communication, have increased their share of nominal consumer spend from 10,6% in 1970 to 16,6% in 1990 and further to 25,2% by 2011. With households shifting their spend to these items, something else has to go. 

Thirdly, there is a substitution effect in spending more on relatively cheaper and steadily improving household appliances aimed at making household tasks, from cleaning to food preparation, easier. While the cost of domestic staff wages have continued to increase above the long-term consumer price inflation, the highly competitive East Asian labour forces have been producing household appliances for us to use domestically at ever decreasing prices. 

Fourthly, there is a fundamental shift in long-term changes in consumer tastes. Stats SA measures exponential growth in certain categories it measures such as “Clothing and Footwear”, and “Recreation, Entertainment and Culture”. Modern day households are spending proportionately more on enjoyment and looking good. Convenience has become a factor in our daily lives.  After a busy day, you may head off to a gym session and then pick up a Woolworths meal on your way home to your 140 sqm sectional title apartment, where you only need a cleaning service once or twice a week to give the unit a “once over”.

(Author: Andreas Wassenaar, published in The Bugle, 13 Feb 2013)

7 Key Points to Securing a Sale (The Bugle)

The current Buyer’s Market in residential properties provides wonderful choice and aggressive pricing for buyers. The sellers, faced with extensive competition from other alternate options, have to do everything they possibly can to present their homes in the best possible light and thereby improve the sell-ability. Well just how can you do this?  As property professionals we see the same mistakes being made over and over again by sellers, which impacts directly on the pricing achieved for their property or even being able to get to the point of an offer. There are no guarantees, but by considering the seven key points below, and applying the recommendations, you will give yourself the best possible chance of securing a sale.

(1) First Impressions Count: As Gary Player is famously quoted as saying, you only get one chance to make a first impression. The sense of arrival provided by your property, even before a prospective buyer walks through the front door, is often referred to as its “curb appeal” and is very important to shaping a visitor’s perception. Presentation is essential. Ensure that the garden or landscaping is neat and tidy, manicured and inviting. Remove all obstacles and repair or replace anything that could be distracting. Broken roof tiles, loose gutters, cracked paving tiles, poorly maintained garage doors or driveways can be distracting and need to be repaired prior to your first showing.

(2) Maintain Neutrality: Extreme colours or themed rooms may limit your market. Neutral colour schemes on the walls and floors provide the buyer with a blank canvass to put their own signature on.

(3) Less is More: Furnished homes can, under certain circumstances, be an advantage, but a cluttered home can have a very negative impact. Remove excess furniture, clean out garages, neaten studies and clean out cupboards.

(4) Lighten Up: Light and bright interiors sell. Often older homes may have heavy curtaining. Do everything you can to make sure the home is as light as possible. If natural sunlight is limited, ensure the lighting is new and bright. For viewings ensure that every light is turned on. Make sure your bathrooms are well lit and the bedside lamps actually work.

(5) Repairs First: Invest time and effort into going through every room in the home and repairing everything. Door and window handles, garden gates, balustrading, built in cupboards, tiles, and air-conditioners all require regular maintenance and repairs. Get it all done. Replace worn items with new. Repainting a home internally and externally prior to listing it for sale is singularly the best investment you can make.

(6) Pay Attention to Detail: Review everything from the perspective of a buyer. Worn light switches are easily replaced with new. Bathrooms are to be spotless. Remove old silicone strips and replace with fresh new white beads. Shower floor and doors are to be immaculate. Glass hobs and extractor fans should be as good as new.

(7) New House Smell: Avoid everything that could provide strong odours, including items that relate to cooking or pets in the home. Smell is a very powerful sense. Use it to your advantage by including fragrant scents in the rooms and cupboards.

Once you have prepared your home for sale, select your estate agency of choice, and work together with them to facilitate viewings as far as possible.

(Author: Andreas Wassenaar, published in The Bugle, 6 Feb 2013)

Putting my money where my mouth is (The Ballito Mag)

When it comes to property investment as an asset class I thought it might be time to put my money where my mouth is. Following Warren Buffet’s advise of only holding investments which you can understand and which you are willing to hold for an extended period of time and which provide an acceptable initial yield, I searched for a property investment which I believed was undervalued, provided at least an 8% gross initial yield, with a strong tenancy demand and significant upside capital growth potential. At the same time the investment would have to fall within my affordability range (R1,2m) and provide the opportunity to raise mortgage debt finance against the asset thereby leveraging the investment. The beauty of a soft sales market is that the current lower prices provide ideal buying conditions and an opportunity for higher achievable initial yields, which will grow over time.

Any investment in real estate must always be compared to the next best property investment. I like to use the listed South African property sector as this benchmark. Listed property investments on the JSE have done well over the past five years as measured by total compounded growth of the shares, with 14 of the top 100 companies over this period being listed property companies. Resilient Property Income Fund was the top performer over five years within the property sector with a compounded growth of 21.2 percent. This then represents the relatively low risk benchmark yield to compare any other property investment to. Growthpoint, which is South Africa’s largest listed property fund and the only property company to be represented in the Top 40 All Share Index, ranked 14^th in performance of the Top 40 Index companies over five years by delivering compound growth of 17.82 percent. Over the twelve months to October 2012 the best performing asset class was listed property, which delivered total returns of 28.3 percent compared with cash at 5.61 percent, SA Bonds at 13.22 percent and SA Equities at 18.59 percent.

The question is then whether my investment in a residential property along the Dolphin Coast could potentially outperform the listed properties on the JSE and what is the gross initial rental yield I can expect? Tenant Profile Network (TPN), which has an excellent database of rental property performance, and FNB, which has excellent data on property sales prices, collaborated to produce the FNB-TPN National Average Gross Yield on Residential Rental Properties data set. This shows that the low point in average rental yields at 6,65% was reach in December 2006, as property prices rocketed, and then started to increase steadily as property prices dropped. The average national rental yield is currently 8,58% and this then can be used as a benchmark to aim for.

On an investment of R1,2m I therefore need to achieve a gross initial rental yield of R8,500 p.m. to give me a 8,5% yield. I satisfied myself that the benchmark initial gross yield is achievable. The question of expected performance over time is the uncertain area. By buying low I put myself in the best possible position to realize the highest level of capital growth achievable. By considering the fundamentals of major migration to the Dolphin Coast from the greater Durban area (because of the Airport moving to La Mercy in 2010) and from the Gauteng and Pretoria areas for lifestyle reasons, there is every indication rentals will continue to be bid upwards due to limited supply. Furthermore by buying in a secure gated environment that has potentially been undervalued in recent years, I am betting on an imminent change and the beginning of solid capital growth in certain properties. I found the ideal investment property and have bought it. There are others, and the smart money is moving in that direction.

(Author: Andreas Wassenaar, published in The Ballito Mag, Feb 2013)