Can Brazil and South Africa Lead Global House Prices? (The Bugle)

What do Brazil and South Africa have in common, apart from being host nations of the FIFA World Cup? According to leading global ratings agency, Fitch, South Africa and Brazil are expected to lead the residential house price rises for 2014. In their published report, the Global Housing and Mortgage Outlook, they examined 17 countries and at that stage predicted average nominal house price growth of around 6% for Brazil and South Africa. Globally Fitch regards Germany, the UK, Ireland and Portugal as having an improved outlook, while Spain, Greece, Italy and the Netherlands are still having a tough time. Interestingly according to Fitch the expected peak to trough decline in Dutch house prices is 25%, not too far below the dramatic 30% decline in Spain since the onset of the financial crisis. The house price index for Greece (as expected) has had the worst decline at 42%. Australian capital cities experienced strong growth over the past two years as demand exceeds supply. Fitch expected Australian house prices to grow by 4% on average in 2014. The US housing market has recovered strongly and Fitch now report that their Sustainable Home Price model indicates that national US home prices are approximately 15% overvalued in real terms. For Canada, Fitch are indicating a 20% overvaluation and for the UK a 15% overvaluation.

We do have marginal variations in our local house price growth measurement depending on how it is measured. As an example FNB’s house price index is currently showing year-on-year growth of 7,8% while ABSA’s most recently published house price index report indicates growth rates of 8,2% for small homes (80 – 140 sqm), 6,4% for medium sized homes (141 – 220 sqm) and 7,9% for large homes (221 – 400 sqm). The Fitch report did however warn that expected interest rate increases at home could temper further price increases and subdue demand for mortgages. This we already know. Fortunately so far this year the actual interest rate increase has been limited to a single 0,5% increase from 8,5% to 9%. ABSA have indicated that they expect a further 0,5% increase in interest rates in September of this year. Our Rand to US Dollar exchange rate peaked in February 2014 at an average rate of R11.12 to the Dollar. Since then it has improved and currently averaging R10.68. The idea of a consistently depreciating Rand has not as yet materialized which has provided some relief from further cost-push factors on our local inflation rate. The first quarter of 2014 saw our real gross domestic product (GDP) contract by 0,6%. A recession is defined by two subsequent quarters of negative GDP growth. Our economy was therefore on the brink of recession. The growth figures for the second quarter are not out as yet, but in a statement of the obvious our new Finance Minister, Nhlanhla Nene, was quoted on Bloomberg as saying we would probably miss our 2,7% growth target for 2014. Barclays Research is predicting a final GDP growth rate for 2014 of 1,4%.  With depressed national economic growth figures, what is an astute property investor to do? Buy high yielding rental properties at great prices.

Published in The Bugle 9th July 2014, Author: Andreas Wassenaar

Buy-to-Let: 5 Key Consideratons (The Bugle)

A recent article on Property24 about the Buy-to-Let investment option as an alternate to traditional retirement saving vehicles caught my attention. The on-line responses from members of the public ranged from enthusiastic to negative. As a buy-to-let investor I regard it as an essential part of any long term saving strategy. As with all savings vehicles, the earlier you start in your career the better. Property investment should be seen as a long term strategy and as with most other asset classes can be cyclical by nature which means that timing the initial investment will remain an important aspect in determining your eventual yield and return. For those considering a buy-to-let strategy here are the 5 key considerations to get you started:

1.   Planning: It is important to have good legal and accounting advise to ensure the correct vehicle is chosen to acquire the properties. Capital Gains Tax and Estate Duty are significant considerations to take into account. I decided on a trust to acquire long-term investment properties, which is excellent for estate planning but not as tax efficient for capital gains tax. Laws are also subject to change and this may tip the balance in favour of one vehicle rather than another.

2.   Research your market: It is essential to have a clear understanding of pricing and the property market cycle of the market you are looking to buy into. I have kept my investments local and close as this is what I understand. Others have invested further afield such as London, Sydney or Florida. This can be good as a Rand hedge although the capital cost of entry may be prohibitive.

3.  Decide on how to finance: The significant advantage of property investments is that mortgage finance is readily available meaning that you can leverage your investment and use the bond as an excellent savings tool. The amount of mortgage finance to use on any property should be carefully considered – associated costs should first be deducted from your gross rental before finance costs are factored in. Ideally you want to end with a paid off portfolio of buy-to-let properties providing you a passive monthly income.

4.   Consider all additional costs: Property transaction fees can be high as transfer duty is payable on every purchase. The case for investing in lower value, high yielding properties is strengthened when you consider the sliding scale of transfer duty below the R1,5m level. It is only above R1,5m that transfer duty is a flat 8%. Up to R600,000 zero is payable, only 3% from R600,000 to R1m and only 5% from R1m to R1,5m. My perfect price range for a buy-to-let opportunity is therefore R1m. The other major monthly costs are Body Corporate and Estate levies, Municipal Rates and repairs and maintenance. When well managed and considered as part of the overall investment cost, these items need not be a deterrent to a successful buy-to-let strategy.

5. What property type is best? Tenant Profile Network have published detailed research on tenant behavior and shown that the R7,000 to R12,000 rental per month range is represented by the most reliable tenant group. Properties offering a high initial yield (a gross 8% or higher would be considered good) and within a high rental demand area are ideal. Location is always the critical factor as it equals demand.

Published in The Bugle, 25 June 2014: Author: Andreas Wassenaar