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)