Property is the ideal long-term investment and it serves as security
The buildings wear out the quickest, in anything from 75 years (a typical house) to 5 000 years (Egypt's pyramids). The land and the title deeds can last forever. That's why property or real estate is the ideal long-term investment.
Each property is unique and can't be moved. It becomes more useful as the city and population grow around it, and people then pay a premium it. But if activity declines, demand for property drops and so does rent or the price users pay. This happens when people desert country towns for the cities, or when urban management collapses (as in central Johannesburg in the 1990s), or when a population declines - as Europe's is expected to (by 50m) over the next 50 years.
Property produces steady, predictable and often growing income. It needs less management than a business. Though you have to collect rent, maintain the building and find a new tenant when a lease ends, clever investors get their tenants to do most of the work. Pension funds are big investors in property. They use its predictable income stream as a proxy for the interest income stream, because it has the same qualities as compounding interest - possibly the least-understood quality of property.
SA's most successful property investor is probably Donald Gordon, a great believer in the power of compound interest and the founder of insurance giant Liberty Life and UK-based property fund Liberty International. Gordon was patient and could say "no" to opportunities. He took his time, making it his servant, not his master. His property portfolio will soon be worth R10bn, with annual income of R275m.
Banks love property owners and lend them lots of money. At about R650bn in SA, it is their biggest lending business. Each property has use rights, granted by the municipality, that influence its value. The lowest-value use right is open space; the most valuable is a mix of uses around a large shopping centre. One of the risks of owning property is that governments can take it away from you, through expropriation. But in a constitutional democracy like SA, you can expect to be paid market value.
A drawback is that the property market is inefficient. You can choose between 430 companies listed on the JSE, with hundreds of experts on each of them. But there are more than 12m residential properties and about 1m commercial properties in SA, with just a handful of economists and journalists talking about them in the most general terms. Market information is poor.
Property can also be illiquid, traditionally its greatest investment weakness. You can't cash in your property overnight. It can take a year or more to sell a property. But that's changing. Some smart property men in the US bundled a portfolio of properties together and listed them on the New York stock exchange as real estate investment trusts (Reits). Property thus became liquid and overcame its greatest weakness. You can now buy into property funds around the world and sell out of them as you can with any other listed investment.
There is now a historic opportunity for investors in SA property. In the past, the private property investment market was severely damaged by a convergence of factors: economic sanctions against apartheid, strict exchange control, the 1973 oil crisis and resulting inflation, and the flight from local political risk. That market is only now recovering. Despite house prices more than doubling in the past six years, they are still catching up with international norms. And commercial property has just started its recovery.
This recovery will take until about 2012, when house prices, offices rents and building costs in Johannesburg, for instance, will have caught up with those in Madrid, Buenos Aires and Perth. Residential property is the biggest asset class in the world, the main source of wealth for ordinary people. Your home is not strictly an investment because you don't derive income from it (though you do save on rent over time). The value may go up enormously, but you would have to pay the same amount to replace it. But a home is a good store of value and can be used as security for other investments. The most popular residential investment is buy-to-let flats, the fastest-growing investment in the world.
Factories and warehouses are the simplest commercial property investment, with the lowest-cost land and buildings and the lowest rent. Road and rail access and visibility are important. Shops are usually the most desirable commercial investment. They are very sensitive to location. The tenant usually pays to fit out a shop, which makes management easy. But big shopping malls are complex investments. Offices, the most common commercial investment, need more management than factories because the landlord must usually fit them out each time a tenant is signed. Hotels, leisure, agricultural and speciality properties are for niche experts.
There are four kinds of listed fund on the JSE: Property unit trusts, regulated by the Financial Services Board, are the least risky. Payments are taxed;
Property loan stocks are companies structured to pay investors mainly in the form of interest, which has some tax advantages. These are popular with entrepreneurial fund managers because they have less regulation; Real estate companies like Liberty International and Sable. These companies pay dividends; and Unit trusts that invest in listed property funds. This is the simplest form of property investment.
By its nature, property is a local investment. But devices such as Reits are making it global. About US$600bn (R4,5 trillion) will be invested across borders this year, 60 times more than 10 years ago. The wave will hit SA in a few years.
Article by: Ian Fife - Financial Mail - from: www.eprop.co.za