Shock-Proof your property portfolio
During the last five years it has paid handsomely to be an optimist on both the JSE and the property market. Those that have had the utmost faith in the positive forces of our economy have gained tremendously.
However, according to Guy de la Porte of Bales Delaporte, Commercial Property Dealmakers, it may be time to become a little more conservative.
Over the last 13 years the South African economy has done little wrong in terms of managing any possible downturns. In early 1997, the SA economy was moving forward in a well-managed and stable manner. All of a sudden, global events took control and the crisis of 1997 was sparked by international loss of faith in emerging markets, initiated by events in the East. This saw South Africas interest rates peaking at 25,5% - a fact which makes many young, new property owners blood run cold.
Recovery took several years, until 2001, when again SA was humming along on a very positive growth path, when the events of September 11th trounced the world. This time interest rates went up to about 18% - a conservative jump compared to the last - and those sensitive to interest rates once again suffered.
As can be seen, since 1994, South Africa has merely been the pawn to broader worldwide events. It is now six years since we last had a global shock and the question is, does one take a conservative view and gear up for another shock of sorts, or does one keep going in the most optimistic manner possible?
Kees Bruggemans, Chief Economist of FNB, suggests that if we introduce mayhem into the world, it depends on the type of mayhem as to how it would affect us. If there were to be energy disruptions with oil prices rising to $120 or higher, coupled with slower global growth and stumbles in China, which would cause commodity prices generally to falter, and introduce much higher risk aversion globally, South Africa would find itself assaulted on three fronts.
Our oil imports and inflation would be higher, our commodity exports would suffer and our capital inflows could be much less. All of this implies a sharply lowered Rand, with CPIX inflation in the 7%-9% range for awhile, with prime interest rate rising to 14%-16%.
De la Porte suggests property investors should consider a middle path in order to be prudent. Having been a property broker for 20 years, I have seen the pain people go through when things get ugly. For this reason I naturally take a more conservative approach to property investments.
There are modern ways and means to remain substantially invested in the property market, but at the same time hedge out a large portion of ones risk. One can thus still share in future capital growth, but eliminate exposure to factors such as interest rates. I believe now is the time to take a little profit and to indeed shock-proof ones investment property portfolio.
Bruggemans view tends to agree with this, but also expresses the view that South Africa may still have another three good years ahead.
It is now up to individual property investors to decide whether they choose to believe that the economic fundamentals of the last few years will continue, or that now is the time to become a little more conservative and indeed put mechanisms in place to eliminate any possible future shocks that may threaten the increases in property values gained in the last few years, concludes de la Porte.
Article by Catherine Pate On behalf of Bales Delaporte: www.balesdelaporte.co.za