Investors should hang onto their properties

The recent announcement by Absa Banks property analysts that they foresee a marked slowdown in the growth rate of most South African housing (the exception being homes in the affordable brackets) has, says Tony Clarke, MD of Rawson Properties, led to enquiries from a handful of Rawson’s buy-to-rent landlords – one or two of whom are now considering opting out.

“Those contemplating this course,” said Clarke, “tend to fall into two categories: they are either inexperienced investors who had hoped for a quick buck profit but who have never sat down and done their calculations, or they have at some stage been overenthusiastic and have overcommitted themselves - again, sometimes, as a result of not doing the basic arithmetic at the start.”

Right now, said Clarke, with interest rates at the lowest point seen in three decades, investors are not seeing such large chunks of their monthly bond payments being “chewed up”.

“This alone is a good reason for hanging in there, even if it causes some financial hardship,” he said. “Another reason is that if you sell now you could take a financial knock, especially if you bought in the last two years.”

The current market, says Clarke, still has to work through 12 to 18 months of poor trading conditions before prices in real terms reach the previously “normal” levels because the large number of bank assisted sales and bank repossessions have brought in an additional 30% of units onto the market. Many of these homes are temporarily available at 80% of their previous values.

“It has to be said,” added Clarke, “that the banks have by and large acted with restraint and really have done what they can to assist distressed bondholders – but the sheer volume of emergency sales has lowered sale prices fast and will continue to do so for the foreseeable future.”

If multi-unit investors do now find themselves in trouble, says Clarke, he advises them to sell one or two properties at the current low prices in the areas where returns are poor and use the capital acquired to lower their gearing on the better paying units – especially those bought in the last six to ten years.

Landlords, said Clarke, should in these tougher times hang onto all tenants who pay on time and look after their homes. This, he said, may well involve an outright cancellation of their rent increase for a year or doing a deal whereby, in return for no increases now, a higher increase will be accepted 12 to 24 months later.

Landlords, added Clarke, can improve their cash flow by stressing to the tenant the crucial importance of paying within seven days of the month end – and then arranging with their banks to pay their bond instalments on the 10th or 15th of each month.

“In difficult times the over-harsh landlord can be his own worst enemy: often we have seen a good regular paying tenant become a defaulter when forced to raise his rent 5 or 10%.”

As indicated, Clarke (who, it has to be said, has been shown over the years to be an accurate forecaster) thinks that the current low period in the property cycle will disappear in the next 12 to 18 months.

“The wise investor is the one who accepts and lives with these cycles. He is in property for the long run, sometimes even arranging to pass his property on to his children.

“A little patience – say, a wait of a few months – will see property returns once again in double digit figures.

“Try, therefore, to keep your portfolios intact – and, if you have the means, now is the time to increase them.”

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