Doubling your money in 5 years
Want to turn R500 000 into R1m in 5 years? Property - particularly affordable housing - is the place to be.

That's according to those who are ploughing big money into bricks and mortar, like property developers. But even life assurers, who have an interest in promoting other asset classes and investments, are seeing the returns to be had in property.

On Tuesday, Old Mutual (JSE:OML) acknowledged that residential property is being increasingly favoured over savings' products - and sent out the message that it's not a bad thing.

Companies like Old Mutual earn vast sums from products like endowments, so it's not in their direct interests or those of the intermediaries who ply their products, to highlight the benefits of residential property investment.

Paul Hanratty, managing director of Old Mutual SA, said: "Residential property has been a good investment and savings vehicle over the last decade." This is thanks to the falling interest rates.

In addition, residential property "remains one of the foundations for wealth creation around the world today", said Hanratty.

He said the growth flows into residential property and other non-traditional financial channels, like savings clubs, increased from 13% to 18% of total adjusted savings between 1996 and 2000.

There is concern that South Africans have been taking up too much credit, but Hanratty pointed out that "consumers are not necessarily profligate as most credit extension is on residential property (housing)".

"This is evident from the fact that an increasing proportion of after-tax income is now servicing mortgage debt," he said.

Although there is concern in some quarters that property ownership is out-of-reach for many, there is stock available from R250 000 to R700 000, with finance provided by big four banks. And this stock, it is predicted, is set to double in value by 2012.

RBA Housing chief executive David Wentzel said he expects the appetite for residential property to continue, particularly for entry-level units.

Property prices are expected to rise by about 15-20% a year in this section of the market.

He said the black middle class is expected to spend money getting on to the property ladder.

Rental income from houses classified as affordable housing is also appealing from investors' perspective. According to Wentzel, whose company expects to build at about 1 000 units for this market this year, an income of about 0,8% to 0,9% of the value of the property, per month, is the norm.

That is significantly higher than more affluent areas like Sandton, where you could expect about 0,6%/month, he said.

As with any rental property, tenant management is an issue.

Currently about R500 000 will get you a 75m² three bedroom, two bathroom house with a lounge and kitchen in Main Reef Village, on the West Rand, said Wentzel.

The affordable housing market starts at around R250 000, and is largely in areas adjacent to so-called townships.

RBA is set to list on AltX next month.

Some property economists are also optimistic about the longer-term price picture for residential property.

Although the market appears to have hit a speed wobble this year, thanks to rising interest rates and the implementation of the National Credit Act, the longer-term trend is up.

Absa senior property economist Jacques du Toit said that generally owners can work on a capital gain of about 80% over the next five years. The increase depends on area and where the property is currently situated on the price spectrum. More expensive properties may rise in price at a slower pace than those in the higher-demand, lower-priced segment.

Absa's forecasts suggest that the average house price, which is not far off R930 000 now, will nudge R1,4m by 2010.

The bottom of the house price cycle is expected in early 2008, followed by a "gradual strengthening into higher double-digit price inflation" as 2010 approaches, according to John Loos, property strategist of FNB Commercial Property Finance.

Article by: Jackie Cameron - www.moneyweb.co.za