Have you considered investing in buy-to-let residential property? It is a solid asset class that delivers compelling returns in the long-term. Most people think about residential property as the house they live in. Whilst your primary property is an investment, it is a relatively poor performing investment compared to property that you buy to rent out.
Investing in residential property is relatively easy to understand as property is a physical asset constructed with brick and mortar versus the seemingly ethereal and complex nature of shares. This makes property an attractive option from a risk and return point of view. It offers both income return, in the form of rental income, as well as capital return, in the form of increased value over time.
Property performs more predictably and with far less volatility than, for example, the share market. The great power in property investment is leverage. Banks will far more readily lend you money against a property than any other asset class. With a relatively small deposit, the bank will help you reap the rewards of property investment.
As a simple example, assume you buy an apartment in the Gateway area for R700K and you put down a 10% deposit, or R70K. In 2014, home prices are expected to go up on average about 8%. Thus, the growth in the value of the property will be R700K x 8% = R56K in the first year. Given that you only put down R70K of your own money, your cash-on-cash return in the first year alone is effectively R56K/70K = 80%.
You will enjoy the capital growth on the full R700K value despite the fact that you only invested R70K of your own money. Over and above this capital return, you will enjoy an income return.
By comparison, if you had invested the same R70K in shares and, assuming they increased at the 2013 JSE average of about 20% for the year, your return would be R70K x 20% = R14K. Your cash-on-cash return would thus be 20%.
The cash-on-cash return of 80% for property compared to 20% for shares illustrates the power of leverage in generating wealth through property investment.
We have covered capital growth, but what exactly is income return? Income return, also commonly referred to as ‘yield’, is calculated as your annual rental income minus operating expenses (e.g. rates and levies) divided by the purchase price. To continue our example above, suppose the rent is R6,000 and rates and levies combined are R1,200. Then the income return or ‘yield’ would be (R6,000 – R1,200) x 12 / R700,000 = 8.2%.
Remember, that in our example, you have a bond with interest to pay. Therefore you will need to foot a small monthly shortfall for the first two years. But with annual increases in the rental, and a bond repayment that is consistent over time, unless the prime interest rate changes, the property will start generating positive cash flow within the first two years or so.
In the Umhlanga area, Gateway offers an ideal opportunity for prospective buy-to-let investors. The area boasts healthy capital appreciation and good yields driven by strong tenant demand.
We’ve all heard the old adage “Location, Location, Location” when considering the purchase of property. Whilst there is much truth to this statement, quality management of a location is increasingly becoming a determinant of property growth.
In 2007, Umhlanga Village was facing rising commercial vacancies attributed to growing urban decay and increased competition from the managed precinct on Umhlanga Ridge. This had the effect of severely impacting growth in commercial and residential property values in and around Umhlanga Village.
Fortunately for property owners, businesses and holiday-makers alike, the Umhlanga Urban Improvement Precinct (UIP herinafter) has not only managed to stem this tide but it has also firmly re-established Umhlanga as one of the most desirable holiday destinations and property investment locations in the country.
The Umhlanga Promenade UIP was founded in 2003 by Southern Sun. In 2007, in response to urban decay in the Village, Brian Wright was appointed to establish the Village UIP. Today, Brian heads up both UIP’s, which are operationally managed as one precinct that includes four adjacent managed areas spanning Umhlanga Lagoon in the North to Eastmoor Crescent in the South.
The UIP has grown considerably over the past 6 years from a staff compliment of 5 people with a budget of R800,000 to over 70 staff members today with a budget of R7,5 million. This funding is 100% private and is provided by commercial and residential property owners in the area.
As Brian enthusiastically explains, public spaces need to be well managed in order for an area to flourish. By well managed, he means creating public environments that deliver high quality experiences. He believes that quality public spaces tell a story – that people care – and that this has a profound effect on protecting and enhancing the value of investment in an area.
One example of his philosophy of creating experiences can be seen in the Christmas lights soon to be erected in Chartwell Drive and Lighthouse Road at the entrance to the Village.
Broadly speaking, the UIP has a dual focus. Firstly, to provide services on the ground in the form of cleaning, maintenance and security with a strong focus on green area development. The UIP also serves as a go-to point for service requests whilst providing credible and relevant news feeds from advisories to events. The UIP works with the municipality to ensure that public services are being performed to the required standard and then fills in the gaps where necessary.
Secondly, the UIP is focused on lobbying the municipality for improvement in municipal services and investment in infrastructure. The organisation has embraced the municipality and its stature has grown as a solutions-focused organisation that, importantly, brings resources to the table.
Clearly, our beautiful promenade and burgeoning commercial hub is no serendipitous event and we owe much to the UIP team for its dedicated efforts in realizing its goal of providing a quality managed area in which we can live, work, play and invest!
So how have properties in the UIP precinct performed against the national average over the past 5 years? This is potentially an interesting mathematical exercise and one that can be deliberated upon for hours.
I pulled Deeds Office data for all sectional title units in Lagoon Drive, which have sold twice over the past 5 years (excluding outliers). By comparing each unit to its own prior sale price we get an accurate measure of growth and avoid the distorting effects of market composition.
The average price growth over the period for these units was 8.8% per annum. By comparison, the FNB Property Barometer report quotes national growth over the same period as 5.9% per annum. Thus the growth performance of properties in Lagoon Drive exceeded the national average by 49% per annum.
I strongly believe that the UIP is a significant contributor to the performance seen in this representative sample of properties. Thanks to its input, we enjoy a beautiful promenade, clean beaches and quality restaurants, which have been attracted to the area. These factors have a positive effect on the perception of the Village and thus on its property values.
In addition, the fact that there are developments and upgrades to the precinct worth more than R5bn, either in construction or in planning, is a clear indication of the confidence in the Umhlanga Village property market.
Clearly Umhlanga Village ticks all the checkboxes from a property investment point-of-view: Location, Location… Location Management!