Property Demand Exceeds Supply

Property Demand Exceeds Supply

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According to SA Commercial Property News, the average growth in residential property over the past decade has been in the region of 23% a year, surpassing equity returns of about 17%.

However, is residential property fairly priced? In 2012 property economist Erwin Roode didn’t think so, stating that property prices were overvalued by at least 25%, based on long-term prices from 1967 to 2011.

FNB home loans strategist John Loos disagreed, saying that it would be more accurate to valuate properties only from 1995 onwards due to the political shifts that preceded it.

Jan le Roux, CEO of Leapfrog Property Group, points to May 2013 Absa House Price Indices, which revealed that nominal house prices grew by an annualised 11,1% in April. Real price growth, after adjusting for the effect of consumer price inflation was 5,2% in March.

As to whether equities or residential property offer the best value at the moment, Le Roux says that now is not the time to be buying over-priced stocks. And home prices? “There are fewer homes than there are people wanting them – so prices will inevitably continue to increase,” he says.

Related: The Rules of Property

 

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Cut the emotion

Jacques Fouche, CEO of IGrow Wealth Investments, says residential property may not necessarily be the best investment, but it certainly can be for someone who knows what he’s doing.

“There are a number of rules. The first is to gear and use other people’s money. The second is to be completely unemotional about the properties you buy.”

“The single biggest mistake people make when buying an investment property is to buy a home they would like to live in, such as a R10 million holiday home in Camps Bay. We recommend you rather buy an entry-level property in an up-and-coming area such as Kraaifontein, with good infrastructure and commercial activity,” says Fouche.

The two preconditions for buying a property are sustainable rental income and sustainable capital appreciation.

Fouche explains that the best returns are to be made from homes in the R0,4 million to R0,6 million bracket, usually sectional title, let to young families that do not yet have enough capital for a deposit, and therefore are forced to rent, yet earn R10 000 to R20 000 per month.

“The capital growth will also be higher than on a luxury property.”

Related: Start Early, Retire Rich

Make Informed decisions

The problem with residential property is having sufficient information, and for this reason Fouche recommends joining a club such as IGrow. On your own, it’s hit-and-miss. “By the time you read about an area in the newspapers, it’s too late to invest,” he says.

He claims that through these basic rules – and a good credit history – anyone can build up a property portfolio of hundreds of houses.

Fouche emphasises the attraction of security complexes, for which there is far higher demand than non-security complexes.

Eamonn Ryan
Before becoming a financial writer and freelance journalist in 1997, Eamonn Ryan was a legal adviser, company secretary and alternate director at listed company Cashbuild Limited from 1988 to 1997. Since becoming a financial writer, he has focused on the business and financial sectors, as well as personal finance, writing for Finweek, The Star Business Report, Sunday Times Business Times, Business Day, Mail & Guardian, Entrepreneur, Corporate Research Foundation (which brings out a series of books each year ranking SA’s best employers and best managers), as well as a host of once-off and annual publications such as ‘Enterprising Women’ and ‘Portfolio of Black Business’. He also writes media releases, inhouse magazines and sustainability or annual financial reports for various South African corporates and financial services groups, including the Ernst & Young annual M&A book.