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A closer look at listed property and buy-to-let residential property investments.
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The year 2016 has seen volatile financial markets globally with the commodity cycle still in recovery mode, economic growth in many countries still faltering and the roller-coaster political landscape.

Arguably, investors cannot be blamed for their conservative appetite for risk as finding investment gems is increasingly becoming difficult when the immediate future looks uncertain.

At a time when equities, bond and currency markets are under pressure, market watchers continue to find value in real estate markets during tough times – whether hitching their  wagons to physical properties or listed property stocks.

On the latter, investors would be normally investing in a property company, which owns physical property assets and collects rental income from its tenants that can be distributed as dividends payouts.

“That’s why listed property is much more defensive than any other sector on the JSE,” said Stanlib’s head of listed property funds Keillen Ndlovu at the Liberty Retire Well Masterclass last week.

Although SA’s listed property sector did not initially pique the interest of many investors, who often had a bias toward equities, the sector has since courted a strong following.

Listed property firmly outperformed equities (JSE All Share Index), bonds (ten-year government bond) and cash over the past ten years in terms of total returns. This has since firmly entrenched the asset class as a bellwether.

The sector has also seen a flurry of JSE listings – from having only 20 property companies on the bourse five years ago to 44-odd companies that invest in student accommodation, shopping malls, office, industrial and residential properties.

Ndlovu said the listings have offered investors choice as SA’s property market has opened up to offshore markets, giving investors access to hard-currency earnings.

Underscoring this is figures from Stanlib which reveal that ten years ago the sector had no exposure to offshore markets and so far this year, 37% of earnings derive from markets including the UK, Australia, Central and Eastern Europe. “If you invest in some SA-focused companies, you are also getting exposure to offshore markets,” he explained.

Having listed property in your investment portfolio helps to boost returns. For example, Ndlovu’s figures show that if your portfolio is 60% invested in equities, 30% in bonds and 10% in cash over 15 years – you would have achieved a 13.7% annualised total return.

“If you add 5% of property exposure, you get a total annualised return of 14%. Add another 5%, you get 14.6% and add another 5% you get as much as 15% in total returns. But you have to focus more on the long-term.”

He believes that listed property allocations in an investment portfolio should be 10% to 20%. But this depends on your risk profile.

Despite SA’s worrying state of the economy and the pesky rand, SA’s listed property sector is achieving an average forward yield of 7% and property companies are expected to post inflation-beating dividend growth of 8% average for the next 12 months.

Investment property

Residential buy-to-let properties continue to be beset by humdrum rental growth and property returns that have dimmed the allure of owning a rental property as an investment.

Latest figures from credit bureau Tenant Profile Network (TPN) and FNB show a rise in buy-to-let rental yields since two years ago.

National gross rental yields (before the rental properties’ operating costs such as electricity, water, maintenance, rates and taxes are accounted for) marginally rose to 8.6% in the second quarter of 2016 from 8.5% in the first quarter.

Rental yields are a key metric for a rental property’s return on investment, expressed as rental income over costs associated with the property.

To make matters worse for landlords, the upkeep costs of a rental property continue to rise faster than rental growth, eroding returns.

Finding value in the rental market is fast-becoming area specific.  For example, if landlords are looking for better rental yields, TPN and FNB figures suggest that they might have better luck Johannesburg (9.51%) than in Cape Town (7.71%).

Despite tenants facing the sustained rise in living costs, interest rates, and unemployment, TPN MD Michelle Dickens said the national rental payments trend is still stable.

Dickens said 66% of tenants nationally and across all rental value brackets are paying rent on time and in full; 6% are in the seven-day grace period; 10% are paying their rent partially, and nearly 6% of tenants are not paying rent at all.

The best performing rental value bracket is the R3 000/month to R7 000/month bracket, which makes up 55% of the rental market share.  The below R3 000/month is performing badly due to affordability issues.

“Investment property is still bricks and mortar, and you are still having capital growth albeit it’s not great at the moment. But ultimately it’s about the management of that property,” she added.

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The Opulent Living Concept Store & Gallery has launched on Kloof Street in Cape Town.

 Much like the high streets of popular European cities, Kloof Street has become one of Cape Town’s most opulent_living_concept_store_and_gallerycelebrated design quarters, and the beautiful old building at No 24 has been remodelled under the expert guidance of top interior designer Sarah Ord. Renowned for her bold and cosmopolitan interiors, Ord’s designs for the Opulent Living Concept Store & Gallery features walls in striking emerald green, offset in places by rich sapphire blue. “It’s the perfect fit for our brand,” says Opulent Living co-founder, Barbara Lenhard. “I have always loved Sarah’s work, and we are so excited to have worked with her on this important project.”

The Opulent Living Concept Store & Gallery has opened its doors on the 1st of November 2016 and customers can expect to discover a range of exclusive items in various price ranges. These include handcrafted jewellery from ANPA, known for its custom-made contemporary designs, and the Legacy Collection, which uses pieces of the original fence from Robben Island prison.

Exquisitely crafted handbags from luxury ostrich leather house, Mvari, as well as colourful creations from the Italian-made Save My Bag range. Beautiful Taunina bears, each handmade and embroideopulent_living_concept_store_and_gallery_kloof_streetred by local women, will grace the shelves, too.

There’s also designer menswear from British fashion label Grays London, established in 1927, recently launched in South Africa, as well as the colourful women’s wear collection, Resort. A bespoke range of Opulent Living lifestyle products will be launched and customers will be treated to exquisite items. Works by prominent South African artists, Jean Doyle, Jimmy Law, Marieke Prinsloo, Richard Scott, Michaela Rinaldi and German-born wildlife art photographer, Klaus Tiedge, are currently on sale.

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The ratings agencies have been circling for months with many fearing a downgrading to junk status, and South Africa’s economic growth rate has been narrowed from 0.8% in February to 0.5%.

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It’s fair to say that South Africans are feeling the pressure of a struggling economy – something that’s set to continue into 2017 and beyond.

During his medium-budget address Minister Pravin Gordhan announced that additional taxes to the tune of  R43bn will be raised over the next two years, with R13bn being raised next year to bring the total tax increase to R28bn in 2017/2018. Whether these taxes will be in the form of company or personal taxes, sugar taxes or VAT remains to be confirmed, what is certain is that it will all feed down to households at some point.

“Admittedly Minister Gordhan has limited space to manoeuvre within the current framework and we support his call for a tightening of belts. That said, the proposed tax increases will certainly place the residential property market under further pressure”, believes Bruce Swain, MD of Leapfrog Property Group.

According to the FNB Property Barometer; “The housing market slowdown has become more broad-based, with a loss in quarter-on-quarter house price growth momentum across all 4 Major Metro Area Value Bands recently”. John Loos, FNB Household and Property Sector Strategist, attributes this to mounting financial constraints due to “house price inflation exceeding per capita income growth, rising interest rates, and growing concern amongst consumers about their economic and financial future in a very weak economy. As yet, though, there is not widespread financial stress”.

Advice to Home Owners and Buyers Alike

“At this point my advice to homeowners and buyers saving up to purchase a home is to assess their fixed costs – adjusting their budgets accordingly. It’s almost certain that utilities like water and electricity and petrol prices will increase over the next few months as well as the tax increases. As such it’s crucial for households to review their budgets to ensure that they’re able to cover the basics. It’s also critical to settle as much debt as possible to avoid further pressure on household finances”, says Swain.

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