So maintains Elwyn Schenk, Pam Golding Properties.
“Interestingly, the residential market is increasingly beginning to be considered as a mainstream asset class to the extent that in the UK for the first time it has been included in the IPD all property index, and recognised as a relatively low risk sector.
“The debate about equities vs property as an investment medium is ongoing - and to a large extent academic as all balanced portfolios will include a variety of asset classes, depending on the investor’s own appetite for risk. Both equities and property are real assets and so over time should rise in line with nominal GDP. History has shown, however that equities have been less stable with a higher degree of volatility.”
Schenk points out that with property, people always need houses in which to live, whether owned or rented, and generally a property downturn is more likely to be absorbed than a stock market plunge. Often, however, equities and property are non-correlated, hence the added case for investors to have a balanced portfolio across asset classes. What does set property apart from equities is that it is a finite resource, which gives it a propensity to increase in value over time, almost irrespective of extraneous factors.
He says an added advantage for the investor is that property can be geared, up to 100 percent in some instances, which, even in a modestly escalating market, can make for excellent returns. This also means that the investor can enter the market with a proportionally low deposit (NCA - National Credit Act - guidelines permitting).
“For the average investor seeking to augment his/her pension with a relatively inflation-proof income, residential property makes a great deal of sense. Take the example of a one-bedroom apartment purchased in Braamfontein for R450 000, generating a gross rental of R4 000 per month - this would produce an ungeared yield, after rates and levies, of around eight and a half percent. While this may appear low at first sight, one needs to add to this the capital appreciation of the property, which over time should comfortably outpace inflation. A comparable example is the dividend yield on equities, which is currently averaging 2.3 percent (reference JSE ALSI) - again in expectation of earnings and capital growth.
“From our experience informed investors are re-entering the market, given that in certain areas property values are at a discount to replacement costs, and the shortage of rental stock is exerting upward pressure on rentals. Couple this with a low interest rate regime and you have a formula for an excellent investment environment, especially after taking into account the tax deductibility of costs incurred relative to the rented property e.g. bond interest, levies and repair costs.”
Schenk says many wise long-term investors have accumulated several properties over time through re-gearing of an already owned property to purchase another. With the process being repeated the property investor - on retirement - will benefit from an inflation proof income from several fully paid up properties. Experience has shown that the optimal investments are one and two bedroom apartments in good positions where demand is strong, normally among singles or young families.
He adds: “As always position is key; always buy your investment property in a relatively sought after area and avoid the trap of ‘cheap’. It is also good practice to use the services of a reputable estate agent to source a suitable property and find and manage a reliable tenant.
“While no asset class is risk free, property over the decades has proven to be a safe haven for the cautious investor, especially relative to other assets which can have a much greater degree of volatility. A good component of residential property should be part of every serious investor’s portfolio,” says Schenk
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