When it comes to residential real estate investments, “unsexy is likely the new sexy” – in other words, stick with a simple three-bedroom full-title home or two-bedroom cluster unit.
In the current economic climate, the smarter choice may be not to invest in real estate at all.
FNB real estate economist John Loos generally says that while there will always be a bargain property or two to buy, the investment market is “not great” right now. And it will be a while before that changes.
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The current environment for real estate investments is “at best mediocre”.
“There are still insufficient signs of meaningful structural reform in the economy to expect higher economic growth rates. It’s not really an environment that will light up the real estate market even with very low interest rates.
“Yes, the demand was by leaps and bounds, but that is decreasing. The South African Reserve Bank indicates that the next rate hikes will rise and that this will likely cool the market further. “
With the housing market cooling in the near future, interest rate hikes likely, albeit gradually, and an economy that is not really growing, real estate investors shouldn’t expect strong returns anytime soon.
Paul Stevens, CEO of Just Property, agrees somewhat. Industry commentators are seeing the first signs of a weakening of the housing sales market and an oversupply of vacancies in the rental sector, which is depressing rents.
“However, these are broad trends and there are many opportunities for savvy real estate investors.”
While there will be some instances of investors hitting stress bargains and making money, Loos believes property values will generally correct and decline in the years to come.
“The ideal time to buy is at the lower end of the big cycle, and in hindsight the last big buying opportunity was likely around 1998, when interest rates were astronomical and real estate values were relatively low. I think we are a little way away from that.
“It’s not the big buying opportunity of the late 1990s, after which there was a massive real estate boom and many people achieved a few hundred percent capital growth.”
OPPORTUNITIES
Loos advises those who insist on taking advantage of the low interest rates to invest in residential property in order to stay away from luxury real estate.
“In a tough economic environment, it’s all about affordability. There are people who want to live in suburbs that they think are good, but in those areas they want more affordable housing. So it is the non-sexy, non-luxurious, undercapitalized homes that are likely to perform and are in high demand.
“It’s the very simple, primary homes that are in high demand – simple, safe, three-bedroom family homes and cluster homes with two or even three bedrooms,” he says.
Stevens adds that mixed-use developments are becoming increasingly sought-after and valuable, especially in sprawling cities like Johannesburg and Cape Town, where commuting can be time-consuming and difficult.
“Houses near transportation hubs are also likely to offer exceptional returns.”
CHALLENGES
However, the home purchase market is under pressure, especially in the rental area below 7000 Ren per month, a pressure that will “last for a while”.
“The poor creditworthiness of most tenants is also a major problem and is not quickly resolved.”
Based on this, Loos says that it is “crucial” to manage and monitor tenants and to keep good tenants.
“It’s a challenging environment for landlords and they also need to consider operating costs. Eskom continues to raise its electricity tariffs well above the inflation rate, so municipalities and other energy providers are doing something similar. You need to do your homework as churches differ in approach.
“If a property is in a dysfunctional community, with rates and tariffs rising well above inflation, this is probably not the place you want to be excited about … this is where people want to live.”
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RETURNS
Investors should always make sure their returns are in line with their investment goals, says Stevens, explaining that they should base their return on investment on these questions:
• Which purchasing costs do I have to take into account?
• What are the running costs?
• For which eventualities do I have to take precautions?
He adds, “Real estate investing is a long game – not something you do in the short term.
“It’s hard to imagine what the future will look like, let alone bet on it. This is currently reflected in market sentiment starting to show restraint – a wait and see approach – as the socio-economic and political impact of the pandemic unfolds. “
Loos says rental returns on hire purchase are still relatively low, financial times are difficult, and tenants are not doing well. This means that this market is “not very attractive” right now.