The conventional wisdom used to be, buy an apartment, live in it a few years and then keep it forever as your first property investment. As you got older and earned more income, you would be encouraged to add more buy-to-let investments to the mix.
“Passive income” is the dream, isn’t it?
Anyone who has actually been a landlord, or who has friends who are landlords, will know that the word “passive” is working hard here (pun intended). Things break, tenants don’t pay and every lease renewal is a stress point while the bond payments go off in the background.
If you’re getting proper capital gains on the property, then it can still be a worthwhile exercise. Cape Town is the obvious example of this, especially if you were lucky enough to own property in the areas that have rapidly increased in value. But in places such as Joburg, that simply hasn’t happened. The apartment I lived in more than 12 years ago in Lonehill, Fourways, is worth exactly the same today as it was back then.
This is why the conventional wisdom isn’t so conventional any more. People have become wise to the risks of buy-to-let investing. Social media has contributed to this as stories of disastrous, impossible-to-evict tenants travel far and wide.
To be fair to the residential property market, listed property hasn’t done much better over that period. The reasons have less to do with urban decay and more to do with the risks you take when buying a bubble.
A decade ago, the JSE property index was completely overblown. These were hype stocks, even though property funds typically offer a return only somewhere between pure equity and government bonds. Real estate investment trusts (Reits) are supposed to be solid choices for pension funds, not the kind of stocks your Uber driver would give you as a hot tip.
But in the depths of the “lost decade” on the JSE, these funds were a way for investors to get access to offshore assets in a way that was perceived to be low risk. After all, isn’t it easier to buy offshore properties than to acquire operating businesses?
The market may be concerned about inflation and interest rates, and with good reason, but the Reits are generally in excellent health with manageable loan-to-value ratios
In theory, that sounds reasonable. But in practice, buying a property fund at a premium to book value isn’t a smart way to keep your capital in one piece. The Reits kept raising capital at high share prices and the market just kept throwing money at them.
As is usually the case when “nothing can go wrong” with a strategy, something did go wrong. A lot of things went wrong, actually, not least of all Brexit and the impact it had on property funds that had targeted the UK for hard currency earnings. Those earnings turned out to be very hard indeed.
Naturally, Covid was the final straw. If you’re staying home and staying safe, it means that you aren’t visiting shopping centres or going to the office. This isn’t good news for property funds.
Today, a property ETF such as the Satrix Property ETF has doubled in value since the Covid lows. But it still hasn’t regained the levels seen at the start of 2020, showing just how severe the knock to the property sector was.
The conflict in Iran triggered a nasty sell-off in the sector. The 10-year bond yield in South Africa has jumped from 8% to around 9.2%, putting pressure on the property sector and decreasing the value of this ETF by around 13%. Helpfully, this has coincided with a reload of the tax-free savings account allowance for the year. You can see where I’m going with this …
The market may be concerned about inflation and interest rates, and with good reason, but the Reits are generally in excellent health with manageable loan-to-value ratios. Many lessons have been learnt by executives and investors alike, with a far more measured approach to offshore exposure.
Locally, retail properties are performing well, and the logistics sector has offered strong growth opportunities. Even the office sector is showing signs of bottoming out, with funds having offloaded lower-quality properties in favour of premium and A-grade space that can attract decent rentals.
In my tax-free savings account, I effectively transform myself into a pension fund by earning Reit distributions that aren’t taxable. I have a liquid investment with diversified exposure. I never have to go change a lightbulb myself or evict a problematic tenant.
That’s the kind of passive income I can get behind.
