Investing in property
Is property the investment for me?
Investing in property
Property is likely the most widely recognised asset class but it’s crucial to separate the idea of investing in property from that of buying a property. On the one hand, you have investment in property and on the other, an investment in a lifestyle asset.
One of the key factors that makes this class so exciting is the scale of differentiation, as investors have a choice between residential property, commercial and industrial, to name a few.
Property is useful as a hedge against inflation, seeing that property portfolios tend to increase their exposure to rentals as inflation rises, feeding into the overall portfolio and increasing dividend yields.
Property funds listed on the Johannesburg Stock Exchange (JSE) are managed by teams of investment professionals who invest using the advantage of scale and aggregation. It provides investors access to highly competent management that make the tricky investment decisions for you, typically focussing on property in the retail space, including strip malls, smaller shopping centres, offices and industrial spaces.
The two cornerstones of investing are to make a capital return and to make an annualised return on the investment, and in property, a significant portion of the return may be in the form of a taxable distribution.
Diversify your property portfolio to balance the risks. Consider how the office space sector was brought to a standstill in the wake of Covid-19 restrictions.
Consider the various subsections in the property sector and also look at fund performances before investing.
South Africa has a large listed property sector that is diversified across the primary retail, office, and industrial sectors. Investors also have access to offshore assets through local listed funds.
Unlike an investment in equity, where you are paid a dividend and incur a dividend withholding tax, in listed property, an investor is paid a distribution that is fully taxable. An investment structure called a real estate investment trust (REIT) makes it possible to pay shareholders without the corporation or the trust incurring any tax.
REITs are generally split between debt and equity in the financing of property transactions, which magnifies the return that gets passed to shareholders.
Cities and towns are continually evolving. When buying residential property, for example, consider whether the property will be in demand in future.
A residential property is a long-term investment that requires considerable time to liquidate. Question whether it’s perhaps a better idea to rent and rather focus your investments on listed property.
Property investment is a diverse and large market that requires expertise to navigate. For investors new to this market, it’s easier to invest in a listed structure where an experienced team can make the decisions on your behalf. Listed property also sidesteps the charges and tenant risks that come with owning a physical property.
Residential property is unique in that it is one of the few asset classes that is commonly invested in using leverage, which is an important concept to consider as part of your investing strategy.
With leverage, you are borrowing money from the bank to purchase a larger property than you would otherwise be able to afford with cash. This increases your investment performance if the value of the property increases, but also brings with it the risk of defaulting on your loan and losing the property if you fail to make interest payments. Another risk is "negative equity" if the property loses value, leaving you owing more than the value of your property.
Generally speaking, home loans are the most commonly accessed source of investment leverage, and often times are even supported by governments in a bid to support home ownership.
- Property is one of the oldest asset classes and will always be relevant
- It is important to divorce living in a property for shelter and security from investing in property
- It is cheaper to invest in listed property, such as retail and office space (REIT) and there’s no exit risk, as when buying a property
- Diversification in terms of location and subsections is important
- The main risks are liquidity, inflation, location and capital flight
- Property is not a cornerstone of a financial portfolio, but it can help with diversification.
- Residential property is likely to be the only investment you can make using leverage