Exiting costly property investments may pay off in the long term

In a property market that is unlikely to show appreciable growth in the short term, investors may want to consider exiting increasingly expensive properties and reinvesting in new markets that will come online in the near future.

This is the view of Rob Stefanutto, MD of Lew Geffen Sotheby’s International Realty, Atlantic Seaboard. “Although certain sellers continue to achieve record prices, this phenomenon is evident only in the top end of the market, which is driven by individuals who are in a position to ride out the negative effects of interest rate hikes. Investors that are more acutely impacted by the shifting market need to take a careful look at their risks,” explains Stefanutto.

Stefanutto warns sellers against holding out for unrealistic prices as buyers are now in a much stronger position to negotiate. “Investors should be careful not to get trapped in properties that can no longer deliver good returns. They may find themselves using more and more of their spare credit to fund their investments, making it increasingly difficult to capitalise on emerging opportunities,” he says.

By reinvesting in new markets that could have legs in the future, individuals can remove the immediate pressure from their households, whilst staying in the market. And as rental returns dwindle, less risky opportunities will pay off in the long term.

Stefanutto points out that a one bedroom property in the Cape Town CBD which cost R700 000 three years ago may be currently achieving a monthly rental of R5 000. Bond repayments on such a property would now cost in the region of R8 000 a month, with an additional R1 200 for levies. The result is a monthly shortfall of R4 200 or R50 000 over a year.

“If you look at an area in the Cape like Parklands, you will find significant rental demand. Investors could sell their one- bedroom CBD property for R1.5 million and utilising there profit made over the last few years to gear up other properties for instance buying a three bedroom, two bathroom, double garage property in Parklands for a little over R1 million, to be rented out at R4 000 per month. Risk can be reduced to R500 000, with a R5 500 monthly bond repayment. Rates on this property will come in at around R350 per month, reducing the shortfall to R1 850,” explains Stefanutto.

In conclusion, Stefanutto comments that innovative opportunities should be sought out by investors in order to maximise returns on their property investments and reduce their risks.