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Property under pressure in 2007

29 January 2007 Gareth Stokes

To be a successful investor you have to make sure that your portfolio contains the correct mix of asset classes. Professional fund managers spend a great deal of time making sure the funds they manage are effectively shared amongst the four main asset classes, namely equities, bonds, cash and property.

South African equities have been performing very well over the last few years. Equities are also the best performing asset class over the longer term. For this reason unit trust funds which consider equity investments are heavily weighted in favour of equities at the moment.

Another asset class that has been performing well over the last few years is property. Listed property funds on the JSE have been flying. And house owners and speculators in the property market in South Africa have enjoyed the good times too.

House prices in South Africa improved by 15% in 2006, after managing 21% in 2003, 32% in 2004 and 22% in 2005.

Will private investors manage similar returns in the years leading up to the 2010 Soccer World Cup?

Property is hard pressed to provide a real return

ABSA ended their most recent property price index with the following statement:

"In view of these developments and expectations, nominal house price growth is projected to continue its downward trend of the past two years for most of 2007. Year-on-year growth of about 9% in the house prices is forecast for this year, with the prices set to rise by around 3% in real terms. With interest rates forecast to move to lower levels again in 2008, house price growth is expected to improve and increase to above 10% in that year and into 2009".

The message for investors in fixed property is that a buy-and-hold approach to property will offer very little reward in the coming year. Investors who hope to make quick capital returns will have to either find grossly undervalued properties, or properties with development potential.

Real returns on property in 2007 are probably going to fall to as low as 3%. And it would appear that ABSA expects the real returns to improve only marginally in 2008 and 2009. It looks like home owners will have to be satisfied with much slower growth on their primary residence - while property speculators may have to hold properties a while longer before realising their gains.

Best strategies going forward

A fully diversified portfolio still requires some exposure to property. In light of current challenges in the housing market, the private investor is probably best served through a listed property fund on the JSE.

These funds offer a number of advantages over buying and selling properties on the open market. First, they have the advantage of millions of rand under management. Fund managers are able to select the best opportunities without the challenge of finding cash to fund the purchase.

Second, listed property funds are able to diversify across regions and property classes. They can purchase and manage property in Gauteng, Kwazulu-Natal and the Western Cape... And they can buy commercial, industrial, agricultural or residential properties.

Such funds are able to weather the challenges and downturns in the property market better than the small private investor with one or two properties in his portfolio.

In the meantime, if you have to be invested in physical property, exercise some patience in finding value in the market. It looks like a buyers market for the next couple of years at least.

 

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