Property ownership has always been seen as a measure of wealth. But it also combines two important financial elements: you can borrow money against it, and it is an excellent hedge against inflation.
When comparing property to other assets, most investors make the mistake of focussing only on the nominal growth rate of the property without taking into account the return they actually make on their money.
Never a better time
Property specialists agree that now is the best time to buy property. Prices are the lowest in many years, with a wide range of good quality properties on the market and interest rates unlikely to be this favourable again soon. There are real bargains to be found at the moment.
Is your home an investment?
Buying a primary residence as an investment has many pitfalls. Possibly the greatest issue is the fact that owners tend to be emotionally attached to their homes, and often over-capitalise to enhance their comfort levels. However, if managed correctly, buying a primary residence as an investment can yield profits in the long term.
Residential buy-to-let
Residential buy-to-let represents about 7% of total property sales and, since the end of 2010, there has been an increase in confidence in the buy-to-let market.Low house price inflation curtailed the short-term speculative component of the buy-to-let market. This form of buying was far more prevalent during the boom periods when buyers focused on profiting from short-term capital growth on property that would outstrip returns from interest rates.
The current shortage of residential rental properties and slow growth in rental stock will result in some acceleration in rental inflation, leading to better yields on residential property. With interest rates likely to stay low for a while, the demand for good rental properties should therefore remain high for a long time.
Commercial property
Commercial property – which includes office, retail and industrial – has been a stable performer during the past ten years. Compared to cash, bonds and listed shares, commercial property remains the best option. Investing in commercial property has paid off for many investors after the 2008 crisis, particularly with stellar results from the listed sector up to the end of 2010.
Commercial property has always been a useful hedge against inflation, because lease agreements can be renegotiated with tenants to reflect rising inflation. South African investors have a growing interest in commercial property, and they are increasingly looking for property in the best locations with the strongest tenants. For offices, that means buildings in prime nodes. For retail centres, it means properties in upmarket suburbs or busy traffic nodes, and, for the industrial sector, it means blue-chip multi-tenanted buildings, with long leases near busy transportation nodes.
Attractive yields
As an investment vehicle, low interest rates make the yields from commercial property look more attractive than ever. Cash flow from tenants is more stable than that from equities and offshore currency. Rentals should cover the property costs, and as rentals increase and exceed the property costs, you are earning passive income for as long as you hold the property.
No other investment vehicle pays for itself, looks after itself, offers such excellent tax benefits and produces a monthly income for life once paid off.
Choose your model
Choosing between residential or commercial depends on your business model and funds available. But investors who are looking for a good return on their investments believe that property is still the place to put their money.
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