By Mike Fannin
Investing in South African property is usually seen as a solid investment. “Safe as houses” as the saying goes. However, when compared with other types of investments, South African property has not done as well as we’ve thought, and it won’t do well going forward.
In 1970 the average price of a house was R21,000. The average price of a house in 2014 was R1,275,000. Put that value in UK terms and the average South African house price in 1970 in terms of pounds sterling was 13,200 with an increase to 60,700 pounds in 2014. This is a growth of only 4.5 times over 40 years – a measly 3.9% per year return.
You would probably have gotten a better return on investment with a fixed deposit in the UK, than with your South African property.
Fundamental Issues on South African Property Investments
Supply and Demand:
In the UK there is limited land for development, so pressure is mounting for the property market. They need to build 220,000 homes per year and are only building 70,000. Thus, the value of property in the UK is significantly higher than South African property, and – based on the law of supply and demand – will continue to improve.
In South Africa, property’s supply and demand has been influenced greatly by our history of a disadvantaged past. In the past, property prices were kept low while interest rates were massive, making it very difficult to get into the property market. During the changes of 1994 the government decided we don’t need to protect the Rand anymore and moved to an inflation targeted regime. Interest fell dramatically which acted as a great stimulus for property that enjoyed a massive peak until 2007 when the whole world went on half-price sale. In real terms we are still 17% below December 2007’s high. House price inflation has collapsed with a growth of only 1 – 2 % while inflation is growing at 7%.
The FNB house price index is still down 17.2% and Pam Golding’s residential property index shows only lateral growth from 2009. Both of these are well below inflation.
The only growth we see is on houses below R1 million, which is tailored more to first-time buyers.
Stunted Job Market:
Due to several factors that are more complex than we are pretending to solve in this article, growth in the local job market is inordinately slow. In order to arouse international investors’ interests we need economic growth. We need growth to create jobs. We need jobs to earn money. We need money to buy houses. The economy is growing at such a slow rate, there’s no fundamental reason why the house market will change in the foreseeable future. Until new people start getting onto the property ladder there’s no reason why property prices should start moving up.
What Must I Do With My Property and Investments?
The first mistake you can make is trying a ‘one size fits all’ approach to your investments. When asked “Where should I invest?” our answer is always, “What growth and return are you looking for?”
However, if you are adamant about investing in property, we find that blue chip property investments consistently perform well. Property in New York or London brings a good return; however, it is quite expensive to get into.
Another alternative to property is a property fund, where a Property Fund Manager can diversify the assets and manage the economy of scale. Investing in just one extra property is a gamble, so this form of investment is safer and wiser.
If you want an investment that has a certain amount of capital protection with some defined income, then by all means consider property as an alternative. Better yet, chat to an independent investment professional, like Carrick Wealth, who can advise you on the best investment options for your wealth.
Ultimately you need to look for a structured and balanced portfolio, for real return that you can measure, just as you would any other investment.
About Mike Fannin
Mike Fannin is the Group Sales Director for Carrick Wealth, the fastest growing wealth and finance management company in South Africa. He is an expert in designing tax efficient solutions for high net worth clients, and is dedicated to the craft of creating sustainable retirement solutions. Mike holds a B.Comm degree from the University of Port Elizabeth, as well as various diplomas in Equities and Risk Management.