4 TYPES OF PROPERTY INVESTMENTS IN SOUTH AFRICA
The South African property market has plenty to offer both novice and experienced real estate investors alike. Join us as we explore commercial and residential investment options and how to make the most of exciting opportunities when you find them.
Golden nuggets of property investment advice
- “Location, location, location” still rings true, but municipal logistics and future development plans are also also critical to consider.
- Match your purchase to its purpose. Carefully examine which property types best suit your intentions for returns.
- While commercial property represents opportunity for profit, residential land and homes should still be treated as an investment, as these appreciate in value over time.
The South African Context
Welcome to South Africa (SA), a country of sprawling landscapes and greenery, a rich historical and cultural heritage, and an exciting, high-potential property market for both first-time and seasoned investors. This southernmost part of Africa is not without its challenges, however, scenic destinations, land diversity, and the favourable exchange rate (to most parts of the developed world) make it an attractive option for investors – in both a commercial and residential context.
That being said, there are also some complexities in terms of purchasing property – from buying logistics per property type, to potential pitfalls and the difference in legal implications for each category. Get expert guidance from RE/MAX investment advisors, and make buying a new home or generating a new source of income is the exciting experience it should be. Let’s start here, by exploring 4 key property types and what you need to know about each one before you invest:
1. Vacant land: The gateway to property investment
Vacant land (i.e. land without a building present) is still widely available throughout SA and is sometimes not even connected to the electrical or sewage grid yet. In order to invest in vacant land, there are a number of conditions that you need to meet in order to get started.
Having as much upfront cash as possible allows you to purchase land ‘quickly’ and cover the landscaping costs, connection to water, electricity, sanitation, and transfer fees. These costs will have to be settled before one can begin building a house. You will also need to decide beforehand whether you intend to use the land for residential or commercial uses in order to determine the correct location and licensing.
2. Buying to reside or let: A cash cow or not?
Residential property is essentially buying a home that you can choose to live in yourself or to rent out (buying to let). If you decide to take the plunge and purchase a house and/or a flat, experts warn that you have to determine affordability and have a satisfactory credit record before you can get started.
If you are a South African taxpayer, buying a home that acts as your primary residence can be a good idea because you get a R2 million capital gains exclusion when you later decide to sell. If you choose to purchase a home as a source of rental income, you can reduce the amount of tax payable on the additional income received by claiming back on certain rental expenses.
3. Commercial property: When investors mean business
Investing in commercial real estate offers some unique benefits. These include a return on your investment, rental income, a variety of potential tenants, tax benefits, a good inflation hedge, and acquiring an asset with the potential to appreciate that can be used to leverage other investments. However, this is a complex market. Only those who know what they’re doing or who have the right support stand to make good returns on these kinds of investments.
When you decide to invest in commercial property you have 3 categories from which to choose:
- office buildings
- retail space
- industrial units
Finding true value for commercial properties is complicated, so it is best to work through a professional who either specializes in company evaluations or who is an experienced and reliable commercial real estate professional to make sure you are paying fair market value. In general, this value can be checked by calculating the replacement cost (i.e. the cost to rebuild the property from scratch). You could also work out the capitalisation rate, which is a valuation measure used to compare different real estate investments and is usually expressed as a percentage to show an investor's potential return on investment. Thirdly, you could calculate the gross rent multiplier (GMR). To calculate this, take the price of the property and divide it by the expected gross rent (e.g if the selling price is R100,000 and it generates a rental income of R1,000 per month, the GMR would be 100). Usually, the lower the GRM, the better the investment opportunity. These are just a few methods that can help provide an idea on whether the commercial property is listed at a fair market value.
4. REITs/Equity: Partial investment over full ownership
Real Estate Investment Trusts (REITs) are an excellent alternative for those who want to be less hands-on when it comes to property investment. These are companies that invest directly in at least 50% real estate debt by using mortgages. They are known as mortgage REITs, or mREITs for short. Equity REITs, on the other hand, are companies that have at least 50% of their assets in real estate equity. Hybrid REITs have both mortgages and equity.
Understanding the risks, to reap the rewards
Regardless of which option you choose, there will be some common risks associated with purchasing property for sale and determining. To help you better prepare for this, below are a few key investment terms associated with these risks along with their definitions:
- Risk of Loss and Default: the risk of losing your investment if you cannot pay back your loan.
- Interest Rate Risk: when the value of the bond or investment becomes risky after changes to the interest rate are made.
- Volatility Risk: when the value or price of a property asset fluctuates. If it goes down, you run the risk of losing money if you sell during the downturn.
- Vacancy Risk: is when you can’t rent out your property due to circumstances over which you have no control.
Let’s clear up a few frequently asked questions
What is the best real estate investment strategy?
The jury is still out on this one as it can depend on external factors such as market movements and earning potential, as well as personal factors such as budget. However, some lucrative examples are typically buying to rent or hold, buying to flip properties (increasing value and selling property for profit), and REITs.
Where can I find out how to buy property as a business?
The answer is right here. Buying property as a business is similar to purchasing as an individual but it doesn’t carry individual liability (personal insolvency). The purchase will be registered in the company’s name and when/if you sell, you are protected from Capital Gains Tax. Transfer costs may also differ but you can use this transfer cost calculator for an estimate.
Are the best property investments in Cape Town, Johannesburg or Durban?
This will depend on the type of property investment you’re looking to make. So, for example, if you want to invest in a commercial property for hospitality purposes, you might consider Cape Town, given the proximity to amenities and natural wonders. On the other hand, Sandton is a work and commercial hub which might make high-value rentals more attractive financially. While Durban can be seen as a hybrid of the two, making it a relatively cost-effective area to invest in for various purposes. These assessments don’t include other important considerations though, such as safety, value trends and accessibility to service providers.
Can you invest in property with no money?
In some instances, you could rent-to-buy, where you rent a property for a period of time, and at the end of the contract, you have the option to buy the home. This tends to be a good option for those with a bad credit rating who need time to rectify their credit score before they can acquire the funds to purchase a home.
Don’t bite off more than you can chew when it comes to property investments
Speak to a financial advisor to find out which option makes the most financial sense for your situation and seek out guidance from your local RE/MAX Office to find the best real estate investment opportunities. This will enable you to identify which types of property investments in South Africa are right for your needs while making smart purchasing decisions that can pay off in the long term.
*Disclaimer: The purpose of this blog is to provide a high-level overview of real estate investment options in South Africa. RE/MAX SA advises individuals to seek out professional advice before going ahead with any purchase. RE/MAX SA cannot be held responsible for any investment decisions made based on the content of this article.