John Roberts, CEO of Just Property Group
THE continued Eurozone crisis; a slowing growth from China, India and Brazil and an American economy unable to maintain momentum are issues that fill the news daily.
The world economy seems worse off than in 2009. Further fears are mounting around Spain’s financial health while the US has, for the third successive year, stalled at the mid-year milestone despite a promising start.
The consequence is that globally property prices have collapsed, paving the way for savvy investors with the required capital to acquire investments substantially below their market value. Property remains a long-term wealth creator and, in finding bargains, that return on investment grows exponentially.
What then should bargain hunters consider before parting with their cash?
The first step is to look and see what is available in the market and not rush into the first opportunity presented. The best time to purchase property is at the bottom of the cycle, but there are no definitive bells signalling when that day arrives. It demands reading the trends and taking a calculated risk accepting that even if you have not succeeded in securing the very bottom of the trough, property is a long-term investment and the price paid now will become relatively cheap 10 or 20 years hence. In practice finding a bargain might mean that the price offered tomorrow could be cheaper than the one you paid today, but equally it could be more. It’s part of the risk.
One insight into where the market may be is the supply of housing. When there are plenty of properties on agents’ books, buyers are in a far stronger position to negotiate good deals than when stocks are short and buyers plenty.
Take cognisance of over-valued properties. Even in depressed markets, there are areas that will remain over-valued and purchasing properties in that bracket will take longer to yield returns than securing a similar property in another neighbourhood or city. However, if you invest for the long-term, overpaying marginally for a property in a good area may translate into a bargain in the years ahead. Sought-after neighbourhoods can yield higher relative returns than less popular areas.
Another element to consider is that properties may be listed below their market value because the owners were initially greedy – asking too much for their home and now being forced to lower that request to bargain-hunting levels.
While South Africa is currently benefitting from the lowest home loan rates in nearly 40 years, there are still owners being forced into distressed sales, even in good neighbourhoods. That makes those sellers desperate and thus more likely to drop their prices below market value.
Distressed markets imply low prices and sometimes attractive bank deals, particularly on repossessed properties causing liabilities on their books.
Likewise, savvy buyers should also seek out stale properties – those that have been on the market for months and gone through the cycle of a too-high asking price; disheartened agents often warning prospective buyers that the house was overpriced and finally lacklustre sellers now wanting to close the deal and move on with their lives. Unless of course there is something structurally wrong with the property!
Another tip for the long-term investor would be that future rezoning can boost property values. Consider those investors who acquired properties around Sandton in the late-1980s and early 1990s or those who owned homes along Old Main Road in Hillcrest 15 years ago. Those previously-residential neighbourhoods have exploded as commercial zones and the value of their houses grown in the same fashion.
This particular approach is typically a very long-term view and requires insight in municipal town planning or market trends for shifting outside traditional central business districts, but when achieved, it can pay dividends.
However, South Africans are not bound to only holding property locally. Exchange control regulations allow, subject to foreign investment clearance certificates, a once-off offshore investment totalling R2 million and UK-based below market value property specialists IPS recently compiled a short list of the world’s eight most distressed property markets.
Ireland tops the line-up followed by the US where the sub-prime market crisis originated. Not surprisingly, the balance of the list also comes out of Europe – Hungary, Greece, Bulgaria, Cyprus, Spain and Portugal.
Only recently there was news that Ireland is demolishing property developments constructed during the boom years as there was little hope of finding buyers – and that in itself is a warning for investors to do their homework to ensure they do not stray too far off the beaten track.
Yet, the bottom line to savvy purchasing is realising the balance between the capital growth and the income derived from that investment. This is a market not only about buying and selling, but the combination of managing that long-term investment during its life cycle.
John Roberts is CEO of Just Property Group