Should you consider investing in property to protect against inflation?

Last month, the Reserve Bank governor said he expected interest rates would not rise in 2021 and that inflation would stay under control.

Have you noticed an increase in unwanted real estate investment-related offers in your inbox? Or the increase in the number of real estate advertisements in the Sunday papers? Are real estate marketers selling pigs with lipstick or are there bargains?

How do we use the current environment? Is this the time to take a leap of faith and give up your rent to buy a space of your own? Or an upgrade to a bigger home? Or buy residential properties for rent? Alternatively, how does this information affect investments in the beleaguered real estate unit trust sector?

The answer, of course, is always “… it depends”. It depends on your wealth and how much you can afford to lose. It depends on your knowledge and understanding of both the physical and investment property sectors. We would suggest that while bargains are available, a thorough review of the risks and costs associated with real estate investments, as well as finding alternative investment destinations for your money, are crucial.

Residential real estate

The combination of 50-year low interest rates and Covid-19 has fueled and in some cases changed the demands of residential property buyers in many parts of the world. The work of homers, homeschoolers and those who took in additional family members has brought charges of finding larger properties in the suburbs.

In the US, for example, new home sales rose 43.2% in the second quarter of 2020 as Covid began to spread across the US, adding to a 35-year high in homeowner sentiment. US buyers seemed to be looking for locations with lower taxes and more space. In the UK, annual house price growth soared in late 2020, peaking at 7.6% in November 2020. This was significantly higher than in the past two years and was the highest since June 2016.

However, there has been little to celebrate for homeowners in South Africa for about a decade. A May 2020 report in the Global Property Guide found that property prices rose about 57% between 2007 and 2019, but real prices fell 18% after adjusting for inflation. More recently, however, the February 2021 edition of the FNB Real Estate Barometer has shown that the latest data reflects improved house prices for certain types of houses in areas of high demand.

The FNB real estate barometer found that the first wave of employees affected by Covid were mostly workers who would normally not be able to afford a mortgage. More recently, however, employment problems have affected skilled workers and white-collar workers. Data released by Stats SA in October 2020 showed that 670,000 jobs in the formal sector were lost year-over-year in the second quarter of 2020.

Buy to occupy::

What Should You Look For If It’s A First Time Buyer Or Looking For A Bigger Home? We have collected some tips:

• If you take advantage of the buyer’s market, low interest rates and banks falling over themselves to compete for “good credit” can make you excited and anxious at the same time. Our main tip is “don’t hurry up”. Slower. Don’t just wait for a good opportunity. Wait for the right opportunity.
• If you’re a first-time buyer, don’t fall for the “rent is throwing your money away” line. Renting doesn’t mean throwing your money away. It offers flexibility, a key benefit for younger buyers. In countries with an uncertain economic or political future, it makes sense to rent during the long-term scenario.
• Before contacting real estate agents, look for auction clues or deceased properties and decide how much to spend on a home loan. It is also a good idea to obtain pre-approval for a home loan so that you can negotiate in good faith with a seller. Note that once your offer has been accepted, you should speak to other banks to see if your original business can be improved.
• Negotiate with the seller. Haggling is part of the buying process. Remember, the real estate agent is working for the seller when the gum hits the streets.
• Before making an offer, get a professional appraiser to inspect your new home. You need to check electrical compliance, the strength of foundations, leaky roofs, leaky swimming pools, the quality of gutters, rising damp, and other easily hidden defects.
• Buy a home that is easy to sell if you move on. Look for an area that continues to be sustained by high quality neighborhood schools where homes and streets are well maintained. Before buying, evaluate the physical security features of your new home, the efficiency and reputation of security companies in the area, and the strength and cohesion of the local people.
• Keep in mind that the popularity of multigenerational homes and homes with additional space for work from home has increased. It might be a good time to set your sights on homes with grandma cottages, either to rent out to pay the deposit, or for {boomerang?} Children or parents.
• Budget for house maintenance and utility bills. In South Africa, the cost of real estate, water and electricity in many communities have risen above inflation for nearly a decade.

Buy to rent::

Real estate economists and analysts seem to agree that vacancy rates for residential properties have risen over the past year and the residential real estate industry is in a slump. This trend has been going on since at least 2016, as this article from Moneyweb shows. Since then, conditions have worsened and landlords are struggling more than ever to find tenants who can pay the rent and accept lower rents from reliable tenants.

An article published by Daily Maverick in April 2021 titled “Buy-to-Let Has Become a Buy-to-Reg for Residential Landlords in SA” in which those obtained from TPN credit bureau in three provinces of SA after 2014 were published Escalation figures for rental income were shown. These trends have left many buy-to-let investors with vacancies. Retirees who have invested in real estate to support their retirement income are particularly hard hit.

Investing in real estate through collective investment funds or real estate mutual funds

A quote attributed to 18th century British banker Baron Rothschild advises us to “buy when there is blood on the streets even if the blood is yours”.

Individual investors can access retail, commercial and industrial real estate investments by buying either shares in a Real Estate Investment Trust (Reit) or shares in a collective real estate fund that invests in Reits and other income generating assets. Both investment vehicles offer investors a mechanism to get in and out of the real estate market very quickly.

Both equestrian and real estate collective investing are required to invest in a range of South African property types, including commercial, retail, warehouse, healthcare, residential and industrial properties, depending on where they see opportunities. Income is derived from the real estate, which provides a safe and escalating income stream. Capital growth comes from quality stocks that have the potential for their stock price to move up.

Reits are listed companies on the Johannesburg Stock Exchange and buy, manage and develop real estate portfolios according to various mandates, while real estate funds invest in Reits. One of the main differences between Reits and collective investments is that Reits is allowed to leverage its assets (lending to buy equipment). In contrast, collective investment property unit trusts finance their investments through new inflows.

According to Profile Media, as of May 7, 2021, the two largest (in terms of assets under management) real estate funds in the South Africa / Real Estate / General sector (the Stanlib Property Income Fund of R 5.4 billion and The Sim Property Fund of R 5.4 billion of R5.1 billion) has generated cumulative (non-annualized) negative returns over the past seven years. The third largest fund, the R2 9 billion Old Mutual SA Quoted Property Fund, has had cumulatively negative returns for five years. However, in the past twelve, six and three months, the net worth of all of these funds has reversed.

Reits posted mixed returns, likely due to the wide range of underlying investments. However, among the sector’s Goliaths (Growthpoint, Resilient and Vukile), share prices peaked between February 2018 and November 2019 before falling. Stock prices have had some tentative signs of growth since then, but they need economic growth, stability, and confidence to hit new highs.

Real estate unit trust fund managers warned in their comments that while returns may remain attractive, they expect little nominal short-term distribution growth and negative real growth. There seems to be general agreement that retailers are struggling and it is unlikely that landlords will be able to negotiate higher rents given the high vacancy rate.

The rating agency Global Credit Ratings has also looked at the equestrian sector. In an article posted on the company’s website, “A Moderately Less Bleak House; The agency expects South African Reits’ performance fundamentals to remain under pressure in 2021. However, if less restrictive Covid-19 lockdown levels remain, GCR is of the opinion that short-term operational risks should subside and allow for more stability, although longer-term development depends on how Reits uses their properties to meet the changing needs of tenants and theirs Customizes.

Rosebank Wealth Group advises caution at this point when making real estate investments, despite the low interest rate and marketing by real estate developers. However, it is possible that those with patience, good research skills, and knowledge of the real estate sector will find good value.