New developments versus established neighbourhoods

New developments versus established neighbourhoods

Private Property South Africa
RE/MAX

There are a variety of real estate investment types in a developing nation such as South Africa, including homes situated in historic and well-established neighbourhoods as well as in ever-expanding areas that have to be developed. Beyond the question of sectional title versus freehold property, investors will also need to decide whether they want to invest in new developments or in more established real estate markets.

According to Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, there are various pros and cons to each option.

“Factors that can help guide investors decision making in this regard include the costs of repairs and maintenance, existing and future suburb demand, as well as house price appreciation and transfer duties.”

Elaborating on each of these points, Goslett explains that the biggest detractor against investing in older homes is the possible repair and maintenance costs. “When buying an older home, there may be some maintenance and repair work to be completed to bring the home up to scratch before leasing it to tenants. The possibility of ongoing repair work is also greater on older properties than on newly built homes. However, to offset these costs, these maintenance expenses can be deducted off the rental income to reduce the investor’s taxable income,” Goslett explains.

As an upside, older homes in more established neighbourhoods tend to have a higher demand than newly built homes do. Most newly built homes are found in expanding suburbs that will grow in demand over time as the neighbourhood becomes more established. “For investors, this means that they can often charge more in rent and might enjoy lower vacancy rates on older homes in more established suburbs where demand for the area already exists,” says Goslett.

In addition to this, if an investor purchases in a new development where there is an abundance of similar homes on the market all at the same time (like in an apartment block or sectional title estate), landlords will have to compete for tenants which, Goslett warns, will put pressure on rental prices and might affect vacancy rates.

But, this is also where one of the most enticing factors of buying a newly built home comes into play. “For those who are patient, the potential long-term return on investment on a newly built home can sometimes outstrip that of an older home in a more established suburb. Because demand in new suburbs is not yet as high as it is in established suburbs, a newly built home can often cost less than an older home would.

If the suburb grows in demand over time, the investor could benefit from much greater returns on the original purchase price. What’s more, in a new development, investors can avoid the upfront cost of transfer duties that would be payable on an older home. This also increases the profit margin on these kinds of investments,” Goslett explains.

Having said that, Goslett also highlights that there are a variety of factors at play when deciding which sort of real estate investment will yield the greatest results. “For every investor who enjoys greater financial success on an older property, there will be another who has gained as much success on a new property. Ultimately, it is the investor’s choice of strategy that matters most. For some, the perfect portfolio might even be a combination of both established and new properties,” he explains.

To make sure they get the strategy correct, Goslett recommends involving a real estate professional right from the very start. “Equipped with in-depth, real-time knowledge of the areas in which they operate, real estate professionals can provide real-world examples of the sorts of returns an investor stands to make on each of the properties he or she is considering. This information can prove critical in making the right investment decisions upfront,” he concludes.

Writer : Kayla Ferguson

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