Property investment: A fine balance between risk and opportunity

Property investment: A fine balance between risk and opportunity

Private Property South Africa
Kerry Dimmer

Miguel Martins, Absa Portfolio Manager, answers the burning questions around property investment in the current environment.

1. What are the challenges facing property investors in the current climate?

Although there are several challenges brought about by the Covid-19 pandemic and economic depression, essentially there are four key risks that lead the pack:

  • Tenant Payment Risk ... the risk that existing tenants are not able to pay their full rent, or not at all, as salaries are reduced, and how sustainable employment has elevated as a major challenge in this economy. A reveal from credit agency TPN’s Good Standing Ratio supports this by showing a drop to 71% in Q2 2020, from an average of 81% in 2019, although there has been a strong recovery to 79% in Q1 2021. (The Good Standing Ratio indicates the percentage of tenants who pay their rent on time, or within an acceptable amount of time).

  • Rental increases … the risk that annual rents won’t increase as fast as costs and interest rates. Costs include levies, water, lights, and maintenance, whilst interest rates determine the monthly loan payment to be made.

  • Interest Rate increases … the South African Reserve Bank (SARB) has forecast rates to increase gradually over the next 12 months. This increases monthly home loan payments, squeezing net rental income made, and possibly leading to a rental loss. The danger is that rents usually don’t increase as fast as interest rates.

  • Vacancy Risk … the risk that a landlord may not find a suitable tenant to move into their vacant property and thus miss receiving a month’s rental income. This can either be due to lower tenant demand in that area, or the quality of tenants is low and the landlord chooses not to accept an application.

A good investor will consider the above risks and put risk mitigation plans in place, such as rental insurance, a savings pocket worth three or more months, and include value adds such as free Wi-Fi to attract quality tenants.

2. How is the digital age enhancing/enabling their property investment decisions?

Digital tools create an increased level of accessibility to information, for investors and tenants. There are many digital resources where investors can search and compare prospective properties as they seek out their next investment opportunity. For example, at Absa, we provide many such tools. One is a result of our partnership with the South African Property Investor Network, which provides educational content online, and platforms for investors to learn from industry experts as well as network with each other.

TPN is another strategic partner of Absa Home Loans and produces a Suburb Report in a digital format, whereby investors gain insights into average selling prices and expected rentals, the previously-mentioned Good Standing Ratio, and other key investment indicators. These are invaluable when considering investing in an area where the investor is possibly new to and not familiar with.

Tech-savvy tenants are finding that they now have easy access to a list of available rentals in an area, and landlords are now paying special attention to their competing listings and providing the best rental offering at the right price point, in good condition, and with attractive facilities.

3. What are the specific information sources that property investors should be using to gain deeper insights into markets?

Investors, as said, must use data to support the direction of their strategy, as well as their specific investment decisions. Absa recommends the following five resources must be on an investor’s list to gain insights into the current property investment market:

  • TPN

TPN issues a Quarterly Rental Report which talks to the various factors in the rental market, with insights on what is driving these, and the direction of such trends.

TPN’s Suburb Report provides a data-driven analysis at a suburb level based on its own data sources, deeds office data, and census data. This is a great resource to consider when investing in a new area, or comparing an investor’s own performance to the area’s performance.

  • Absa Homeowners Sentiment Index

Absa Homeowners Sentiment Index is a quarterly survey of over 12,000 consumers, consolidating their views on various themes of property ownership, renovation, and selling and investing. In the latest Q2 2021 report, for example, investors continued to survey very positively relative to investment in property, and it also highlighted some of the existing risks.

  • Interest rate forecast reports

The SARB, commercial Banks, and other institutions regularly issue economic reports on their expectations of the outlook for interest rates. These forecasts tend to vary between institutions, but the supporting insights are valuable in gaining a sense of direction of the largest single cost driver for the investor.

  • Network of investors, sales and lettings agents for area-specific views

There is nothing like experience and on-the-ground views. Building a network of fellow investors not only allows one to contextualise and digest the information for the data sources mentioned, but also provides practical lessons and solutions on how best to manoeuvre the challenges of building and managing a property portfolio.

Building a trusted network of estate and lettings agents is not only valuable in terms of sourcing investment opportunities and property management support but also obtaining their views on local trends. Be warned though, this group of professionals need to be, and are, inherently optimistic about their markets.

4. How popular are coaching and training programmes for property investors?

There is a plethora of articles, books, YouTube videos, and other resources that will guide a property investor but coaching remains a key method to obtain personalised input into your strategy. The benefit of a coach is that you have an experienced person, who ideally is an active and experienced investor, who can share their knowledge and experience. They can also provide input as the new investor designs a strategy and makes purchasing decisions, and challenges one to consider alternative strategies as well to stretch beyond comfort zones. Although property investing can be done alone, investing in an experienced coach or training course, will help avoid mistakes that have a high cost in the long run.

The key to finding the right coach is determining whether that individual understands your strategy and your personality, and it is a good idea to ensure you obtain several referrals. Online training programmes are another route, which also presents an opportunity to engage with other investors and thereby build up a network of similarly-minded individuals. Programmes that are conducted by an instructor/trainer also provide the opportunity to engage with the instructor on various subjects, as well as offering a chance to bring your own experiences into the discussion.

An often overlooked aspect of growing your property investment knowledge is an investment in yourself. Investors often shy away from spending a couple of hundred Rands for a day’s training, or even a couple thousand Rands for a series of coaching sessions, due to the ‘cost’ of the programme. But this same investor will be happy to commit to a R1-million property investment and pay R100,000 or more for transfer costs and a multiple of that in renovation costs.

A golden rule is to invest in yourself before you part with your cash on a property deal. Learning through others is low-cost, even free, but your own lessons may cost you hundreds of thousands of Rands.

5. Best overall advice for those dipping their toe into the property investment environment?

  • Seek out active Facebook and Social Media groups where users are regularly asking property-related questions. There is a high quality of response and support coming from others in the group. In this regard consider the SA Property Information Hub, hosted by SA Property Investor Network, as a valuable resource.

  • Remember that ultimately you are responsible for your own decisions. No matter what a training, coaching, or social media programme presents or discusses, you sit with your own decisions. While it is highly recommended that you access as much information as possible, in the end, it is up to you to digest that information, which will inform your decisions.

Lastly, but possibly most importantly, treat your property investing journey like a business and not a hobby. Even if after one or two investments you decide this is not for you, the effort put into identifying and purchasing quality properties will pay off in the long term. And if you decide to continue growing your portfolio, your earlier properties will contribute to the multiplier effect that comes with the benefit of holding quality assets with sustainable rental income streams, for the long term.

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