Assess your assets and get rid of the sluggards
While it would be ignorant to think that everything is okay, you need to take responsibility for your investments and start taking action on your poor performing assets. This is certainly no housing or stock market crisis – but rather a credit crunch. It’s become far tougher to borrow money than it was little more than a year ago. Banks were far too liberal loaning money (especially in the US and UK) where a stated income gave buyers access to a mortgage they couldn’t afford. Once this mortgage was issued, it was sold onto funds and traded as asset-based securities or derivatives. But, eventually these mortgages could no longer be serviced and this forced investors to sell off their properties way under market value.
In South Africa, we’ve had to deal with huge inflationary increases in electricity, oil and fuel prices, (which, in turn, drove up food prices), nine consecutive interest rate increases and then, of course, the weakening rand. Two positive factors we South Africans need to acknowledge is that we’re not exposed to subprime loans, as most first-world markets are; and that the NCA (National Credit Act) has played out positively in our favour. In fact, at the time of writing, a third large South African bank had tightened its lending criteria. Banks still need to be able to lend money, only with more controlled criteria. All it means is that granting loans will require larger deposits and assessments of credit records will be more rigorous.
Yes, we have our fair share of challenges, such as crime, corruption, emerging market sentiment (which batters the rand downwards) and the credit crunch. Christopher Gilmour, an analyst at Absa Investments, says that because the world still perceives South Africa to be an emerging market economy, with the rand being a commodity currency, the rand is losing around 50% of its value. He says that, using the CPI (Consumer Price Index) differential between the US and South Africa over a 20-year period, the rand should be trading at around R6.20 to the US dollar, as opposed to its current R10.28 to the dollar.
Mop up the overseas bargains and hedge your property portfolio
There are ways and means of rand hedging your property investments with the rand losing, on average, 5% each year to all the major currencies. One way is simply to invest in property offshore in a stronger currency and obtaining the gearing or mortgage offshore as well. Getting direct ownership of foreign property, without suffering the vagaries of the world stock markets is easier and more affordable than most investors realise. This investment option is not only for South Africans who want to emigrate, but also for those who want to repatriate their profits and retirement savings, as there are large numbers of South Africans returning to the country.
The 2010 FIFA World Cup will transform the world’s perception of South Africa. I believe South Africans don’t fully realise the positive effects this event is going to have on our country. Ask any foreign tourist who’s visited our shores – almost all of them will say they’ll definitely return. Foreign visitors are in awe of our country’s natural beauty, rapid progress in infrastructure (hotels, shops and restaurants) and our incredible lifestyle. Despite inflationary pressure, South Africa is still a very affordable country to live in and visit. In fact, South Africa is, in many ways, the world’s best-kept secret.
Get your quiz sheet at the ready
Too many local property investors have also had unfortunate experiences at the hands of ineffectual estate agents. In South Africa, most estate agents are trained to sell houses to families, not properties to investors. This makes so-called “investors” confused as to what really constitutes a good investment.
It really is important to get someone on your side since property investing is a team sport. Test their knowledge of cash on cash returns, yields, rentals and cap rates as well as knowledge of the area and markets. You also need to get a good conveyancer, structuring attorney and property accountant on your team if you really want to be successful.
One fundamental of property investment worldwide is to invest in property where there’s population growth. Population growth means demand for housing drives up property prices and demand for rental properties. Countries like South Africa, the UK and Australia, for example, have huge shortfalls in housing that drives capital growth and rentals. If you’re in a good cash and credit position, now is the time to buy.
The biggest property sale of the decade is now on. Take action on your poor performers if you have to and get into a positive cash flow position quickly. Don’t sit idle on the sidelines during these exciting and challenging times. The main thing is to take action.