Ask the Property Experts

Posted on: February 6th, 2014 by STBBSiteOwner

Source: Presented by Bruce Whitfield on The Home Channel on 01/10/2008

The Home Channel takes a look at investing in the commercial property markets as well as viewer questions with experts Gina Schoeman from Macquarie First South, Kgaogelo Mamabolo from Liberty Life and Godfrey Timber from STBB Attorneys.

Bruce Whitfield: Welcome to Ask the Property Experts where we answer your questions. Today we are taking a tiny step back from the residential property market to look at some of the other forms of property investment in South Africa. The panel this week is economist Gina Schoeman from Macquarie, Kgaogelo Mamabolo investment head of unlisted properties at Liberty Life Properties, and Godfrey Timber from STBB Attorneys. We will talk about residential property – and we have lots of residential property questions coming through – but that’s not the only form of property obviously. There’s a mass of commercial property – you can buy yourself a factory if you like, or you can buy into a property unit trust fund if you wanted to and make a killing theoretically – what is the state of commercial property right now?

Kgaogelo Mamabolo: Like the residential property market it has been impacted by the current economic situation – especially in an interest rate sensitive fund – because consumers are getting impacted by the interest rate hikes. I think the latest statistics say consumer spending and confidence is the lowest since 2004 so obviously that’s impacting – especially on the retail front – however don’t forget that we are dealing with a situation where rentals are in place that will protect you…

Bruce Whitfield: They’re contracted as well aren’t they?

Kgaogelo Mamabolo: They’re contracted, but at the same time there is the risk that tenants could default – but the view is that’s probably happening more with the “moms and pops” smaller shops in the smaller regional shopping centres. Historically the larger shopping centres for example Sandton City hold up well in these times – but that doesn’t mean they don’t suffer a little. In terms of the other sectors we are coming off a very low vacancy rate environment – that’s probably one of the best things that’s protecting us in the current market -but if you look at the industrial sector there’s a lot of supply constraints and therefore you’re finding that rental increase are a lot higher in those markets. The latest view is that you can still look to about 10% to 15% and in some cases about 20% increases in those rentals because replacement costs are so much higher, there’s low vacancies, supply constraints – and all those issues in place. It’s very similar as well to the office sector that’s coming off a low rentals base – you’re coming from existing rentals of about R86 and you require about R130 to break even say in the Sandton node, so that’s quite a big jump for the market – but at the same time you may have some tenants resisting and wanting to move to much more affordable areas, so it doesn’t necessarily mean that everybody is going to pay that rental.

Bruce Whitfield: Easier said than done. Gina if you look at what Eskom is doing in terms of its approvals – being a little bit more restrictive in terms of allowing the willy-nilly building we were seeing two or three years ago, still Joburg looks like a construction sight because of all the contracts – but are we going to see as many new developments going up in the next five years? If not that suggests even if demand flattens off there is going to be a shortage…

Gina Schoeman: We’ve identified about four main constraints to non-residential building. The first is funding costs – that’s increased hugely, and there’s your interest rate link. Then building costs – that’s linked to materials coming through from all over the world, inflationary pressures and skills shortages especially at the council level with the zoning – and electricity. It is not a problem like it was in the first quarter – we saw a huge knock-on to non-residential building activity there. It’s lifted slightly but it’s still a worry. We were just discussing earlier that it’s a worry getting building plans passed – those that have already been approved, and infrastructure investment at the moment in South Africa is very strong, what’s already been approved is going to go ahead – it’s what hasn’t yet that needs to be approved. That holds a lot more risk like the Boschendal real estate development…

Bruce Whitfield: Is that facing some headwinds?

Gina Schoeman: We’re not really sure what is going to happen. Will it go ahead, or won’t it go ahead?

Bruce Whitfield: You just have to step outside this building for example – we’re in the middle of Rosebank if anyone doesn’t know – and it’s like an old person’s mouth with cavities all over the place and these huge gapping holes in the landscape have to be filled…

Gina Schoeman: This is an historical trend that happens when an economy grows quickly. It’s not a perfect science – there is always that catch-up period – so we are building now for the amount we’ve grown. To a degree – and this is why we’re quite confident the infrastructure spending will carry on quite strongly – because economic growth is slowing over the next two years with consumer demand slowing and the inflationary pressure – at least it gives time to catch up. So we are not like China for example where growth just keeps surging ahead – infrastructure has to catch up. It takes long to build buildings…

Bruce Whitfield: Not in China. Godfrey, what are you seeing?

Godfrey Timber: When I compare commercial versus residential I seem to notice that residential has seriously been quite hard hit in comparison. There is still commercial activity which is surprising – we have a lot of bonds going through, and we see some serious amounts going through in our commercial department – so that seems more benign compared to the residential market, so there is some positive hope. In the market in general there seems to be some positiveness that seems to be emerging – things seem to be changing.

Bruce Whitfield: Kgaogelo, are you rather buying a property unit trust right now, or are you buying – as some of us might have done recently – a new residential property as an investment potentially?

Kgaogelo Mamabolo: I’m definitely not buying residential properties. It has to do with your investment appetite and how much money you’ve got. People are still buying in this market – transactions have gone a bit flat but haven’t stopped, people that don’t rely on debt are probably the people who are taking advantage of this current market. The issue is that we’ve just come from a period where valuations were quite bullish – so the seller would not want to be as pessimistic as the buyer would want them to be – so we do have a bit of a gap right now in the market. It’s a pity because when things do turn around – when the listed sector comes back in the next five months or so – we are all going to be competing for the same portfolios or the same properties. Everybody is saying there aren’t good stocks out there in the market the big guys want to buy – so it’s a bit of a Catch 22 situation – but you hope that you can get the best deal you can get. I think there is a slight shift with people saying “if I’m really desperate I will sell.” But it’s a bit of a tough one right now and when is the recovery going to happen in the economy?

Bruce Whitfield: Gina, when is the recovery happening in the economy?

Gina Schoeman: I’ve just bought a house – one way to tell when interest rates have peaked is when an economist starts buying property. Keep in mind that things have improved for 2009 – but it’s still about a year until we get there. Yes, inflation is coming off – and we’ve seen petrol prices coming down, food inflation is stabilising and things are looking quite good – but we are only going to see the benefits probably in June 2009 when we receive our first interest rate cut. If we get it in April 2009 that’s because growth is a little weaker than everyone expected it to be – but even then it’s going to take consumers a while and a couple of cuts to consolidate their debt before they start wanting to move into the housing market especially if they’ve been burnt.

Bruce Whitfield: Which also means that if you’re somebody who doesn’t rely on debt – you’re somebody who has some cash available through the tough times we’ve been going through – now is a good time to be in this property market…

Gina Schoeman: That’s before anyone gets to confident about the interest rate cuts – because then your negotiation margin decreases considerably.

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Bruce Whitfield: A big economics question – one that goes to the heart of property investing -comes from Boris. “We’ve all seen what the recent electricity woes are doing to large scale developments and the like, but now I’ve seen we are also experiencing issues around water – this has to be hampering our growth. The problems seem to be mounting. My question is do we realistically have the infrastructure capacity when it comes to water and electricity supply – not to mention transport – to carry on growing the way we have been?” That’s quite a broad question – it is more of a statement really than a question – but it raises some questions…

Gina Schoeman: As we mentioned previously remember economic growth is slowing – which is actually for our infrastructure spending quite a good thing. We are building – the cavities all over the place. Infrastructure spending over the next three years in South Africa is going to total R840billion – and of that Eskom is R200billion – just to show the magnitude of what’s going on at the moment. Most people think that our huge infrastructure spending era was in the late 1970s but actually that’s not so – what we’ve done from 2005 to now is double what we’ve ever done before, so it’s surging ahead. Probably the biggest risk is electricity – because can those projects come into place? They’re looking at water, they’re building the roads, they’re going ahead with the rail – we are very confident that it’s all going to take place. Unless we start growing at 8% economic growth – then we will find ourselves with problems – but I don’t think that’s going to happen.

Bruce Whitfield: I’d like to have to deal with those sorts of problems – those sorts of challenges would be a lot more interesting…

Kgaogelo Mamabolo: The thing is people aren’t seeing the results now – it’s when you start seeing them that those kinds of questions arise…

Gina Schoeman: I was in Cape Town recently and I saw the stadium for the 2010 World Cup and I was blown away. I think it’s very impressive…

Bruce Whitfield: So do the rate payers. Glenda Ward has sent us a book that I’ve managed to condense down to a couple of paragraphs for Godfrey: “I had a property that was said to have structural problems. There were major cracks about 2cm wide from the roof to the middle of the interior wall, but no cracks on the outer wall. I submitted a structural claim to the NHBRC which was accepted. The engineers were sent out and it was determined that no underpinning was required – that the builder must simply repair the cracks – which we did.” Subsequently they sold the property and they disclosed all the issues saying they had some cracks and “if you have a problem we’ll sort it out.” Six months later the cracks did reappear. The new owner subsequently got another independent engineer’s report. Essentially the second engineer’s report said basically the same thing – there are cracks, but you don’t need any underpinning you simply need to fill the cracks. What Glenda is asking – and she is concerned because the buyer is now getting lawyers involved – does she have much to worry about?

Godfrey Timber: I think if Glenda has already got the NHBRC on her side they’ve got clout in the market – and if a court has to listen to what has been presented it’s quite a strong argument. If they have indicated there is really no structural damage – it’s just cracks that need to be fixed – I think she has a strong case. She shouldn’t be worried if she has on-sold the property particularly because she disclosed the issues – so I would definitely say she has a strong case and shouldn’t be too worried.

Bruce Whitfield: I would guess the new buyer is feeling a little bit disgruntled – a little bit upset by their purchase – and they’re saying if we’re going to solve this problem let’s do the job properly, let’s whip the wall out underpin it properly and rebuild the wall once again – what would Glenda be liable for that’s what the new owner chose to do?

Godfrey Timber: If the new owner chose to do it definitely not – because she has already covered herself, she’s had the NHBRC in. I think she stands definitely in a stronger position than he does…

Bruce Whitfield: If this is a sectional title unit and the NHBRC still believes it shouldn’t be underpinned should the body corporate not be paying for either the underpinning or the repairs?

Godfrey Timber: The NHBRC would have issued an enrolment certificate for the particular unit – they take care of the structure. I think the body corporate is not responsible…

Bruce Whitfield: It’s also internal…

Godfrey Timber: It is internal. We shouldn’t look to the body corporate to pay for it – and neither should be look for the seller. The buyer is definitely going to have to deal with that on his own.

Bruce Whitfield: Glenda will be very pleased to hear that. Andre de Oliviera says my question deals with gearing: “I’m looking at a property for investment purposes but I can’t decide how to go about it.” Do I pump as much money as I can into the bond and get it paid in five years? Thereafter any income from rentals is additional income – is that a good idea?

Gina Schoeman: That is a positive cash flow property. If he can afford to pay off a property very quickly – and maintain it. I think that’s what people forget – you’ve got to keep a certain sum to the side to maintain a property.

Bruce Whitfield: The second part of the question: “Or do I gear it and try and make a higher return on a small portion of the capital?” That’s a quandary that a lot of property investors find themselves in – do you borrow money and put down R100,000 and any return you get is on that R100,000 and you ignore the interest payments because it is only an investment and you will pay for it one day when you sell it – or do you pay for the full property?

Gina Schoeman: It depends on how confident you are that you’re going to get the price you want when you sell it one day.

Bruce Whitfield: It depends on the length of your view I guess.

Gina Schoeman: Your perspective – when do you plan on selling it, and what is your 20 year view?

Bruce Whitfield: There is no single answer…

Gina Schoeman: It’s your risk…

Kgaogelo Mamabolo: There is going to be risk in the cash flow as well. Once you gear you are exposed when the cycle turns again…

Godfrey Timber: People must also bear in mind that right now the rental market is doing extremely well – people can’t afford property because of the interest rates, so you’re finding as a result they have to go in and rent properties – so there is definitely an increase in the rental market at the moment. That might be a positive argument to gear because you’re kind of sure you will get a tenant in and possibly a good rental.

Bruce Whitfield: I like the fact he’s asking the question – because here for example he puts down R200,000 on a house, and he could afford to pay an extra R20,000 a month into the bond for argument sake – now he might want to take that R20,000 and put that into the equity market or he may want to invest in a second property and he may want to gear himself like that. The point is yes, you can do it – but be aware of the fact that somebody may come and take your shirt away from you…

Gina Schoeman: It’s your risk appetite.

Kgaogelo Mamabolo: He must also think about diversifying – if you put all your money into one property, and that property doesn’t work – but he is still young so he must also invest in the stock market. Look at those different options. If there is money left he can put it into the property. The other money will work for him as well – it will help him pay off the interest rate on that bond – so there are different ways he must look at it, and not just focus on one thing.

Bruce Whitfield: The shortest question in the history of Ask the Property Experts: “What developments are coming up in the Eastern Cape?” I don’t know the answer. Does anybody know the answer to that? I didn’t know they build things in the Eastern Cape…

Gina Schoeman: What about the motor industry?

Kgaogelo Mamabolo: There is some activity. The Eastern Cape is big – focus on East London and Port Elizabeth. There’s Coega…

Bruce Whitfield: One day Coega will work.

Kgaogelo Mamabolo: It will work. I read that in Port Elizabeth there’s some new suburbs being planned…

Gina Schoeman: Uitenhage. That’s our Detroit.

Bruce Whitfield: Except it actually still works…

Godfrey Timber: East London as well. Lots of activity in that area.

Gina Schoeman: The motor industry is doing exceptionally well in South Africa – we are seeing a lot of companies move here with their plant, and they set them up – and the people who work there need houses.

Bruce Whitfield: I’ve been astounded by the road from Port Elizabeth on the way to Grahamstown – there is stuff happening.

Kgaogelo Mamabolo: Let’s not forget Hemmingways – that’s 70,000 square metres of shopping centre going into East London.

Bruce Whitfield: James Thomas says: “I have a home-based business and carry home owner’s insurance. Should I consider commercial property insurance? Is there a major difference? Should I only consider this if I am upgrading my premises?”

Godfrey Timber: I suggest that he sticks to the residential – generally I see residential insurance being much cheaper than commercial – but it also depends on the type of commercial that he is doing. So I’d say stick to the residential unless there is real incentive for you to change the zoning that will increase the value.

Bruce Whitfield: If you are welding commercially in your backyard – and there is a risk you can burn your house down – surely that would require additional insurance as apposed to if you’re running a secretarial service or a bookkeeping business from home? Let your insurance company know – ask them for the best advice – and if you don’t like their advice get another insurance company.

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