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| Be wary of buy-to-let market |
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Be wary of buy-to-let market
Finance24.com - 24 June 2005
While the outlook for the commercial property sector (retail and industrial) is particularly rosy over the next year and beyond, the average investor should however be wary of the buy-to-let market given that the residential property sector is now past its boom phase.
The current property environment, supported by the most recent interest rate cut, continues to tell a positive story following a phenomenal run last year - both for physical property and the listed property market.
Good growth prospects for the commercial sector will have a positive knock on effect for the listed property sector, which focuses exclusively on commercial property, says Colin Young, fund manager of Old Mutual's listed property funds.
Within the buy-to-let market, the focus should fall on the lower end of the middle segment (the R1m to R2.3m range), where real growth is still likely, Young notes.
In real terms, the residential buy-to-let market has not done well in the recent past.
"Over the past three years the buy-to-let market has been negative because too much supply has been coming on board (except Johannesburg)," says Young.
"Overall, demand has not kept up with supply, setting off alarm bells and sending signals to investors to be very careful."
Young notes that while those that have bought a second or third home will get positive capital growth in the value of the building, probably higher than inflation depending on the area of investment, this wealth creation is being eroded because rental incomes are not nearly covering bond repayments.
Latest Absa data indicates that residential buildings above R2.2m are only growing at 11%.
That is still positive growth but trending towards pedestrian, as is the case in the lower end segment where buildings below R1m are growing at an equally pedestrian rate.
Those who have invested in second or third properties are advised to do their numbers carefully and, where applicable, consider selling before the cycle turns and inner city office conversions in cities, like Cape Town, come onto the market.
Average investors looking to ride the wave of good fortune predicted for the commercial sector have two ways of participating.
They can either invest in property syndicates, a move Young discourages because of the risks attached, or they can invest in the listed property unit trust market.
Listed property unit trusts are the favoured option given that listed property, boosted by the positive outlook for the commercial sector, is expected to generate a positive return well above inflation for the year.
These returns should increasingly be based on improving property fundamentals and an overall positive property environment, bolstered by the recent interest rate cut, Young concludes.
The listed property sector achieved a total return of 40% in 2003 and 40,6% for 2004 compared with the All Share Index's return of 12% and 25,4% for the same periods respectively. |
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