The biggest myth that we bust was that almost all South Africans still believe strongly in property as an investment class . In fact 74% thought that buying a property even in today’s uncertain economic climate was a prudent investment but an even bigger majority of 93% said that they would prefer to buy rather than rent if they could afford to. Overall, owning property had far more positive association than renting. Generally owning was associated with investment and assets, while renting property was perceived to be unwise and irresponsible by those in the survey.

So why don’t the respondent’s buy? The broad answer is that they cannot afford to buy, or they could not afford to buy the same amenities that they could rent. We know that banks that traditionally loaned money to home buyers are lending very cautiously at the moment and this comes out clearly in the survey. Applying for a homeloan is the most stressful event in the home buying process. A remarkably low 15% of tenants suggested that they preferred to rent because they could get better returns in other investments.

Other important factors that influenced the buying decisions of potential buyers were the price (67%), the proximity to work (44%) , the proximity to good schools (42%) , and the proximity to shopping centres (35%).

But one of the most interesting points to note was security. When asked what the most important factor which influenced the choice of area for both buying and selling the answer came out very clearly in favour of god security. Nearly 44% of respondent’s suggested that the crime rate, the security presence and the cleanliness of the area was the strongest influence when deciding on an area.

To sum it all up, nothing has really changed my view on buy-to-Let property investment. I will continue to look for small 2 bedroom units in good areas, within a secure complex. The banks and the state of the economy will continue to control the volume of tenants who become owners but we now have confirmation that there is huge pent up demand for affordable good housing. If you love the idea of owning property, you are not one of the crazy ones. If you can but don’t choose to invest in property, maybe you are…

If you choose to see the cup half empty it probably will be, but more than ever we need to take a good look at how we have prepared ourselves for retirement and the question of which asset class to trust still looms large.

I still challenge the perception held by many that it is not a good time for investing in property. The argument against property often makes a point that property prices are expected to remain flat for a while with very modest capital appreciation which I accept.

I have made arguments over the last 12 months about how good times are now for finding great opportunities in property, and have laboured the view that this is the time that you should be in the market, but there is another very important point. A disciplined property investor will pay little attention to the business cycle and focus more on yield and cash flow than what the ebb and flow of capital in and out of the market.

A few weeks ago I attended a talk by Jim Collins, the influential business management expert with top selling books to his credit like Good to Great and Built to Last, and I was inspired to borrow this story from his new book to share with you.

In December 1911 two teams of explorers pitted against each other on a journey to be the first to reach the South Pole. Both teams were determined to be the first to achieve this audacious goal, but they were vastly different in preparation and strategy.

Firstly, the English explorer, Robert Scott decided to take advantage of good weather to drive his team to the maximum to cover the most distance they could in a day (sometimes covering 45 miles on a good day) so they could rest and recover when bad weather would make the journey impossible. Scott had new untested equipment and ideas which he predicted would give him the edge and was confident that he would be the first to plant his flag at the pole.

Norwegian explorer Roald Amundsen on the other hand, paced his team to cover only a set distance every day regardless of weather conditions, covering no more than 20 miles a day. He learned from living with the Eskimos what equipment, food and clothing worked in sub minus conditions, and planned carefully to cover only a short distance every day to prevent his team from suffering from fatigue. So they kept moving slowly with skis, dogs and sleds, able to make progress even in the worst of conditions. On the evening of 12 December, after years of planning and more than 650 miles of journey through torturous conditions, Amundsen found himself only 45 miles from the pole. The weather was clear and he had no idea of Scott’s whereabouts, but instead of pushing through to the pole he covered only 17 miles and set up camp once again, refusing to be tempted or influenced by conditions to change his strategy.

Amundsen eventually got to the pole first and returned back to base with his team intact. Scott, on the other hand perished with his entire team, found eventually only a few miles from the safety of camp.

Jim Collins refers to this strategy in as the 20 mile rule and his research shows that companies that grow consistently perform better in the long run than those that adjust their plan according to market conditions. But in real estate investment this rule is even more relevant.

Think back over the last 7 years and remember how many unprepared adventurers dived into residential property investment and bought up houses in a frenzy while the conditions were bullish. At one stage in 2007 one in every four properties sold was bought for investment purposes and this fuelled an oversupply of housing especially in the mid-priced market. Off plan offerings were snapped up by investors with no plan other than to flip on to a willing buyer who would hopefully be prepared to pay more for the property on completion. The result was catastrophic for many who would have been significantly better off if they had a long term plan and stuck to it religiously. I am sure you know investors like Scott who perished in the financial crisis that followed.

Most people buy property as a pension plan to replace their income when they retire, and this is where property investment is a winner.

But apply the 20 mile rule.

Look at the end goal and decide how much free cash flow you will need to live off at that future date. Calculate the value of the debt free property you will need to own to generate that income at that future date and work back to see what you will have to acquire to make that happen. Work on yield or cash flow.

There is no wrong answer as long as you end up with a plan and you stick to it religiously, regardless of what the markets are doing.

This year the Discovery Invest Leadership Summit will be taking place in Johannesburg at Sandton Convention Centre on Wednesday, 21 September 2011. Speakers include Dr Nouriel Roubini, Ricardo Semler, Chris Anderson, Dan Ariely, Graça Machel, Maria Ramos, and Al Gore, a huge line up I am sure you will agree.

I have been to the previous 2 summits and I would not miss this one. Check out www.theleadershipsummit.co.za

Without getting too heavy I found the facts quite obviously shouting out in favour of this asset class.

Take a look at the graph below. If you were pretty average and bought an average property in 2000 for cash, and held on to it for all of 11 years, even having the benefit of living in it for the period, you would have done pretty well growing your money by 214%. And according to FNB, even if you had taken inflation (CPI) into account you would still be up 64%. I can’t help thinking that this must be the ultimate advert for real estate investment. Can you imagine if you had taken advantage of leverage, and rented the house out to cover the bond what your returns could have been?

Another thing we should read into this is that in a particularly poor economy the index was the highest ever at 314, 6, so property you could say has never been so expensive.

I (like many other residential investors) am working on the assumption that house prices will remain flat for the next 12 months at least, and will buy property that is being sold below market value in an area where rental yield is good and where I can earn a nett income to cover my expenses after paying a small deposit. So any positive growth in the next 12 months is a bonus. So the stats shown below are again encouraging.

The FNB House Price Index rose by 6.1% in August compared with August a year ago, and an improvement over July. The black line shows the real increase after adjustment for inflation and it seems like the average house is again growing in value at a rate faster than inflation!

Too much analysis of these broad averages is misleading and if you are an astute investor, you will probably have selected property that is performing better than average, and you will have geared it to accelerate your returns.

But as they say the stats don’t lie.

1.Rising property prices
IN 2010 it looked like we had hit bottom and prices were back in positive terrain. The graph below shows that we have subsequently had a relapse, with prices dipping again. Looking at the graph we can see the line flattening out already with the potential to turn positive more steeply as we go into spring. Obviously within this generalisation covering all residential property types that ABSA issues bonds to, there is some property that is growing strongly. I see much of it promoted on privateproperty.co.za. So if you buy well, the opportunities are boundless.

While returns in property as suggested by ABSA in the above graph, are up for interpretation, even at these levels there is some positive yield with the use of debt or leveraging in funding the purchase.

2. Lowest interest rates since 1974
Nothing has changed here even though there was strong speculation that we would be well into a cycle of rate increases by now. What has changed? I guess there are a few macro-economic factors, but the result is we have very slow growth in the economy and the SARB have decided to keep rates down to try to get some stimulus going. It is predicted that nothing will change here even though inflation will knock through the prescribed ceiling before year end.

3. The bubble factor
If a “bubble” is defined as a period where replacement cost is equal or lower than the selling price of a home, the opposite must also be true. A wise economist once professed ( I believe it was Erwin Rode) that when the price of a new house is the same or less than a second-hand home a bubble exits. This makes sense to me as clearly second hand houses are older and should be trading below what a new modern house would trade for, but if demand is so high that demand is driving up prices to beyond replacement cost, then the market has gone mad and a bubble exists. The below graph shows that although there is some moderation due to building costs dropping to an all time low, there is still a significant gap between old and new. So there is not much incentive for the market to produce new houses leading ultimately to a shortfall in available housing, pushing rentals and prices firmer.

4. Rental yield
In the current market, most sane investors are investing for yield. Again there is great disparity between luxury houses (that don’t get good yields) and entry level flats and townhouses. Everything hinges around rentals for me because ultimately tenants will move from renting to buying and prices will rise with demand. But even with the low interest rates, this is not happening and rentals are firming strongly. See the FNB graph below.

Above are 4 of the fundamentals i discussed last year, and i will follow with the others in a later post.

So what is your view on these comments?

But I can tell you that I got hooked by the property bug buying my first property at an auction. It was an old house bordering on a commercial node that was part of a deceased estate. I knew there was a lot of interest but i had a tenant lined up already. I remember watching the bidders at the auction from my seat and when they were exhausted fighting it out against each other and the hammer was going to fall, I put in my first bid. All I can say is it is a really exciting process with the best opportunities to find bargain properties. But you really need to understand the rules of the game.

Let’s explore some of those.

Firstly there are different types of property auctions, so chose which type of auction you go to carefully. In South Africa there is a growing trend to sell your house through an auctioneer in a VOLUNTARY auction, with the prime purpose to get a better price for the property playing buyer against buyer in a live environment. These auctions can work well for the seller in an active property market but seldom work for the buyer. The seller has a reserve price and the sale is subject to the sellers acceptance.

Look out for the bank auctions, also a voluntary auction (sort of), organised by the bank but where the distressed seller (who is significantly in arrears with his bond)is given an ultimatum to sell at the auction, subject to the bank accepting the bid. In this case in most circumstances the properties are sold at a discount and the bond holder agrees to write off the shortfall on the outstanding bond. (in fact they give the seller an unsecured loan with soft terms for the shortfall) So in this circumstance you are buying a home from a seller with all the normal warranties and on transfer the rates and taxes will have been sorted by the seller. This is a great place to source realistically priced property, without the risks inherent in forced sales.

SHERIFF auctions – The ultimate source of great value property is of course the SHERIFF auctions. Where the bank is unable to rehabilitate the bond holder and they see no chance of recovering their funds, the bank applies to the court to attach the property and sell it to the highest buyer as it stands, called a sale in execution. These transactions are executed by the sheriff of the court. They are not well advertised with poor turnouts and often postponed. In most cases the only party at the auction is the bank. The bank will let the property go at a big discount, often around 50% of value, and this is where the real opportunities lie.

PIP – Understand when the bank buys the property in at a sale in execution they have to incur significant costs, transfer, evicting the errant occupants, making good the damage and securing the vacant property. On top of that there are many stalling tactics that can hold the process back and the bank gets locked up in litigation, preventing them from selling the property on. They add all the costs incurred and try to recover the total when they sell. This is the property in possession, or PIP, and therefore not great buys in most cases.

If you are ready to go and get in on the action, here are 5 Lessons you should remember before buying at a sheriff auction;

1. Make sure you can follow through with the purchase. If you can’t make the guarantees, you will forfeit the deposit and still be liable for sheriff’s fees.

2. The property is sold as is and it is your responsibility to settle all outstanding rates, taxes, municipal services, body corporate levies and don’t rely on the figures given by the sheriff.

3. The majority of these properties are occupied and it is your problem to evict the occupants.

4. If the owner is sequestrated, the transfer can be held up for extended periods of time. The owner is often allowed to have occupation while this is in process and you cannot get transfer, so your deposit and costs are locked up.

5. You will have little time, or often no access to the property before the auction, so there is considerable risk that the property is in a reasonable condition.

I am a free market advocate. If you want more housing, create an environment that gives benefit to the individual who creates it, and make sure that the markets are well oiled, and you will get housing. The more you interfere with the market the less chance you will achieve that goal. When we build or buy houses, we create supply, which collectively, keeps the price of housing in South Africa relatively low. (Even though we are trying to profit from the price increases that inevitably come when demand outstrips supply)

I am not naïve to the challenges facing the growing gap between rich and poor, land owners and landless, but messing with our intrinsic right to own property is so counterproductive its frightening we actually are still having this debate. I can find no example where any place in the world has flourished under communal land ownership of any shape, please correct me if I am wrong. There is also few examples of government being capable of running any business efficiently.

I accept that the idea that a person could own land has not always existed. Feudal lords in medieval Europe distributed land in much the same way as in much of Africa where Tribal Chiefs still prevail. Tenure was traded for loyalty, soldier duties and taxes.

This changed in much of Europe starting in 1789 with the French Revolution where the lands belonging to the aristocracy were seized and redistributed. The Russian Revolution of 1917 and the Chinese Revolution of 1949 was even more radical doing away with private ownership altogether. Mugabe’s Zimbabwe is hardly an example, because there appeares to be no constructive purpose in the way that productive farms are still being stolen and destroyed, but the result of that is clear to see. So we now have the benefit of learning how badly these economies failed, and the faster they have reformed and privatised, the more they have developed.

When colonialists spread into the new world they bought, bartered and stole land from the indigenous people in the countries they occupied. But by cutting up the land giving ownership, thereby providing INCENTIVE to mostly hardworking and sometimes skilled immigrants, to farm, mine, or improve, FOR THEIR OWN GAIN, resulted in those countries flourishing.

In Africa today, there is a direct correlation between the amount of privately owned land and the size of GDP.

We can’t turn back the clock but we can learn from the past, and implement the best strategy to create jobs, housing and food for the people of Africa. The answer is for government to fire up the power of entrepreneurship. MORE land ownership is the answer, so get the land off the government balance sheets and put it in the hands of the people. Reform the tribal system to provide tradable title to the occupants. Give mining rights to the highest bidder so we can get the capital and expertise to unlock our HUGE natural resources, privatise the generation of electricity and rail infrastructure so foreign capital can help us dig the stuff out, process it and get it to the ports.

The rapid growth in GDP, tax revenues and employment that will follow will quickly reinstate this awesome county of ours to top position, as an example of true democracy, where state really is “for the people”.

Its a no Brain-er!

I got to thinking that maybe they are not so obvious. In fact I realised that they may be quite subjective as different investors buy for different reasons with very different circumstances.

So let me put 8 of my most relevant fundamental rules that should drive your property investment:

1. Cash flow – The market is not going to take off like it did in the last boom, and it is predicted that it will stay flat for the next few years as we recover from the excesses of the previous cycle. SO don’t try to speculate with high end residential stock. Rather look at property that generates cash flow – yield. That can be commercial or residential.

2. Location – cash flow is important but so is location, so be careful of the low end flats in bad areas. Would you live there? Are you prepared to go and sort out an issue with the tenant?

3. Buy good quality stock – If the building or unit is cheap, there may be a reason, and maintaining a poor building is always more expensive than you imagine.

4. Customers/tenants – all business is built around customers, so when considering an investment look at the potential to attract tenants. Let’s assume you have an industrial building selling for a high yield but purpose built for a particular business. When the lease is up and you start looking for new tenants will you have to change the building substantially to match the market needs? In residential property, this means buy near a commercial node, where there are always tenants.

5. Retail Value – finally look at the value. Any trader will tell you that good business requires that you buy for R1 what you can sell for R2, so why should property be different? Find a good buy, where the product is being sold for lower than market. There is lots out there at the moment.

6. Replacement value – how much would it cost you to build or replace the structure + land? If you can buy land down the road and build for less, it probably makes sense to do so. It is said a real estate bubble as a time where the market is paying more for second hand property than it costs to replace it. So beware if you are paying a premium over the replacement price.

7. Time – property investment is not an in and out business. It’s about creating long term passive income. Match your expectations.

8. Gearing – Don’t over extend yourself, you don’t want to be forced to sell when everyone else is doing the same. But gearing can get you great returns on your cash employed.

When we talk about fundamentals, its mostly about using common sense. Whatever your financial advisers say, property is a great way to build long term security, and you don’t have to give up your day job to do it.

I thought I would share a story about a fellow who was very good at accumulating wealth, despite his humble beginnings and limited formal education. I suppose you could call Kieth my “rich Dad” if you were a Kiosaki fan. In fact he was my Uncle. Through the years that I watched Keith build a modest empire he never used a computer or read a newspaper. You would think that the ability to do detailed analysis and being on top of current affairs is vital for a captain of industry? But Keith relied on paper, a jar of pencils and a calculator on his desk to make decisions, and it worked for him. His shortcomings were in retrospect one of the reasons why he was successful. You see he was not clouded with a noise of unnecessary information. He probably would not have paid too much attention to the ranting’s of the Malema’ s of the day, but focussed his energy on the simple fundamentals. “Buy for R1 and sell for R2” or “I can get more rent for this property than it costs me to borrow the money”.

So let’s take a simple look at today’s property market conditions through Keith’s eyes.

Developers produced more stock between 2004 and 2009 than the market could absorb, and there is still surplus stock of new built (therefore maintenance free) houses, townhouses and flats for sale, many directly from the developer at 2007 prices, including VAT (so no transfer duty). The previous interest rate cycle has put the average over indebted South African household under significant financial distress sprinkling the market with some desperate sellers, pressured by the banks to sell and take a loss or face repossession. At the same time Interest rates are at their lowest since 1973 so cost of capital is cheaper than it has been for nearly 40 years. There are more tenants in the market as a result of tighter lending criteria by the banks and first time buyers are less able to move to becoming home owners. And finally, rentals are firming. From an investors point of view this looks like the perfect feast. I am pretty sure I know what Keith would do.

But in this world filled with information and data, investors seem to be staying out of this “bad” residential market.

According to the 4th quarter FNB Estate Agent Buy-to-Let survey, buy-to-let buying was only 7% of overall transactions in the period, down from over 25% at the peak of the “good” market in 2004

Of every 4 buyers in early 2004 at least one was buying for investment purposes! Consider the amount of supply of units that came onto the market for rental often at the same time, as developments completed, and in the same areas, where land was available for development. And this was the good times, apparently. Why do we get caught up in the spin of it all?

Fundamentals matter in real estate investment more than anything. Real Estate is simple, there are fewer variables and cycles happen more gently. You should not consider investing in residential property as a short term investment, buy well, don’t over gear, hold and don’t worry about the cycles.

Ask me if it’s a good time for residential real estate investment and I will stick my neck out and say yes – it always is. Tune out the noise…________________________________________

I stuck my head out recently when I wrote that inflation can be the property investors friend, and this of course is especially relevant when you are geared. The effect of a period of high inflation is that the capital amount owed to the bank becomes worth LESS in real terms than when you borrowed it. Also the rentals paid by your tenants will become cheaper relatively , providing room for you to escalate them. The replacement cost will also appreciate with inflation.

The downside to inflation is that interest rates are used as a first tool by the Reserve Bank to counter it, so rates are hiked to keep inflation within the government prescribed ratio, and that means we end up with a variable monthly cost which is very dangerous if you have not provided for it.

We can be pretty sure now that interest rates are on their way up. The banks have already made the assumption that rates will be increased by the end of the year by 0.5%, although SARB is still talking about early 2012.

Is there any way to negotiate a fixed rate from the bank?

My view is that I will not fix at this stage. Firstly I don’t believe rates will run like they did in the last cycle, because we are still over extended (our debt ratio is too high) and an increase of more than 2% will be extremely uncomfortable for homeowners. (John Loos – FNB Property Market Analytics 25 March 2011)

Secondly, we are already experiencing “cooling” measures that are not interest rate related as we pay more for fuel, electricity, water, rates, and road tolls.

But the most important reason why I wont fix is that the bank gets to employ a very clever bunch of analysts and actuaries, who calculate these risks for the bank. The purpose of offering fixed rates is not for your well-being but for the bank to make money out of you. So if the bank thinks they will be safe with a 3 % premium then I am NOT going to bet against them.

There is always a case for fixing your home loan rate, and we have not considered wildcard external forces like escalation of unrest in the Middle east and Nuclear catastrophe in Japan, both of which are possible.

If you want to be safe then remember that the option is available and it’s probably a good time to consider it now.