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A Fin24 user seeks advice on how to increase his investment portfolio. He writes:
I'M 41 years old and have made some of my own investments over the years: R600k in the Oasis Equity, R900k in Coronation Industrial, R200k in Coronation Property, R100k in Foord equity and R100k 36ONE Flexible Equity.
Some of the investments are running out of steam.
I don't have any physical property exposure.
My broker's advice is to get out and go into a balanced portfolio. Please advise - I would like to increase my investment portfolio.
I am debt-free.
Daryl Ducasse, investment risk specialist and investment manager at Merkurius Capital Solutions, responds:
If you would like to get into direct fixed property, I would recommend that you consider shifting expectations on return, income and capital growth.
From a residential point of view, returns have and can be in the range of 4% to 8% in the first year.
Residential capital growth has been flat in real terms for a number of years (don’t let statistics fool you – do the research on market conditions and historic sales prices in the area you may consider buying in).
Income growth has a cap – i e there is a point beyond which you cannot escalate the rental in relation to the offering (for example, a 1 bed apartment valued at R800k will only attract a certain type of tenant, with a certain income profile - you would not be able to get R12k per month for that unit).
Escalations are 10% and below, and you would be carrying further costs such as body corporate levies, rates and taxes and any net consumptions not paid by your tenant.
In addition, there is more of an inherent risk when it comes to residential property letting; even though you may enter into a one- or two-year lease, the Consumer Protection Act affords tenants the right to cancellation with one month’s notice.
During that time they may well have accrued expenses which they have not paid for, leaving you to cover them (the various municipalities place the burden of payment on the owner of the unit).
Your only solution in that event is litigation, which will incur more costs on your part, with the potential failure of recovery in any event.
Furthermore, the Prevention of Illegal Evictions Act can interfere with any intention you may have of evicting a non-performing tenant from your property, particularly if that tenant is a single mother, dependent on one income – the court would not necessarily favour your circumstances over hers.
Sorry to be such a prophet of doom; it is not consistently like this – just a fair warning that having Coronation manage your funds hassle-free could actually be far more convenient than managing such a property under these circumstances, and you are encouraged to do your research before taking the plunge into this investment area.
To counter all of the above, you could find a reputable rental agent and property manager (don’t fall into the trap of thinking you can manage your unit better, you pay those people to take the burden and hassle off your hands - and don't be tempted to manage it yourself because you want to demonstrate competency on your part).
Stepping away from residential ownership and letting, you would probably be better off finding a small commercial property, although the fact that you have somewhere in the vicinity of R2m and don’t wish to gear may make this a challenge (commercial property is usually the domain of larger investors).
Having said this, you may be fortunate enough to find a neat sectional title office unit, or retail or mini-industrial unit with a good tenant.
I much prefer commercial property, for the following reasons:
In conclusion, I am presuming you would not want to take all your available funds and shift into direct property, otherwise you would not achieve a balance.
I can only assume then that you would want to apply no more than 20% to 30% of your available capital.
That being the case, perhaps you can take a view on land for development – there are a number of opportunities which have come out of distressed environments where you would enjoy real value.
Otherwise, you do need to consider gearing a residential or small office unit. My partner runs a small business in Cape Town's Century City leasing apartments in a top grade building on short-term lets; this is a very successful formula.
- Fin24
Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.
Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers.
Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.
I'M 41 years old and have made some of my own investments over the years: R600k in the Oasis Equity, R900k in Coronation Industrial, R200k in Coronation Property, R100k in Foord equity and R100k 36ONE Flexible Equity.
Some of the investments are running out of steam.
I don't have any physical property exposure.
My broker's advice is to get out and go into a balanced portfolio. Please advise - I would like to increase my investment portfolio.
I am debt-free.
Daryl Ducasse, investment risk specialist and investment manager at Merkurius Capital Solutions, responds:
If you would like to get into direct fixed property, I would recommend that you consider shifting expectations on return, income and capital growth.
From a residential point of view, returns have and can be in the range of 4% to 8% in the first year.
Residential capital growth has been flat in real terms for a number of years (don’t let statistics fool you – do the research on market conditions and historic sales prices in the area you may consider buying in).
Income growth has a cap – i e there is a point beyond which you cannot escalate the rental in relation to the offering (for example, a 1 bed apartment valued at R800k will only attract a certain type of tenant, with a certain income profile - you would not be able to get R12k per month for that unit).
Escalations are 10% and below, and you would be carrying further costs such as body corporate levies, rates and taxes and any net consumptions not paid by your tenant.
In addition, there is more of an inherent risk when it comes to residential property letting; even though you may enter into a one- or two-year lease, the Consumer Protection Act affords tenants the right to cancellation with one month’s notice.
During that time they may well have accrued expenses which they have not paid for, leaving you to cover them (the various municipalities place the burden of payment on the owner of the unit).
Your only solution in that event is litigation, which will incur more costs on your part, with the potential failure of recovery in any event.
Furthermore, the Prevention of Illegal Evictions Act can interfere with any intention you may have of evicting a non-performing tenant from your property, particularly if that tenant is a single mother, dependent on one income – the court would not necessarily favour your circumstances over hers.
Sorry to be such a prophet of doom; it is not consistently like this – just a fair warning that having Coronation manage your funds hassle-free could actually be far more convenient than managing such a property under these circumstances, and you are encouraged to do your research before taking the plunge into this investment area.
To counter all of the above, you could find a reputable rental agent and property manager (don’t fall into the trap of thinking you can manage your unit better, you pay those people to take the burden and hassle off your hands - and don't be tempted to manage it yourself because you want to demonstrate competency on your part).
Stepping away from residential ownership and letting, you would probably be better off finding a small commercial property, although the fact that you have somewhere in the vicinity of R2m and don’t wish to gear may make this a challenge (commercial property is usually the domain of larger investors).
Having said this, you may be fortunate enough to find a neat sectional title office unit, or retail or mini-industrial unit with a good tenant.
I much prefer commercial property, for the following reasons:
- The returns are usually between 8% to 11% in year 1.
- The tenants are commercial in nature and unless they are a sole proprietorship, they do not enjoy the same privileged protection of the CPA, meaning any process of litigation to recover outstanding amounts due to you is less likely to invoke that type of defence.
- These tenants often have capital equipment of far greater value than residential tenants (in an apartment), and a landlord's hypothec - a legal right to recover unpaid rent from a tenant or avoid a damages claim - means that you have some ability to recover monies owing to you.
- Escalations are also in the range of 8% to 10%, but capital growth out of these investments may exceed that of residential property.
- Utilising gearing (from a bank), you may be able to double the value of the acquisition you can consider – provided you manage the interest rate risk properly;
In conclusion, I am presuming you would not want to take all your available funds and shift into direct property, otherwise you would not achieve a balance.
I can only assume then that you would want to apply no more than 20% to 30% of your available capital.
That being the case, perhaps you can take a view on land for development – there are a number of opportunities which have come out of distressed environments where you would enjoy real value.
Otherwise, you do need to consider gearing a residential or small office unit. My partner runs a small business in Cape Town's Century City leasing apartments in a top grade building on short-term lets; this is a very successful formula.
- Fin24
Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.
Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers.
Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.
