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| A Time to Reap and a Time to Sow by: Jason Lee - August 2009 There is no question in my mind that in current market conditions the key is to get back to basics. This is not the time to be throwing money and time at large scale property development whether commercial or residential. In fact the hard line taken by most SA banks at present in not granting finance for new development projects should be enough of a warning light for anyone even contemplating new development projects in this market. Current market conditions are all about sowing the seeds for the next property boom and those that position themselves well in the next 3 to 5 years will stand to reap unbelievable rewards in the years ahead. A number of readers may be surprised at my 3 to 5 year time period in which to sow the seeds for the next boom. Unlike a number of optimistic property commentators that are talking about a return to the glory days in line with the 2010 soccer world cup I am afraid that I do not share their sentiments. In my view it is a little naive to think that after the extended boom enjoyed by all that down market conditions will be short lived and everything will be back to normal by next year. I believe we are still facing at least 3 more years of a buyer’s market and then a slow and gradual climb back to the boom times. In terms of getting back to basics there is no better value and or investment in current market conditions than buying good old fashioned middle class family homes that offer 3 bedrooms, 2 bathrooms, open plan living, a garden and good security. If you consider that most homes that meet the above criteria are now being valued and listed at selling prices that are approximately 20% lower than what the agents would have listed them at during boom times, and if you consider further that most buyers are offering and closing deals at 20% less than the listed price in the current market then without doing any work except buying smart you are effectively buying these properties at a 40% discount. That toppled with current low interest rates and an ever increasing pool of tenants waiting to rent these properties makes these properties incredibly prudent investments in this market. If you think that this is too simplistic and that I am alone in this approach then think again. In his article “The Hamptons Stress Test” (Vanity Fair magazine July 2009) Michael Shnayerson reports the following from a Hamptons (the prize suburb outside New York traditionally home to the very rich and famous) estate agent: “It’s like trying to catch a falling knife” says Mala Sander, of the Corcoran Group in Sag Harbor. “Listings that were $6million last year which should have been $4million, now they’re going for three and a half.” “This is beyond anything I have seen in 22 years,” says Tara Newman, also with Corcoran. “I’ve gone from low expectations to no expectations. Later in the article the author comments as follows: “Sales have slowed to a trickle, and 25 percent off asking is where the haggling begins, not ends. But houses do change hands, and a new listing, modestly priced, stirs online inquiries from cash-hoarding buyers set to jump in at the right time. Scott Strough, of Strough Associates, has a Wall Street client – a Wharton quant, former George Soros hand, now with his own fund – who has looked at 700 to 800 houses. “Literally,” Strough says. “He’s drafted spreadsheets.” It is clear from the above that discounts on middle class family homes are available worldwide and are drawing the interest of some very sophisticated investors. The beauty of these investments is that they do not require development rights, plans, builders and professionals, commercial tenants to stay in business so that they can pay the rent, body corporate meetings etc. All they need is time. Despite what you may have heard the banks are still lending money for the purchase of well priced family homes even up to 100% if you are prepared to help them get a defaulting bondholder off their books (see www.quicksell.co.za). If you are not able to procure 100% bonds then these easy to understand property investments make perfect sense for family, friends, colleagues and investment clubs that are looking for long term investment opportunities. Please also bear in mind that you do not necessarily have to buy 800 houses like in the example above to make money in the medium to long term. In fact with our volatile interest rates that are traditionally high compared to most first world countries I would caution against buying large numbers of houses that could put you in a precarious cash flow position. At the end of the day it is all about value for money and quality stock over quantity. A classic example of this is a house in upper Kenilworth, Cape Town that I recently missed out on because I did not pounce when I had the chance. The house in question is a beautiful old manor house situated on 2000 square meters that in boom conditions would have sold in a week for R6.5m. Given the current market conditions the house was listed at R5.5m. I was prepared to pay R4m but did not submit my offer because the agent informed me that it would never fly (wow was that a huge mistake). I recently discovered that the house sold a month ago for R3.5m! Without doing anything but waiting I believe the buyer of that property stands to at least double his money in the medium to long term. What makes the deal even sweeter is that the property is perfectly positioned to subdivide and sell a 1000m2 vacant plot. The purchase of one great property like this can be more beneficial financially than bragging to your friends that you own 20 properties that could take you under if you are not careful. For those of you looking for short term gains I would once again turn to middle class family homes. The predominant buyers in current market conditions are first time buyers and middle class families looking to upgrade or find more space. The banks are also still willing to lend to these buyers because they are end users that offer significantly less risk to the bank than investor buyers. Testament to demand for these properties can be found in the May 2009 Property Genie Trends Report (see www.propertygenie.co.za) where it is indicated that the most viewed online property for May 2009 was a Parkhurst, Gauteng Property offering 3 bedrooms, 3 bathrooms and a garden. Despite market conditions if you can buy a solid family home at a bargain, make cosmetic changes that are appealing to middle class buyers, and price it competitively there are still opportunities to make short term gains even in current slow market conditions. Builders and the building trade in general are coming under pressure at the moment which in turn is driving down prices on new builds and home renovations. I recently did a major renovation on a commercial property that I own that cost me a fraction of what the same renovation would have cost me 2 years ago. If you can buy low and renovate for less there is a good chance that you can sell the property at a price that offers value to a buyer that does not want to go through the inconvenience of doing renovations him/herself. I will caution, however, that there are no guarantees in this market so always have a backup plan to rent the property out and have enough resources to cash flow the property until you are able to sell it. Happy house hunting!! |
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