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What is your hurdle rate?

Last week I asked a well-known CEO of a large listed property fund what he regards as the hurdle rate for purchasing new property in South Africa. He gave a thorough answer as follows; He would use the Weighted Average Cost of Capital (WACC) where the equity portion is equal to the average forward yield of listed property (currently at around 9.5%) and where the debt portion is equal to the 5-year swap rate (currently around 13%). Averaging the two at their respective weights he estimated it would be around 11.5%. Taking into account that the prospects for lower interest rates and higher property values are good and that a new transaction would take 3-6 months to complete he subtracted 0.5% to arrive at a hurdle rate of 11%.

As private, direct investors we feel that it is prudent to add 1.5% to this hurdle rate to take into account that our portfolios are not as liquid or widely diversified as the listed sector. Therefore an initial yield of 12.5% is the hurdle rate that we regard as prudent for an investor to buy new private commercial property at present.

Over the last month we have seen a massive increase of commercial property for sale. Coming off the back of low interest rates and its inevitable impact on yields it became fashionable to market properties at yields of around 9% over the last couple of years. What we find surprising now is that many sellers still believe they can get these type of yields in the current interest rate environment. Don’t they know that a change in interest rates causes every income producing asset to be repriced? Well, maybe they know but they refuse to accept it and they hope that some uninformed investor would be willing to pay the high price of last year or the year before.

It is well-known that when prices re-adjust downwards that property sellers just don’t sell. They would rather wait. They do this in the hope that prices come back to their previous highs. This is human nature and a very natural response. In the share market, where prices change on a daily basis, investors see the reality of the lower price on their computer screen immediately. With direct property investment, investors should be aware of the change in their property’s values, even though they don’t want to sell. If you decide to sell, something which we don’t advocate, then try to get the best price and be happy if you’re lucky enough to get a premium. If you intend to buy, beware of paying a premium and remember that almost everything on the market now is at a premium - even if you think it is at a discount.

A well-known Australian author and global property investor was in South Africa recently and his message was simple: He wouldn’t touch a new property unless it breaks even from day one on a cash flow basis. So even at 12.5% he would not be a buyer in South Africa. With prime rate at 15.5% and the typical commercial bond deal going down at prime less 1.5%, the cost of money, on an interest only basis, is 14%. So, his hurdle rate is 14% because he likes to use 100% debt finance.

The question is what is your hurdle rate? Are you still buying properties with yields below 10%? If yes, please send me an e-mail. I have details of a large number of great properties I can pass onto you that we will NOT be purchasing!

So far the problem has been that valuers did not have evidence of the changing values because no transactions took place. We now have it on good advice that a recent office block deal was concluded at an initial yield of 9.75%. It was in an A-Grade building in mint condition in a prime business node, with a blue chip listed tenant with a 10 year triple net, fully repairing lease. In other words, a far above average type of deal. If you add a few basis points for a lesser deal in an average area, for a B-grade building, with a non-listed tenant with a less than 10 year lease without it being fully repairing and not on a triple net basis then I reckon you end up at about 11.25%. This seems to be in line with the comments we received from the above mentioned CEO. I look forward to receive your feedback by way of our weekly poll question.

All the best
Executive Editor

SA Property Investor SA Property Investor
Issue no: 203 5 September 2008
 Residential property: a great long-term investment? Go to the top of the newsletter
Many people have the belief that residential property is still a great investment. Read this very informative article by an asset manager and see if you agree.
Residential property: a great long-term investment? - Realestateweb, 02 September 2008
Many South Africans, like a lot of Americans up until some time last year, seem to have this unshakeable belief that residential property is a great investment.

There seems to be an ingrained determination not to pay rent to a landlord so that he can pay off his bond, with the corresponding desire to rather own one's own property and to put one's savings towards one's own bond. Is this tendency to own, rather than rent and invest the difference elsewhere, always appropriate? As ever, the answer is "Well, it depends".

Obviously, when you get your timing right from a capital appreciation perspective - say you entered the residential property market in 2002 - a house can make a great investment. However, the sad reality is that most of the time it does not. Sad, because for most of us our house is the largest investment we will ever make and is viewed as a key factor in our deemed net worth.

Many financial planners that we know choose to exclude a client's residential property from the list of assets used to determine the level of savings and asset allocation required to meet their financial needs upon. Their view is that you never know what price you will realise when you choose to sell, with the market being generally illiquid and subject to wild swings in confidence. In many cases too, a large proportion of the value realised would be needed to discharge debt. 
 Weekly E-News Go to the top of the newsletter
Global tough times -, 03 September 2008
At times it seems as if the ability to complain endlessly about something is a prerequisite to receiving South African citizenship, but with the economic squeeze as tight as it is we can be forgiven for moaning about the cost of living.

Are you sure this is how Donald Trump got started? - Realestateweb, 03 September 2008
Over the years, wise investments in real property have been a winner.

Home loans still within reach - Property24, 02 September 2008
It may be more difficult to obtain a home loan now but it is still possible.

Of human bondage - IP Magazine, 31 August 2008
Mortgage lenders are having to come up with innovative relief schemes for hard-pressed debtors.
Hillbrow building hijackings hit the big screen - Realestateweb, 04 September 2008
Inspired by building hijackings in Johannesburg, the new SA movie Jerusalema tells the vivid story of the harsh realities of living in Hillbrow

"I'm not an upmarket squatter" - Realestateweb, 03 September 2008
"Voetstoots" court case man who lived in property for 2 years while delaying transfer reveals best tip to other buyers.

Not in my backyard! -, 03 September 2008
A finding by the Constitutional Court in June has serious implications for the approval of building plans by local authorities.

VAT: What you pay for property speculation - Realestateweb, 02 September 2008
Want to know how Value Added Tax works when buying off-plan to make quick money? Tax expert answers Realestateweb visitor's question.

Moving? Check out local schools - Property24, 01 September 2008
Among the many things families who relocate have to bear in mind is the quality of schools in their chosen area.

Decision good for property -, 01 September 2008
The SA Reserve Bank's recent decision to keep interest rates on hold has made many property investors breathe a sigh of relief, the Alliance Group said on Monday.

Following a greener path - Property24, 01 September 2008
With the launch of the Green Building Council of South Africa and regulations regarding the energy efficiency of buildings greater than 80sq m(SANS 204), the topic of green building is the latest buzz in today's built envoronment. Antonella Dèsi explores what all the hype is about.

Conference: future of fractions - Property24, 01 September 2008
The two major aspects set to shape and boost the fractional ownership market in South Africa over the next few years are fractional ownership finance, and the emergence of top-class global exchange platforms.

You can do anything! Even be a rich international property investor - Realestateweb, 29 August 2008
Entrepreneur,31, on mission to help other young South Africans build wealth elsewhere.
Residential property prices: the worst-case scenario - Realestateweb, 04 September 2008
FNB launches own house price index and reckons a drop of 5% is worst you can expect before things improve - plus new Absa stats.

Buyers club together to buy homes - Property24, 03 September 2008
Due to inflation and the high costs of property an increasing number of buyers are pooling resources with friends, family or likeminded investors in order get a foothold in the market.

Global property prices: falling like dominoes - Realestateweb, 03 September 2008
They say residential real estate is a local game, but new figures show prices tumbling in one country after the next - with South Africa teetering.

Sect. title for dummies -, 02 September 2008
The rise in popularity of sectional title ownership over the last two decades is a testament to the fact that sectional title ownership is fast becoming the preferred home ownership option for both resident owners and buy-to-let investors.

Ready, set,...not yet! - IP Magazine, 02 September 2008
The residential rentals market has come in from the wilderness with a bang.

Property perks up after NCA "volatility" - house price stats - Realestateweb, 01 September 2008
Standard Bank's median house price index has "returned to normality", though the residential market is "still in the doldrums
Save by managing occupancy costs - Property24, 03 September 2008
As companies face increasing challenges stemming from global and local economic pressures, maximising bottom-line efficiencies becomes as important as achieving top-line profits.

Benchmarking your portfolio of leases: Why it's important, and how to do it - eProp, 02 September 2008
In a stable company with steady staffing levels and few operational changes, performance can be as simple as comparing total occupancy costs from year to year: If they go up beyond inflation, that’s bad, and if they go down, that’s good.
Build firm's book nearly doubles - Property24, 03 September 2008
South African-based construction group Wilsom Bayly Holmes-Ovcon (WBO, WBHO) will be executing work worth R18,3bn for the year to June 2009 - up from R10,6bn the same time a year ago.

Time to buy PUTs ? - eProp, 02 September 2008
The jury may be out as to when interest rates will peak, but experts agree that when they do, it will be the best time to buy property unit trusts.

Bear Market Survival - The Times, 01 September 2008
With damning statistics and predictions of impending economic doom, it is no surprise that many investors are tempted to believe that the local markets are in crisis.
Karoo town lures cash buyers - Property24, 04 Septembr 2008
Residential property in the Klein Karoo town of Montagu is still selling strongly, especially to cash buyers.

BFN's Estoire bucks past trends - Property24, 03 September 2008
Estoire small holding area situated on the north east of Bloemfontein, has never been considered prime investment area. Things are now set to change.

Demand surges in E Cape -, 03 September 2008
The Eastern Cape region continues to experience a high demand for farms - particularly game farms - reports Gregg Rippon, specialist farm agent for Pam Golding Properties in the region.

Midrand well poised to boom again -, 02 September 2008
Situated between Johannesburg and Pretoria, popular Midrand is set to boom once more when the property cycle turns.
UK’s Olympic success buoys consumer confidence -, 04 September 2008
UK consumers’ confidence remained low but did not fall further this month.

Oz's developers welcome slowdown - Property24, 01 September 2008
Established property developers and real estate marketers in Western Australia have welcomed the slowdown in residential sales.
 Upcoming Events & Seminars Go to the top of the newsletter
2nd Annual South African Value Investor Conference
2nd Annual South African Value Investor Conference - Book your seat today!

How to Profit Investing Offshore - focus UK (Seminar)
Neale Peterson (Publisher, Real Estate Investment Magazine)
Scott Picken (CEO, International Property Solutions)
Peter Kirkham (UK Investor & Specialist in UK repossessed properties)
Philip Viviers (Expert in International Tax & Structuring, Moving Money Offshore)
Kevin Jones (CEO, Omega Finance)

Price: R250 per person

2 September 2008 - Hilton Hotel Sandton - 18h30 - 20h30
Book here

3 September 2008 - Sheraton Pretoria - 18h30 - 20h30
Book here

Cape Town
4 September 2008 - Radisson - 18h30 - 20h30
Book here

IPS Exclusive Investor Breakfast Launch
IPS along with City and Docklands & Real Estate Investor Magazine, will host an exclusive breakfast launch. At the launch there will be £20 000 discounts, the developer, mortgage brokers, lawyers and everything else the investor requires. There will also be a 45 min presentation on the UK Market, the development, tax and structuring, moving money offshore, arranging mortages and a FAQ to answer any of your questions. Most importantly you will get the best opportunity to invest!

Price: R250 per person

11 September 2008 - Sandton Convention Centre - 07h30 - 09h30
Click here to book

Cape Town
18 September 2008 - Cape Town Convention Centre - 18h30 - 20h30
Click here to book

George Robertson's Trust Education Seminar - 4 Hour Seminar
For more information visit:

The Estate Agents Affairs Board’s Exams
Dates for 2008: New dates to be confirmed
You must enrol at least 4 weeks before the exam date. For information about enrolling for the Board Examination, click here. For any other information please visit their website:

Reserve Bank Monetary Policy Committee Meetings
8-9 October 2008, 10-11 December 2008
To advertise your upcoming property-related event, please e-mail Marissa the details.
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 Editor's Note
FNB has developed its own house price index - and reckons a drop of 5% is the worst you can expect this cycle. Read the full report.

Absa's House Price Index, released on Thursday, puts the average house price at about R962 500. Read the full report.

Standard Bank's median house price eased by 1,8 percent year-on-year in August, while the median house price in level terms was R550 000. Read the full report.

Due to the huge success of last year's SA Value Investor Conference, Robert P. Miles has agreed to make this an annual event in South Africa. This year the 2nd Annual SA Value Investor Conference will take place in both Johannesburg and Cape Town. Don't miss out on a opportunity of a lifetime. Click here for details and to book your seat.

Until next week!
 Business Partners
 Opinion Poll
The minimum yield I expect of a new commercial property investment as a private investor is;
If the "Submit" button is not visible, click here to vote on our website.
 Last week's poll results
Even amidst the talk of a recession and all the negativity in the property market, are you still excited about property, and more so, investing in property?
 Book of the Week
The Smart Money Guide to Real Estate Investing
Gerri Willis
Buy this book from:
Buy from
 Our Goal

Our goal is to serve all South African property investors; locally and abroad, residential and commercial, direct and indirect, listed and unlisted, large and small, off-plan and existing, single owners, partnerships and syndications. There are obviously many ways to own property but to make the right choice requires intelligent property investing comparisons. Being well-informed is the first step, so our goal is to deliver all the best property information.

 Did you know?

In the common law of England, the doctrine of worthier title was a legal doctrine that preferred taking title to real estate by descent over taking title by devise or by purchase. It essentially provides that a remainder cannot be created in the grantor's heirs, at least not by those words. 

The rule provided that where a testator undertook to convey an heir the same estate in land that the heir would take under the laws of inheritance, the heir would be adjudged to have taken title to the land by inheritance rather than by the conveyance, because descent through the bloodline was held to be "worthier" than a conveyance through a legal instrument.


 This Week in History
01 September 1906

The International Federation of Intellectual Property Attorneys (FICPI) is established.

The International Federation of Industrial Property Attorneys abbreviated FICPI , is a non-political, international, professional body of intellectual property professionals, i.e. patent attorneys and trademark attorneys, in private practice, as opposed to intellectual property professionals working in the industry. FICPI is based in Basel, Switzerland. R. Danny Huntington is the current president.

 Key Property Indicators Go to the top of the newsletter
Prime interest rate
ABSA House Price Index (New)
(nominal year-on-year growth)
(Aug '08)
(Jul '08)
(Jun '08)
(Aug '07)
FNB Residential Property

FNB House Price Index (New)
(Aug '08)
(Jul '08)
(2007 ave)
Standard Bank Residential Property
(Aug '08)
(Jul '08)
(Jun '08)
(Aug '07)
(Avg. house price change)
(Jul '08)
IPD SA Property Index -
Total Return: All Non Residential Property
Property Loan Stock Index
Real Estate Index
Property Index
Property Unit Trust Index
Capped Property Index
For more reports & indexes, please visit our website (Updated)
 Quote of the Week Go to the top of the newsletter
"There are many qualities that make a great leader. But having strong beliefs, being able to stick with them through popular and unpopular times, is the most important characteristic of a great leader."   Rudy Giuliani

Executive Editor
Newsletter Editor
Website & Technical
Rian Maartens
Craig Holt
Marissa Knibbs
Martin Cronje
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SA Property Investor makes no representation and gives no warranty as to the accuracy of the information in this document and accepts no liability for any errors, misprints or omissions herein (whether negligent or otherwise). SA Property Investor shall not be liable for any loss or damage whatsoever arising as a result of any person acting or refraining from acting or placing reliance on any information contained herein. All information in this newsletter been obtained as is and is provided as general information only. No reader should rely solely on the information contained in this publication, as it does not purport to be comprehensive or to render specific advice. As such it is not intended for use as a source of investment advice. All readers are advised to retain competent counsel from legal, accounting and investment advisers to determine their own specific investment needs.
SA Property Investor