The Property Market

1
The Property Market OPM Leverage for Personal
Advantage
Presenter Christopher Hart Senior Treasury
Economist
2
Outline

• Focus buy to rent
• Property as an investment the foundation
• The currency and interest rates
• Property performance
• Pitfalls and strategy
• Investment return potential

3
(No Transcript)
4
Inflation currency a major driver
Forecast sideways to the end of 2005. Further
strength cannot be ruled out.
5
Inflation in a cyclical upturn, peaking by the
end of the year or early next year
6
Pipeline inflationary pressure PPI and CPI
7
The rand and inflation
8
SA US Consumer Inflation Differential
Lower than the US for the past 10 months!
9
SA US Producer Inflation Differential
Lower than the US for the past 18 months!
10
International Inflation Rates
11
International Interest Rates
12
(No Transcript)
13
Performance improving27,7 y/y August 26,8
y/y July
14
Affordability of housingSouth Africa House
prices and income
Income required to qualify for a mortgage bond
of which the repayment does not exceed 30 of
income
15
Pitfalls and Strategy
16
Pitfalls

• Requires active management
• Credit risk
• Maintenance risk
• Hidden costs
• Cash flow
• Vacancies
• Reserves quickly exhausted

17
Assumptions

• R1 000 000 capital cost
• Rental starting at 0,8 of initial value (pm)
• Value escalates at 15 (pa)
• Rental escalates at 10 pa
• Maintenance costs at 1,5 of value (pa)
• Bond costs at 11 interest (pa)
• Registration costs at R100 000
• Insurance R500 pm
• Rates taxes R1000 pm

18
Investment Performance
19
Returns

• Outlays R448 270 (Including opportunity costs)
• Net Return R1057 620
• Outlay equivalent R4440 pm
• Return equivalent R10 460 pm
• 136 return pm
• Increases with further advances
• Rental income could be better (0,58 of the value
  at end of period using the assumptions)
• Capital growth could be better

20
Investment PerformanceFurther advance of R100
000 assumed
21
Returns

• Outlays R220 000 (Including opportunity costs)
• Net Return R890 000
• Outlay equivalent R2170 pm
• Return equivalent R8780 pm
• 305 return pm
• Infinite returns if no (net) money is invested

22
My Strategy

• I ALWAYS register a bigger bond on an investment
  property (say) 150 of purchase price
• Limit the total bond on own dwelling
• Pay as little of the capital sum of the
  investment as possible while you still have
  consumption debt
• Increase holdings when investment property
  becomes cash-flow neutral
• Take a 10 to 20 year commitment
• De-leverage after this period for financial
  independence work only for the joy!

23
Some (nasty) issues

• Foreign ownership of property
• Municipal rates and taxes

24
Summary
25
(No Transcript)
26
(No Transcript)
27
(No Transcript)