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Commercial property: Recovery comes after slow growth

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Previous slumps in the market were followed by a rise

A poor economy and two full years of slow growth have made many investors hesitant to expand their property portfolios, but there are still ways they can embark on new property investments.

Schalk van der Merwe, a Rawson Properties franchisee, says now could be the ideal time to make such investments.

“Conditions at present closely mirror those experienced at the end of the 1998-to-2000 and 2008-to-2010 property market contractions. Both cycles experienced a two-year period of minimal growth followed by a slow recovery, which picked up to deliver excellent growth shortly thereafter.”

“Now, almost exactly 10 years later, we’ve gone through a similar two-year contraction and are starting to see signs of recovery taking place. That suggests a similar upswing is just over the horizon, making this the perfect time to buy and benefit from maximum future growth.”

Investors thinking of expanding their exposure to property should consider investing in under-priced listed property funds, advises Rode & Associates’ Erwin Rode. Industrial properties are particularly attractive as their vacancies are “not serious”.

“But, given the poor prognosis for the South African economy, do not bet on much capital appreciation for many years.”

Investors looking to expand their property portfolios can also consider releasing equity in their current investments, Van der Merwe says.

“One benefit of property as an investment is that it generates equity through appreciation. If you bought a property a few years ago, that property will be worth more than its original, mortgaged value today. That difference, together with however much you’ve paid off on your bond, is equity.”

He says equity can be “released” by refinancing a property at its present value or taking out a home equity loan. The resulting capital can then be used to finance additional investments, which is a popular way to expand and diversify a property portfolio. 

While the option of releasing equity can be viable, Rode cautions that financial gearing (using borrowed money) can, in many instances, reduce total returns to nil.

“This is known as negative gearing, and it implies that buying properties without a mortgage gives you a better chance of getting a reasonable income return.”

In a 2016 article Ian Formigle, vice-president of investments at American firm CrowdStreet and a real estate professional, wrote that although leverage, or debt financing, is an “important and even necessary” part of most real estate deals, as the 2008 to 2009 real estate downturn highlighted, there are times when too much leverage on an asset can be “a recipe for heavy losses”.

“Investors must understand leverage and how it can influence the risk and reward of real estate investments.”

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