Share this
Twitter
Digg
Del.icio.us
Yahoo
Technorati
Googlize this
Facebook
Hear this text
Print
E-mail
Tags
Should South African investors focus on properties or shares, or both? BBQ speaks to industry expertsWould the remarkable property boom of the first seven years of the 21st century subside, or continue at a slightly slower rate within the next decade; or should domestic businesspeople discard property and opt for the shares portfolio?
Economists say a focus on global economic factors should bring would-be investors closer to the truth about the correct choice.
Global economic factors
Economists and market analysts are divided on the sustainability of the global economic recovery and the prospects for economic recovery in 2010.
As long as uncertainty prevails, inflation remains subdued and central banks keep interest rates low while maintaining most emergency measures, and because of that, liquidity remains high, said Prieur du Plessis, chairperson of the Plexus Group.
But for how long will this liquidity remain high?
Louis Fourie, the founder of Citadel and the current executive director of The Logic Filter, a mentorship consultancy for executives, told BBQ that interest rates will remain ”consumer friendly” for at least another year, as credit demand had fallen to non-inflationary rates of increase in the last 12 months.
Kim Silberman, an economist at Cadiz Securities, said inflation will not remain subdued merely because uncertainty prevails. Inflation fuelled by Asia may well feed into the rest of the world.
She agreed it would be some time before domestic demand-driven inflation is a problem in developed world economies.
American and European Union rates also may rise due to a fall in demand for their treasuries as opposed to a hike in rates in response to inflation. “We are starting to witness some pressure on rates as fears about fiscal deficits mount,” she said.
But what happens if the global economy returns, or when worldwide inflation increases and central banks are forced to withdraw existing emergency measures and increase interest rates to reduce liquidity? How will all this impact on investment in shares and in property?
Fourie said asset price trends lag interest rate movements by some 12 months. This implies that the first interest rate increases will signal a cyclical lid on both stock prices and the property market down the line.
Dawie Roodt, director and chief economist of the Efficient Group, said global inflationary pressures will force central banks to tighten monetary policy, perhaps as soon as the second half of 2010.
A further threat is also a possible sharp bond market correction. “All these factors can potentially cause havoc with the world economy, but we probably have a year before the pawpaw really hits the fan,” Roodt told BBQ.
In terms of the impact of a possible increase in interest rates to reduce liquidity, and the impact on investments in shares and in property, Roodt said property prices are likely to remain rather suppressed worldwide, particularly in Europe and the United States.
“Share prices are expected to rally in the short term, but with slow gross domestic product growth, it is unlikely to be sustainable. Commodity prices are expected to boost share prices for the next couple of months,” added Roodt.
Pros and cons of property and shares
What are the pros and cons when you consider property and share portfolios as investment options?
Silberman told BBQ that property probably performs more like a growth stock than a value stock and that your expected return would be part capital gain and part dividend.
Investment in property can take different forms such as unit trusts or equity.
Roodt said with reference to non-listed property, shares are generally more volatile than property due to a number of factors. Over the past year or so, shares came under much more pressure than property, but also recovered much faster.
Du Plessis said property offers the potential of capital growth (as the value of the underlying property holdings increases) as well as the potential for the income stream to grow as the rental escalates annually.
The investment potential of listed property should improve as property prices recover and economic growth improves. Vacancy rates in commercial property would decline, resulting in an improvement in rental income.
A moderate exposure to listed property therefore would be a good alternative to low-yielding interest-bearing instruments in an income-generating investment. (Source: Business Day, 22 January 2010)
A few concerns about the property industry
Dave Mohr, senior economist at Citadel, said properties experienced a turbulent and difficult period in the past two years. In the property industry, there was an excessive supply as a result of a boom in the property prices.
There has been progress in addressing the extensive supply. The boom in the non-residential part of the property industry began later, and the vacancy rate in that part of the industry has picked up recently.
More and more non-residential properties are subjected to the increased vacancy rate and one sees “to let” notices everywhere.
People earn x, and of that x, there is a cost of rates, bonds, electricity, municipal tax as well as an increased tax burden from the state. The affordable income to spend on property will experience sustained pressure, said Mohr.
Furthermore, real residential property prices remain very high and many analysts believe that we will not see double-digit growth soon.
The rest of the economy is not dependent on the property industry, but the property industry is dependent on the rest of the economy, added Mohr.
South Africa benefited from a property boom between 2000 and 2008. Normally, one may see two booms of this nature and magnitude in a lifetime. One of those occurred in the early 1980s and the other in the first decade of the 21st century.
Now we have seen a tendency of the house prices in real terms plummeting to where they were before the boom began, said Mohr in an interview with BBQ.
Banks internationally and locally have expanded their property books and banks, therefore are exposed to property to a certain degree. Banks much rather would extend their investments over the full spectrum of the economy, instead of aggressively lending to the property market and becoming too exposed and vulnerable to one portfolio.
Affordability under pressure
John Loos, property analyst at First National Bank, said there may be a massive change in the affordability of housing within the next decade, which will impact on the residential industry.
Where affordability focused on servicing bonds in the past, increases in electricity prices and other expenses such as property tax would force homeowners to look at other operating costs to stay in a house, which would impact on the affordability of housing.
Big houses with swimming pools and extra quarters for domestic workers most probably would be replaced by smaller houses on erven as small as postage stamps, which will accelerate the demand for flats.
There is also a reduction in the sizes of erven. The average erven on which houses were built over the past five years were 586 square metres, versus an average erven of 1 067 square metres 10 years ago, said FNB’s valuers.
Affordability will have an impact on the residential market as a whole because prices will not increase as dramatically within the next 10 years due to additional costs such as property tax and increases in the price of electricity. FNB, said Loos, expects an increase in residential prices of 8% in 2010, an increase of 4.7% in 2011 and of 7.4% in 2012.
There will be a positive impact on the prices of smaller units because of increased demand in the small home sector.
Opt for shares and property
Some economists expect an economic growth of 3% or more for 2010 for South Africa (such as Rian Le Roux of Old Mutual). Other business analysts in South Africa reason that a growth of less than 3% is a reasonable possibility based on high levels of debt, a weak level of local consumer demand and international demand.
The medium-term assessment by National Treasury in October last year was 1.5% growth for 2010.
Roodt expected economic growth in South Africa to be close to 3%, which should be good for shares. “I would prefer to invest in shares right now and in property a bit later, especially when inflation starts to increase a bit, as property is a nice hedge against consumer price index,” he said.
Du Plessis told Business Day that a portfolio of perpetuate preference shares offers an attractive proposition.
Any increase in long-term rates means an immediate drop in the capital value of investment in bonds. This is also true when long-term yields increase at the end of the quantitative easing programmes. “Inflation-linked bonds would be a more attractive alternative,” he said. (Source: Business Day, 22 January 2010)
Fourie told BBQ that a solid wealth accumulation strategy provides for sound diversification.
Property is only one asset class, and on top of that, very exposed to socio-demographical variables with respect to its location.
Shares give you exposure to various industries, even economies. “I would not invest on an ‘either or’ basis, but on the basis of effective diversification,” added Du Plessis.
Fanie Heyns
