Fancy yourself as a property mogul?

Property economist John Loos explains where the hot and cold spots are in the property market.

Bruce Whitfield:
Yesterday’s house price growth figures got me thinking about how one can go about investing in property for a profit nowadays. Consider that if you borrow money at prime, which is 10.5 percent, and house price growth year-on-year is only 12.3 percent, then you are not making too much money after paying back the bank for your bond.

John Loos is FNB’s commercial banking property strategist. John welcome to the programme, nice to have you with us.

John Loos:
Thanks Bruce.

Bruce Whitfield:
Can you still make money out of investing in residential property? Are there still any bargains to be had anywhere you think?

John Loos:
Well I think on the lower side. If one look at the smaller size categories according to Absa, you have actually seen accelerated house price inflation there for a couple of quarters now. Still admittedly in the lower teens but on its way upwards and that is an encouraging sign and that is probably the area to look. The bigger size on the more expensive classes seems to be pretty dead at the moment. Residential property I think is on a go-slow at least till well into next year so it is not the best asset class at the moment.

Having said that, I think later in the decade towards 2008, house price inflation will start to pick up because I expect that by next year the rentals market will probably be a bit stronger with less stock coming into the market. So these things go in these types of swings and I think for the rest of the decade it will be a fairly steady investment but it won't be the best performing one.

Bruce Whitfield:
Investing in property is quite emotional and it is quite egotistical as well. A lot of people are not going to go and buy a one-bedroom pad in Hillbrow or in a similar area in Cape Town because they are going to say, hold on a second, I can't say to people that I am a property investor. I rather go and buy something in Camps Bay and may be paying over the odds for it but at least I can say that I have invested in Camps Bay.

John Loos:
I guess the tendency is to go to the more expensive areas and that might be a bit of a mistake. Generally coastal properties have been doing very well for quite some time because people like to have a holiday house and so on. But one has to look at the less obvious and often less favoured areas. I think for one, township property is going to be experiencing a boom and the one I pick out is Soweto.

I think that is going to be the real flagship model of township investment, a lot of commercial developments going on there and with that will come your residential developments for middle to upper income people. So there is a possibility and that's the result of a structural change in this country, which is taking place and I think it's going to be boom time there.

Bruce Whitfield:
Also if you are obsessed about getting involved in the property market and you take the emotion out of it you ought to look at commercial properties and say, hold on a second, especially factory property at the moment, because if the currency continues to stick to a weakening trend as we have seen recently then perhaps commercial property, more factories and more opportunities in that area and maybe look at unit trusts with the property exposure like that.

John Loos:
Yes I definitely think commercial property is the flavour of the month and it will be so for possibly the rest of the decade. The question obviously with listed property is, is it in the price yet? My gut feel is no. I think South Africans tend to err on the conservative side.

We have had a couple of booms in recent years that has exceeded all expectations, we are in the longest business cycle upswing, we have had a residential boom that has exceeded expectation and I think that the commercial property boom is going to be very similar. It is going to exceed expectations so in other words, things aren't all in the price yet. Cap rates can still fall a bit if you are going for unlisted and I think on the listed side there is still quite a bit of legs as well. I think commercial property and listed property are more the place to be than residential at the moment.

Bruce Whitfield:
You don't get nervous when somebody like the South African Chamber of Business says something along the lines of, we are expecting business confidence to come under pressure in the next couple of months. It suggests that business activity might slow a little bit.

John Loos:
As I say, we tend to err on the cautious side. Yes, maybe a small downturn, but I think we're on a longer-term path of accelerating economic growth. A lot of structural changes that you can't quantify is happening in this economy as we have come out of the isolation years and we are in a commodity super cycle boom and that the majority of the population is just used to getting economically active after very restrictive laws.

The South African Chamber of Business is entitled to their view, but my personal experience as an economist is that on average we have tended to under forecast economic growth for quite some years now and we have tended to over forecast inflation and over forecast interest rates. I think a period that we are in is an underestimated one of what the economy can do and I think that is going to continue for some time.

Bruce Whitfield:
John Loos thank you very much indeed, property strategist at FNB.

Source: iAfrica - www.iafrica.com

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