With swirling political and economic developments, property investment in South Africa has been on tenterhooks for a few years. With new President, Cyril Ramaphosa, steering the ship, market conditions could improve. In the meantime, it is good news for the brave investor.
Ferdinand Hoffman, who is a director at Moore Stephens in Cape Town, believes the South African property sector is still in a ‘period of caution,’ particularly in Cape Town.
The call for a constitutional review of section 25 of the Constitution to make it possible for the state to expropriate land in the public interest without compensation, has rattled the market, with investors adopting a ‘wait and see’ approach.
“The climate for investment property is uncertain right now, given the clutter of news on expropriation. It does seem clear, though, that apart from unused land, there is probably no risk for commercial and residential property owners,” says Managing Partner for Moore Stephens in Durban, Charles Reid.
Trends and opportunities
On the residential side, lifestyle developments with a focus on convenience and safety are expected to have major pulling power.
“More people want to live closer to their work, shopping and entertainment such as gyms, restaurants and coffeeshops. They also don’t want to sit in the traffic. This will lead to people living closer to each other in smaller properties. It creates opportunities, such as converting office space into residential space and turning a big plot with a single home into a building with many flats,” says Izak du Plessis, the head of the
Moore Stephens property team and director of Moore Stephens Stellenbosch.
For buyers or sellers in property, tech is all-important. Young South Africans, in particular, are looking for properties that offer high-speed internet access and fibre-optic networks. They are also going ‘green’ with features like solar power and greywater systems, which are drawcards too.
Reid says he’s not a fan of investing in residential property, other than your own home, given possible problems with managing tenants.
“Having said that, there seem to be interesting opportunities in the inner cities and in student accommodation – not for the faint-hearted though!”
If you are keen to plunge into investing in inner-city areas, the government’s Urban Development Zone incentive offers tax breaks in 15 designated inner cities across the country. Demand for mixed-use precincts in inner cities is on the rise.
Commercial properties
On the commercial front, Reid sees opportunities for converting existing properties for commercial use, although he cautions that it is difficult to make the numbers work on new commercial developments if investors are relying on a big chunk of borrowing to support their investments.
“Appropriate levels of gearing are key to property investment returns. Investors need to manage their personal exposure by carefully selecting and vetting tenants, given the insistence on guarantees by institutional lenders in South Africa.”
Another interesting investment option is in storage facilities. Du Plessis says storage units are becoming popular, as people move to smaller living spaces and need somewhere to store their extra furniture and goods.
Retail and office trends are shifting too.
“Retail properties need to change to provide more entertainment for their customers, while offices are moving to shorter leases. There is also a trend towards sharing office facilities between businesses,” says du Plessis.
Nail your strategy
Hoffman suggests that clients interested in developing property portfolios should determine their property investment timelines and strategies upfront, and not deviate from them.
“Your risk appetite should determine the investment asset base and the required yield should determine the funding structure and gearing levels. Taxation benefits should remain a secondary consideration for investment property,” Hoffman suggests.
Wise up on tax
The bigger your portfolio, the more you will pay on estate duty and transfer duty. Du Plessis suggests that it is very worthwhile to ask for advice on how to
structure your property investment portfolio in a tax-effective way.
Capital Gains Tax is a major consideration.
“Taxation is only triggered upon disposal and realisation of value and should therefore be avoided if possible. If investment properties held as capital assets are sold, the effective capital gains tax rate can vary from 18% to 22.4% in most cases,” says Hoffman.
The Value Added Tax (
VAT) increase from 14 to 15% introduced in this year’s national Budget is also expected to impact on the property market.
“Residential property investors will pay more if they buy properties from VAT-registered sellers like developers. Commercial property investors will also pay more VAT but will be able to claim it back, so the increase will not have a big effect on them,” says du Plessis.
The budget presented to Parliament in March also announced that estate duty will increase from 20% to 25% for estates worth R30 million or more.
“The increase in estate duty in the 2018 budget will have a limited effect on property investment as most investors above the R30 million threshold transact within a trust or company structure for this purpose,” said Hoffman.
Whether you are building or managing a portfolio of properties, or just investing in a second property, it is important to plan well, get advice on being tax-efficient and weigh up the pros and cons before you commit to a deal.
Contact Izak, Ferdinand or Charles or contact the Moore Stephens property experts closest to you.