“These fundamental differences between property and other asset investments are often not acknowledged by commentators and analysts.” In particular, he says, these people tend to overlook the huge advantage of being able to gear a property investment, thereby effectively maximising the investor’s return on equity.
Surprisingly, says Jason Lee, Rawson Commercial National Manager, the “obvious” advantages of investing in property are often not fully understood or appreciated by many people, even though they may have been highly successful in other fields.
He says the simple fact that most of us live and work in buildings, one would think would give us a basic understanding of property and its intrinsic merits.
In practice, however, he says many are often seduced by an apparently more attractive investment channel elsewhere, usually in the money market or a business option – and he says frequently these ‘exciting’ opportunities in business have resulted in the investor losing virtually all or most of what he has put in.
Lee says this is probably the reason why the banks, while still fundamentally pro-property, are traditionally cautious when it comes to funding a new business – or even the expansion of an existing successful enterprise.
“The first excellent reason for going the property route is that the chances of getting finance (anything from 70 to 100%) are good.”
However, Lee says if you invest in a business:
- You will be unlikely to get finance of over 50%
- Your re-payment period will be significantly shorter (very often only three to five years) and this is likely to cause financial stress
- The bank will reserve the right to pull out at short notice, with all payment of the remaining debt becoming immediately due
- Interest rates on the money borrowed are normally very high and comparable to overdraft rates on private accounts
None of this applies to a property investment, he says, where substantial bonds are still available to those with good track records and the repayment period will be two or three times as long as that of a business loan.
Furthermore, he explains, the bank is required by law to follow due process in procuring outstanding debt and the bank’s first recourse is to the property itself.
“These fundamental differences between property and other asset investments are often not acknowledged by commentators and analysts.”
In particular, he says, these people tend to overlook the huge advantage of being able to gear a property investment, thereby effectively maximising the investor’s return on equity.
“If I buy a R1 million investment policy and cash it in, say, two to three years, for R1.2 million, I will have made a 20% return on my cash invested.
“If, on the other hand, I buy a R1 million property with a 20% deposit and an 80% bank loan, and sell it after the same period for R1.2 million, the return on cash invested is 100%.”
Right now, says Lee, investors are flocking back to commercial property and one of the main reasons for this is that, in the money markets, many investors are now having to be content with returns that are below the current inflation rate (currently fluctuating at around 6.2%).
Looking at Rawson’s commercial portfolio, he says any analyst can see that this type of property will almost invariably achieve an 8 to 10% return from day one, thus providing inflation beating returns and capital growth over time.
“When all is said and done, the basic lack of mystery and the fact that it is easily understood, ensures that property remains a safe haven for investment.”