Buyers urged to focus on income potential of South African property
Property in South Africa is becoming more and more attractive to investors, as the sector begins to recover from the financial crisis. However, industry experts are now encouraging potential buyers to change the way they look at real estate in the country to get the most out of residential stock.
John Loos, household and consumer sector economist at FNB, and Michelle Dickens, managing director of Tenant Profile Network (TPN) Credit Bureau, claim that when making an investment, people must not think solely about resale value.
"When it comes to property as an investment it is actually the income stream that it generates, relative to the price paid, that should really be the focus," Ms Dickens said. "In investor speak, a far better number to focus on would arguably be the “initial yield”, i.e. the income expected to be earned over the next year divided by the property value."
This means that while a property may not significantly increase in price at resale, it could provide a good income as a holiday let or rental. For Mr Loos, this is a crucial distinction. He claims that people who look at South African house price performance in recent years and see a depressing picture are missing a trick. "Weak house price growth that underperforms rental income growth is actually what is required to improve the attractiveness of property as an investment in future, through leading to a higher yield," he said.
In part, this short-sightedness is the result of a lack of yield estimates on property in South Africa, according to Mr Loos and Ms Dickens. To change this, their respective companies TPN and FNB have teamed up. TPN already holds a wealth of rental data, while the FNB posses the house price information and automated valuation models (AVM) needed to make yield estimates.
The companies will now produce the FNB-TPN Residential Yield dataset, which takes all of the properties for which TPN rental data exists, then uses the AVM to estimate a current value of a property, before calculating the initial yield on all such properties.
John Loos, household and consumer sector economist at FNB, and Michelle Dickens, managing director of Tenant Profile Network (TPN) Credit Bureau, claim that when making an investment, people must not think solely about resale value.
"When it comes to property as an investment it is actually the income stream that it generates, relative to the price paid, that should really be the focus," Ms Dickens said. "In investor speak, a far better number to focus on would arguably be the “initial yield”, i.e. the income expected to be earned over the next year divided by the property value."
This means that while a property may not significantly increase in price at resale, it could provide a good income as a holiday let or rental. For Mr Loos, this is a crucial distinction. He claims that people who look at South African house price performance in recent years and see a depressing picture are missing a trick. "Weak house price growth that underperforms rental income growth is actually what is required to improve the attractiveness of property as an investment in future, through leading to a higher yield," he said.
In part, this short-sightedness is the result of a lack of yield estimates on property in South Africa, according to Mr Loos and Ms Dickens. To change this, their respective companies TPN and FNB have teamed up. TPN already holds a wealth of rental data, while the FNB posses the house price information and automated valuation models (AVM) needed to make yield estimates.
The companies will now produce the FNB-TPN Residential Yield dataset, which takes all of the properties for which TPN rental data exists, then uses the AVM to estimate a current value of a property, before calculating the initial yield on all such properties.
PUBLISHED : 13TH DECEMBER 2012
