January 2007

Investing in property - other ways to make it work

The start of a new year sometimes brings a renewed enthusiasm to assess one's finances and establish some goals for the year ahead. Our current series on property might help you to re-evaluate the place of property in your financial planning. So far we've concluded the following:

• In the current market circumstances, it can work out cheaper to rent rather than to buy a house; and
• The buy-to-let market is currently not yielding good returns.

We highlight the word "current", because our discussions are based solely on existing market conditions, and any information and advice given in our articles is to be seen in that context.

Staying topical then, it's interesting to note that the South African Property Report for 2006 comments that growth in the residential property market is definitely slowing down. If investing in residential property is not going to give good returns at the moment, how canyou make money from property? The answers to this can be summarised thus:

• Consider investment in the commercial and industrial property markets through a property syndicate.
• Consider buying JSE-listed property investment instruments.
• Invest in mortgage participation bonds.

Commercial and industrial property

Commercial property is real estate zoned for business use, such as retail outlets or offices, while industrial property is real estate zoned for industrial use, such as factories. The 2006 South African Property Report states that commercial and industrial property are both on an upswing in terms of growth and returns. According to the Report, investors are now seeking out opportunities in commercial and industrial property markets as opposed to the residential market.

But how can the average income earner possibly afford to become an investor in this segment of the property market? After all, if you want to purchase a block of offices and rent them out, it will cost far more - in millions of rands - than purchasing in the residential market. It's not possible to enter the commercial and industrial segment on your own, but it is possible if you are prepared to form a private property syndicate.

A syndicate is simply "a joint purchase by a group of investors who come together to pool their funds to purchase and hold property". By pooling your funds with a few other like-minded investors, you can together gain access to the commercial or industrial property market.

Choose your syndicate partners carefully - they need to be people who have similar investment goals to yours, with good personal finance sense and solid financial track records. They will most likely be friends, family and colleagues with whom you have an existing relationship of trust. You will need legal consultation to establish your syndicate as a legal entity.

Once you have formed your syndicate, the same principles apply as when you are planning to enter the property market on your own. You will need to do your homework thoroughly on what property to buy, decide how much you are prepared to offer by calculating the anticipated returns on your investment (for example, rental income from a block of offices).

You don't all have to invest the same amount - there can be smaller and larger 'shareholders' in the syndicate. If one person can only contribute 10% of the purchase price of the property you choose, and another can contribute 20%, their returns will be based on their initial investment. As with any investment, extreme care must be taken when making decisions. You need to be very well-informed when investing in the commercial and industrial property markets. Get as much advice as you need.

If the idea of a syndicate does not appeal, but you still wish to invest in the non-residential property market, there are other options open to you. We'll discuss these in the next issue.

Click here for previous issues of Money Matters.