The question many South Africans are facing today is, do I invest in property now or do I only consider off shore investments to hedge against the Rand?
I believe in both could be wise (subject to your financial position and objectives) for various reasons. Hedging against the Rand needs no explanation and is fairly simply to comprehend, but also choosing to invest in property locally in current market conditions, sounds like financial suicide... or not? Let me clarify:
Local Residential Property:
Firstly I would be careful not to just have a shot gun approach and sign for anything and hope for growth because of sales hype especially because of potential irrational exuberance in many instances in current conditions. I would ensure that my reasons for committing to a transaction is sound. Am I buying property to brag to my friends or am I taking a calculated risk approach which includes doing a sound due diligence, considering all pro's and con's of various opportunities and most importantly looking at my potential Internal Rate of Return over time and comparing apples with apples ultimately that way?
This removes emotion and creates a platform for growth when done correctly. When all the boxes for a solid investment is ticked this way, effective returns will be much more significant which is the number that should be used to compare to any potential hedge against the Rand ie. when using gearing responsibly the effective return on capital layout is significantly more than if one only takes capital growth into account. The correct method is to calculate out of pocket expenses in terms of acquisition costs + shortfalls up to break-even point in relation to proceeds after a potential sale and disposal fees including, estate agent commission, capital gains tax, certificates etc. This sounds complex but is really simply when using correct software and is done within minutes, pushing out invaluable information on the other side.
The complex part comes in how to calculate expenses. Many marketing agencies these days hide real expenses in the form of expressing returns like gross yield, rent value ratio etc. A primary indicator to use is nett yield which takes potential expenses into account and then Internal Rate of Return which takes all 27 variables of a property investment into account and is the best possible way to measure property against some other types of investment. It is important to also consider things like liquidity and realised vs unrealised aspect when doing these comparisons to be fair and accurate. Conservative projections are always better as it reduces risk and could illuminate potential nasty surprises.
However even using IRR can be disastrous in property if over-ambitious assumptions are made, ie. in the current market using 10% or higher annual rental escalations, exorbitant projected growth, no provision for potential interest rate increases, unrealistic expense increases, and ill informed operational expenses, which in my opinion in the Northern Suburbs of Cape town, based on long term residential leases, is less than 20% of projected rental income in the case of sectional title developments. Know that when the sales figures are illustrating operational expenses in these instances of less than 20%, question marks should pop up immediately as realistically they vary between 23% - 27% generally. This however is obviously influenced by elements such as rental management fee, size of the complex (to dilute standard operational costs) and extras offered which needs to be maintained under common property expenses, but overall, generally, is quite accurate in my experience. Potential investors are also often drawn into sweeteners like levy discounts for the first year or rental assistance scheme for a short while, and often that short term gain leads to long term pain when reality kicks in. I tried to highlight some important factors of property investments in current market conditions in a youtube video done recently.
The bottom line is, one should learn how to properly do your own due diligence and verify information provided by sales people so that you can ultimately be accountable for good and bad decisions and don't fall into the trap of blaming events or others for consequences of bad decisions. The saying goes "the more we learn (and apply) the more we will earn".
Happy Learning and enjoy the journey!