One area in which the Covid-19 pandemic seems to have created investment opportunities for income-chasing investors is the real estate industry.

Whether it is purchasing shares of real estate companies on the JSE or a residential property that will generate rental income, opportunities are apparently many. But there is an important proviso: you must be willing to take a long-term view on investment.

This is according to the CEO of Izandla Property, Nonhlanhla Mayisela, who was in a webinar conversation with Business Maverick’s Ruan Jooste and Chris Immelman, the MD of Pam Golding International, about real estate investment opportunities.

“Property is a long-term and patience game. If you are in it for the long haul, you are set to see some form of value,” said Mayisela.

“On the back of an economy that is not growing, you are not going to see meaningful growth in the industry for a long time. For anyone looking at the local real estate market, maybe the market might recover in the next three years. But you have to stick it out for a while, at least for the next five to 10 years.”

She pointed to JSE-listed shares of property companies that own office buildings, shopping malls and warehouses. Most share prices have tumbled since the start of the lockdown in March as investors are worried about whether real estate companies will survive the pandemic.

Real estate companies generate their main income from the rent paid by tenants. Company income streams have been under pressure because non-essential businesses such as restaurants and clothing retailers were closed during the hard lockdown, affecting their ability to pay rent. Putting income streams under further pressure was that real estate companies offered tenants rental payment holidays, sacrificing higher profits in the process.

Declining share prices

The SA Listed Property (Sapy) Index, which comprises the biggest real estate companies on the JSE, has tumbled by 48.1% this year. The sell-off in real estate shares in recent months means the Sapy index is now trading at an average discount of 50% to its net asset value. In other words, real estate shares are trading at significant discounts.  

“Therein lies the opportunity for any first-time investors to pick up stocks at discounted rates, with yields [returns of a stock] that are tracking at close to 20%,” said Mayisela.

She said investors must be willing to accept that the rental income of real estate companies will not grow significantly during a Covid-19 economy, because tenants won’t have the ability to pay inflation-beating rental increases when leases are renewed. And companies probably won’t resume dividend payments within the next six to 12 months when they have more certainty about the economic outlook.

Residential investments

The cut in interest rates by the Reserve Bank to boost the economy during the pandemic has created investment opportunities in the residential property sector. The bank slashed the repo rate five times to 3.5% – the lowest in about 47 years – bringing the prime lending rate used by commercial banks to 7%.

Mayisela said SA was likely to be in a low interest rate environment for the next 24 months, creating opportunities for residential investment properties.  

“There is significant demand for property in the country. If you can secure debt at 8% – 100 basis points above what current prime is – there are opportunities in residential property. If your property is yielding 10% [in rental income], you are already accretive from day one [depending on costs associated with rental properties such as rates and taxes].”

Pam Golding International’s Immelman supports Mayisela’s views, saying investors should even look at owning properties in offshore markets to diversify their portfolio of real estate assets. 

Immelman helps investors purchase properties priced from €290,000 (R5.6-million) in Portugal, Mauritius and other regions under a scheme that also grants them residency in other countries. 

“We don’t deal with clients that say they want to take all their investments out of SA. People want to diversify and create a fallback position and not leave SA completely,” he said.

Immelman said there had been a growing number of investors wanting to purchase properties in Portugal, Mauritius and the UK – especially as SA faced heightened economic and political uncertainty. DM/BM