Property Investment: Choose the Right Option

If you are considering investing in property there are a few options to choose from – all of them offering their own pros and cons.

According to Craig Hallowes, Association of Property Unit Trust spokesperson and Marriot CEO, Simon Pearse it is best to borrow money when the interest rates are at its highest point. This will ensure that you can afford the debt. It is also wise to invest when the property prices are at its lowest, resulting in a bigger return when the prices start increasing again.

The option when choosing a property investment include:
1. Direct Property Ownership
This investment includes buying your own property with the main idea of renting it out. This type of investment offers you full control over the property but lacks liquidity and demands a high entry cost. You also need to actively manage your investment.

2. Joint Venture or Partnership
Here you buy into an investment with the help of other parties. The advantage of this type of investment is that you gain access to higher value properties without paying it on your own. This investment also lacks liquidity and there is little or no diversification of assets. Apart from the low-income yield, there is also the odd chance that you might run into disagreements with your partners.

3. Property Syndication
This is an unlisted investment scheme that enables a group of investors to buy property and become part owners – either directly of indirectly. These schemes can be structured in different ways with a number of cost layers attached to them. This is beneficial because you pay lower individual entry cost as it is spread amongst a group of investors, but can involve very high maintenance costs. Besides the fact that there is no formal market (making it hard to control) there is also scope to manipulate property values. It is hard to exit this type of investment with the liquidity constraints that it offers.

4. Listed Property
This is Property Unit Trusts (PUT’s) and Property Loan Stock (PLS’s), which is effectively REIT’s. These are listed on a financial exchange like the JSE. The benefits of this type of investment are that it is highly liquid and managed by professionals who can select the best properties. This investment offers costs that leaves nothing to implications and protects the investors with a highly regulated market. The only disadvantage is that you can’t control which properties are purchased but you can sell in the very liquid market if you do not like the strategy of the PUT or PLS.

5. Exchange Traded Funds (ETF)
This investment is established as a collective investment scheme much like a unit trust. The aim here is to replicate the price and yield performance of a specified Index as far as possible. These units or shares are generally listed on a financial exchange like the JSE. Benefits include a low entry cost and easy access as well as flexibility. It is highly liquid and transparent in terms of the investment and interest and offers a well-regulated market. The downside is that you can’t manage your portfolio actively should you wish to.

6. Collective Investment Schemes
This evolves a unitised fund set up under a trust deed that allows investors to participate in a larger pool of property assets. This investment is highly liquid and managed by professionals. It offers explicit costs and a considerable diversification of assets both geographically and across sectors – all in a highly regulated market. A disadvantage is steep management fees.

7. Offshore Property
This investment can be made in any of the options above, however the additional dimension of offshore investment diversification is added, for example, property in Paris or London. This diversification is a great benefit as you can spread your risks across different geographical regions. The exchange rate risk is a disadvantage and so is the fact that you might not understand the foreign market and buy into low-quality properties. - Elizabeth McLachlan

Invest in property in South Africa