We discussed Culture and Commerciality as part of the value of land in Part 2 of our blog on Land.
We begin with Capital in this feature.
CAPITAL: Us laymen understand this best. But in order to gain a full perspective, we will incorporate the other two.
I was once corrected when I told a group that their home is their biggest asset. “No’, said one participant, explaining that their pension was bigger. So, the moral of the story, don’t job-hop! Our houses are big investments and I know of no one who has decided never to buy. Our objective is to buy a home as soon as possible, pay off the bond and then enjoy the proceeds from its sale one day to supplement our retirement funds. In between, we may change homes in life-stages moving up the ladder of size and in the end, downscaling for reality. The theory is that our homes will appreciate in value and that that accretion of capital will complement our savings in other vehicles both onshore and offshore. But there are some other considerations that come into play so let’s explore them.
Robert Kyosaki of Rich Dad Poor Dad fame, taught me a thing or two when he postulated, against all the current wisdom, that a house is a liability and not an asset. In fact, he made the point repeatedly (even annoying NYSE and the influential National Association of Realtors) that any asset which does not yield an income, is naturally a liability. I have alluded to him so often over my years of writing blogs as his wisdom is so unconventional but completely unassailable. This is especially the case when property is not selling almost at any price – I have two friends who right now are experiencing this. It feels like, “There are just no buyers” said one of them recently. Kyosaki’s view was simple, if you wanted to own a Porsche, take the cashflow you would spend and buy a factory. Then as the factory’s tenant paid off the bond, use the net proceeds to buy the Porsche. Thus, for a little deferred satisfaction, you had the factory and the Porsche, and you would not feel the liability that we all know a Porsche is. Being Head of Homeloans and a proud homeowner, this was unbelievable news to me. But even sitting here looking onto my garden, it’s quite obvious that this home could make a lot of money on AirBnB that we don’t have by living in it, and re-painting it last year was costly not income-generating. Point is, we don’t think like this [or even agree with Kyosaki] when our homes are growing at 8+% compounded every year. It’s only when that rate of growth collapses and even selling your house, [pointing to property’s illiquid nature; never mind having to perhaps pay a bond], becomes very remote, that we have this discussion. The Western Cape has felt the cold wind that has chilled the Gauteng property market for years. To sum it up, if your house is growing at 8+% in value every year it more than mitigates the cost of maintenance and that makes it an investment amongst other investments. Capital is often locked up in an asset.
Another point is land ownership. Your home is built on land and how that land is owned or regulated is important to it and your houses’ capital value. The 99-year Lease has always been the nemesis of the banks, but 99 years is a seriously long time. A bond of thirty years would fit into it 3 times and only with the last would the bondholder need to worry about value in terms of continuity of tenure. Take the famous example of the Duke of Westminster who owns 300 acres of London being Mayfair and Belgravia. It’s worth UKP10bn and is leased long-term to everyone who lives or trades in the area. I know when I got back from Mauritius last year that I mentioned their 60-year lease form of land ownership nationally. Ownership methods in South Africa fall into a number of categories and let’s look into them for the sake of understanding Capital value.
Freehold: This form of ownership is common, and the title of ownership is registered in the Deeds Office. It gives you unfettered ability to do whatever you like with your property so long as you pay for services and remain within municipal bylaws. Your house is your castle and you can add on, paint and sell at a reasonable whim. All of the capital loss and appreciation accrues to the owner; but the point for our conversation is that the capital does that because you own the land.
Rental: In this case someone else owns the property and title never transfers. But for certain exceptions contained in the written and signed [now a law that it exists ie verbal lease agreements are not permitted] Lease agreement, maintenance, services [normally excluding electricity and water] and any depreciation or accretion of value are the responsibility and right of the owner. In short, the tenant never has any capital opportunity but also seldom takes any significant maintenance responsibility. In fact, in most leases, the tenant must return the property to the landlord in the same condition they initially received it, wear and tear aside.
Cluster: This is a form of ownership akin to freehold but where a form of community living is intended. The primary purpose is shared security, but the style also became popular when cities began to encourage densification so as to alleviate urban sprawl. In this case a small communal area levy is paid normally to an innocuous Home Ownership Association [HOA] for caretaking of the common areas such as parks, pavements, internal roads and water features. But you are constrained by the Estate Guidelines if you want to alter your dwelling, sometimes even to the colour of the paint. It can be annoying but normally neighbours become friends, and everything can be handled as amicably as possible. As regards capital upon sale, it belongs to the seller but be careful of “estate levies”. Ours is 0.25% and clearly agreed and signed at exception, however, I have family who were stung 12% upon sale and shocked at the loss they suffered!
Sectional Title: Marina Constas of BBM Attorneys wrote a book almost 20 years ago titled, Demystifying Sectional Title, which is a good read if you’re interested. To sum up this form of ownership, she writes, “Complex living is…..complex.” This form of ownership extends to cluster-type developments, semi-detached and high-rise buildings. The example right at the beginning of this blog series, the owner of a unit on floor 17 of the Michaelangelo Towers, is typical of sectional title. Great for security, a lower cost of building [though you seldom feel that!], and capital accretion. The Body Corporate [BC] is accountable for property maintenance and disasters and must insure for these and is also accountable for the integrity of the common areas ie as regards maintenance and normal use. The biggest problem comes in when self-destruction is caused to the property or when the BC funds deplete. Banks will not lend into a defunct BC balance sheet and nor should you consider buying into such a complex; it’s bad news and an individual owner has little influence in the Scheme. But all things going well, sectional title has served property ownership well so far in our country. Capital belongs to the owner.
Leasehold: I think we have covered this style of ownership implicitly above. However, I was surprised to learn that Waterfall Estate in Midrand is a leasehold property. I don’t have the detail, if I’m correct, but it would be honestly disclosed, I’m sure. Capital is the owners but beware being the last owner before the long-term lease ends. Logic says the Lessor will simply extend the lease as happens in the Duke’s case but practice could be different.
Fractions: This form of ownership, quite distinct from timeshare, is excellent if properly managed and let [in a rental pool] and can give the fraction owner a good return on investment in a sough-after complex. Its downside lies in the unavailability of funding due its “shareblock” characteristics so only cash buyers can participate. In my experience, very little capital accretion occurs, and the ownership style is recommended only amongst “friends” and for vacational properties. Certain of the Sandton apartment complexes allow for units purchased to be aggregated in a rental pool in the context of a hotel and conference center. Capital in the Park in Sandton is such a successful development, but such schemes are not fractions but rather a play on sectional title with a formal rental pool.
No one blinks an eyelid with any of these examples for one reason and one reason only: Consistency of Policy. It is the inconsistency of policy, the willingness to amend Section 25 of the Constitution, which now seems a certainty, that has spooked the property market in South Africa. “Spooked” is a euphemism for the anger, fear and frustration that land ownership may no longer be sacrosanct in law and that expropriation with compensation may no longer be engraved in every property transaction since the beginning of property title. No power line, railway or road has been built that has not implied expropriation in their path. I give you some land and I am compensated using a Sworn Appraiser’s valuation. The problem now is dispossession and the critical need to re-address the past as it is understood by the majority of our citizens. There lies the aggravating rub and I must say, the only government I would trust with the process if it has to go ahead, is one headed by Cyril Ramaphosa. I would rather the land redistribution legislation do its proper work but if something more radical [which I do not believe] is required, he should head it. What the future holds is precarious our beautiful, tortured country is suffering from deep uncertainty.
Also, for me at the heart of this issue where we have explored the wealth creating potential of land ownership, is the fact that land redistribution has not worked, that many units in the likes of Soweto are still not owned, and that tribal lands remain under the rental control of chiefs. Bottom line, no capital has been built in these three areas and only Culture is served by tribal lands. The downright hypocrisy of these issues against the willingness to “bet the bank” with expropriation without compensation [EWC], is anathema to me. Get land redistribution working with proven models in place that can be scaled then we can stomach EWC as a nation. Get the title deeds of so-called “matchbox” houses delivered then we can stomach EWC as a nation. Get some form of land value and “sectional title” into tribal lands so tenants have wealth creating and not just subsistence benefits from their use of their land and then we can stomach EWC as a nation. And a final bet I would wager is that those initiatives would solve so many problems that we would never need to radicalise uncompensated land expropriation.
Long may the property industry last!
Yours in Property.