The dizzying heights of the most recent property boom, when house price growth peaked at an average annual rate of 32% in 2004, as well as the protracted recovery period in which the property industry has been languishing since late 2009, are prime examples of fluctuations that obscure the otherwise clear cyclical movements in the property industry.

One of the fundamental basics of economics is that markets move in cycles. Markets experience boom times, followed by a period of market correction and a downturn, before the next boom arrives. This is a natural phenomenon evident in all markets, and whether it is called “boom and bust”, “bulls or bears” or simply “peaks and troughs”, investors can be absolutely certain that neither a growth period nor a downturn in any market will last forever.

What was uncertain, however, was the highs or lows that may be reached during an upturn or a downturn, and the duration of either.

“In the property industry in SA, the average cycle normally spans around seven years,” says Dr Koos du Toit, CEO of the P3 Investment Group.

“But given the heady heights reached in 2004, when many analysts and experts warned of a ‘property bubble’, as well as the subsequent economic turmoil as the world experienced the worst recession in living memory, it is not surprising that many have lost sight of the fact that we are simply moving through another cycle.

“Yes, the market correction and downturn of this property cycle were nothing short of terrifying for speculators and those investors who had overextended themselves financially. And the long, slow recovery has been painful for even the most prudent investors. But the cycle is turning, as it always does, and the market will again experience an upturn.

“What remained uncertain was when the upturn will commence – many predict only towards the end of 2012; what level property price inflation will reach before the next market correction; and how long the upturn will last.”

The question arises: How can a property investor protect a portfolio against the ravages of the property cycle?

“Many property investors do attempt to ‘time’ the market, but this is akin to speculation. The 2004 boom and this long, protracted recovery provide ample proof that ‘timing’ the market can be a dangerous game,” comments Du Toit.

“Professional – and thus successful – property investors take a long-term view of their investment and the market. They don’t speculate; they are building sustainable property investment businesses. This includes keeping an eye on the property cycle, but their focus is not on ‘timing’ the market, but rather finding the right investment properties that will yield an ongoing passive income and capital growth over the long term. Seasoned and professional property investors know that these investment properties can be found regardless of where we are in the property cycle.”

Du Toit explained that professional property investors did not simply acquire properties, they acquired property assets with long-term income-generating potential.

“In layman’s terms, this approach can be compared to buying a cow. You can either keep the cow for milking over the long term, or you can sell it quickly at the highest price for slaughtering. If you acquire a cow for milking, you will have an asset, which is appreciating in value, and you will benefit from the milk it produces on an ongoing basis for years to come. If you sell the cow for slaughtering, you might make a quick ‘killing’ – to use the terminology speculators are fond of. But you may not, particularly if several other cow owners have the same idea. Either way, both the cow, as an asset, and the milk it would have produced over the long term, are gone.”

Du Toit notes that a property should be acquired as a cash cow.

“The intention is to hold the property over the long term, milking its ability to produce a passive monthly income that keeps pace with inflation year after year.

“While the property will also appreciate in value, this is regarded as an added bonus, since the objective is not to sell the cash cow, but rather to milk it. This approach is almost immune to the property cycles, since regardless of whether property prices are rising or falling, there will always be demand for good entry-level rental properties in well-established and growing areas.

“And while capital appreciation is not the main objective, investors are richly rewarded for their patience and long-term perspective by superior capital growth over the years, as the ups and downs average out, producing a steady upward trend in property price inflation.”

This, clearly, was an entirely different approach when compared to speculating, in which property investors try to “time” the market by buying at high prices, and hope to “make a killing” by selling even higher in the short term.

Du Toit says that while fortunes have been made in this way, it is a high risk approach that has certainly seen many investors lose their investments, and has given many South Africans a distorted understanding of property investment.

“Property investment – acquiring property assets that can be ‘milked’ over the long term for their income-generating potential – may not be as thrilling and exciting as wheeling and dealing with properties, timing the market and making a killing.

“But it is a proven, tried-and-tested recipe for virtually failsafe property investment. And it is a system that allows investors to sleep peacefully at night, knowing that wherever we are in the property cycle, whatever highs or lows may be reached during an upturn or a downturn, or the duration thereof, their properties are generating an inflation-linked passive income, and in the long term, even their most optimistic capital appreciation expectations will be realised.”

This article is to inform and educate, not to advise.

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PRETORIA – House prices in the cities of Cape Town and Johannesburg have shown the steadiest increase of all the major metropolitan areas in the country since the turn-around from negative growth in the second quarter of 2009. This is according to the latest house price index released by property research group Lightstone. The index (recorded until March 2010) also shows that properties in the ‘affordable’ band are performing well above other bands like the ‘luxury’ and ‘mid value’ bands.

Although Johannesburg has led the pack in annualised month to month house price inflation for 2010, the city’s figures took a dip from 8.7% in January and 9.2% in February to 8.6% in March. Cape Town however did not see the same reversal. Figures for the Mother City were 7.7% in January, 8.8% in February and 9.0% in March 2010. In the February/March period figures for the rest of the metros remained flat, accept for eThekwini which rose from 5.4% to 5.5%. The Nelson Mandela Metro fared the worst over this period declining from 2.0% to 0.8%.

Property price inflation also increased steadily for both coastal and non-coastal properties since the 2009 turnaround began, although it seems that the rate of inflation is starting to decrease for non-coastal properties. These figures were 7.4% in January, 8.2% in February and 8.4% in March 2010. Coastal properties on the other hand have retained a steadier pace of increase for 2010 at 4.5% in January, 5.3% in February and 7.4% in March.

Lightstone CEO Anthony Miller warned that the month-to-month data sets for February and March should not be seen in isolation and that they could contain data anomalies owing to various factors. 

Freehold properties have also outperformed their sectional title counterparts. Freehold property inflation was 7.9% for January, 9.0% for February and 10% for March this year, whereas sectional properties have shown a decline from a flat 7.1% in January and February to 6.8% in March.

According to the Lightstone data, the most lucrative sector remains the mid and affordable bands. Inflation in the affordable band rose from 10.9% in January, to 14.3%, but declined sharply to 12.6% in March this year.  In the mid-sector figures were 8.3% in January, 9.1% in February and 9.3% in March, compared to the luxury and high value sectors which showed increases of 7.3-8.0% and 7.2-8.0% respectively.

FNB Property Strategist John Loos says their Estate Agents Survey shows that Cape Town was indeed the city with the strongest demand in the 1^st quarter of 2010, but that the rate of decline in inflation was quicker for Cape Town than Johannesburg during the 2^nd quarter of the year. Loos also confirmed that the Nelson Mandela metro was their weakest performer during the 1^st quarter, mainly because industrialised cities were worst hit by the recession.

Loos was however, surprised by the sharp decline in the affordable price band shown by the Lightstone data and says that their figures don’t correspond. He added that their coastal figures were also somewhat different and showed much weaker performance. “They [Lightstone] measure their coastal properties as properties within 500 metres from the shoreline. We measure whole coastal towns and our data definitely showed year-on-year deflation in the first quarter of this year.”

Lightstone’s Anthony Miller confirmed the differences in data capturing methods for coastal properties and said that he would like to see another month or two’s data before drawing any conclusions on the coastal property market or any other trends for that matter. According to Miller, an early speculative conclusion may be that “there is a recognition that the market has largely bottomed out and that people who have capital are looking to buy bargain holiday properties”.

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