Beat Inflation And Interest Rates By Buying Property With Others
The South African Retirement Reality Report 2022 by 10X Investments notes that “46% of people polled said they don’t have a retirement savings plan” and nearly three-quarters of those who do, worry about whether they will have enough money to live on in retirement. Two-thirds of the respondents to Sanlam’s 2022 Benchmark Survey said they were “kept awake at night worrying about being able to [financially] weather an emergency and 66% also worried about retirement”.
With another interest rate increase likely later this month, it’s not surprising then that South Africans are considering the possibility of owning a property with like-minded friends, sharing the deposit, other purchase costs, bond repayments, maintenance and rates.
Property syndicates have been a popular way to invest in commercial, retail, industrial, rural or residential real estate since the 1980s but “there are a number of pros and cons that should be considered and weighed up,” says Paul Stevens, CEO of Just Property. “The more people involved in a syndicate, the more complicated decision-making processes can be, but the risk is also more widely shared.”
Property considerations
Where do you see your shared property being located? Take into account that it’s a good idea to be near shops and hospitals, especially as you age. If you’re all hoping to invest in an asset that appreciates and can be sold in future for a profit that will see you through your later years, Stevens recommends looking at trends in the property market for direction.
Property has traditionally been viewed as a stable investment, but the ever-changing global real estate market requires investors to stay updated on the latest trends for informed decision-making. Current market trends bode well for investors as we see a property market that is shifting in the buyer’s favour:
- FNB, in its Property Barometer released on 17 April 2023, reports that house price growth is expected to slow to around 2% this year from 3.5% in 2022. This makes it a buyer's market.
- There are fewer buyers in the market and properties are sitting on the market for longer, which means that if you are able to buy, you’re unlikely to be competing with many other buyers. You have more negotiating power now.
- There seems to be no respite in the short term as household finances continue to be placed under pressure by interest rate increases and rising cost of living. Rental demand is increasing, so if a property is well positioned and well set up with alternative power and water sources, you can be confident that it is highly rentable.
Once you’ve decided where to buy, think about whether you’ll purchase land and build separate units on it or purchase an existing property and divide it into units. In the current market, and assuming the syndicate wishes to preserve as much capital as possible, Stevens recommends investigating new developments, especially those that offer off-plan purchases: “These offer financial benefits that include savings on transfer costs that otherwise apply to properties that have already been registered with the Deeds Office.” New developments also tend to be “gated”, and this will offer added security, which becomes even more important as we age.
Distressed property sales, including repossessed properties or those on auction, can provide an opportunity to buy immovable assets at a discounted price, he adds, “but be aware that the cheapest option is not always the best. This is why it is so important to work with a trusted property professional.”
A binding agreement
Once a decision has been made on the nature of property to be purchased, a clearly documented and signed agreement between all parties is essential in order to remove doubt and the risk of misunderstanding. Stevens recommends that the following questions be addressed in the agreement:
- How will the property be financed?
- What costs need to be covered, including bond repayments, operating costs (maintenance, levies/ taxes, cleaning etc)
- What is the repayment schedule?
- How will missed or part payments be handled?
- What will you do if someone runs out of the funds necessary to keep up their end of the bargain?
- How will the common areas of the property be used?
- What access to/ use of the property will be allowed to, say, children or friends of shareholders?
- What options will be available if a member of the syndicate wants “out”?
- How will deviations in the agreement be handled?
- How will maintenance be handled?
- What will happen if one person becomes ill or very frail and needs 24-hour care? Do you need to consider incorporating a small unit for a rotation of full-time carers?
- What if one party wants to sell and the others want to remain?
- What happens on the death of a shareholder?
“These are just a few of the possible scenarios you’ll need to consider and cover in your shareholder agreement,” warns Stevens. “I can’t emphasise strongly enough the importance of sound legal advice, independent financial guidance and, when it comes to the purchase, help from an astute property professional.”
Open communication, shared purpose and agreement on operating principles are critical success factors, he says. “Whether the investment will be made via a trust or whether you set up a company to make the purchase, there are laws that govern each as well as risks. Demand total transparency at all times, and rather walk away from anything vague,” he advises.