Real Estate Investor Magazine South Africa November 2014 | Page 28

STRATEGIES

BY koos du doit

A Long-Term Perspective
The key to investment success

R

egardless of the asset class you choose to invest
in, experts and analysts will always point out
one of the most important fundamentals of
investment success is a long-term investment horizon.
It is a contradiction then that many so-called
experts advise against property investment based on
the fact that property is an illiquid asset that cannot
be converted into cash quickly, as is possible with, for
example, shares or short-term fixed deposits.
While it is certainly true that property is an illiquid
asset, this is not a drawback. In fact, the illiquid nature
of property assets is a significant benefit in terms of
unlocking investment success.
Avoiding rash decisions
One of the greatest investment pitfalls property
investors face is their own human nature which, in
financial circles, is referred to as ‘investor risk.’ It refers
to the fact investors are often swayed by emotion ranging from wild optimism to sheer panic - which
results in buying high, selling low, getting the timing
wrong or abandoning long-term investment strategies
in response to short-term market fluctuations. The
result of emotional investment decision-making is
often that investors sell at a loss and then miss the
recovery which will have seen them recoup their losses.
So, precisely because property is an illiquid
investment, and cannot be acquired or disposed of in
a moment of panic or euphoria, it protects investors
from making emotional decisions based on short-term
events and market fluctuations.
The key to success
The illiquid nature of property also ensures investors
to take a longer-term perspective on their investment.
In the property industry, the general consensus is a
property investment must have an investment horizon
of at least five years. Given the property cycles in
South Africa tend to last around seven years, this will
be a more appropriate time frame. However, there is a
macro property cycle, believed to stretch over 20 years.
From this perspective a 20-year investment horizon
will provide the truly impressive returns property can
offer.
But if you want to create infinite returns on your
property investment, plan to keep it forever. The

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November 2014 SA Real Estate Investor

longer you hold a property, the higher the return on
investment, because the longer you hold the property,
the more rental income and the more capital growth
the property generates. If you acquire the property in
a trust, the property will continue to generate both
capital growth and income for generations beyond your
lifetime – a very successful strategy employed by the
world’s wealthiest, who have held properties in trust
for 300 years and more, allowing their families to enjoy
the wealth created by infinite returns on investment.

“The longer you
hold a property, the
higher the return on
investment.”
Accessing your returns
The illiquid nature of a property asset does not mean
an investor cannot access the returns without selling,
as is the case when cashing out an investmen, in for
example, shares. An investor can access the returns
created by the capital appreciation on the property
through refinancing (taking out a second mortgage on
the property), or by pledging the property as security to
raise other types of finance. This means that an investor
can access the return on investment on an incomeproducing property without selling the asset and losing
the monthly income the property is generating and its
future capital appreciation.
The illiquid nature of a property asset is, in fact, a
benefit. It is a hedge against investor risk and against
a short-term perspective, and it enables investors to
access returns without having to sell the underlying
asset and sacrificing future capital appreciation and
income.

RESOURCES

P3 Investment Group
www.reimag.co.za