Real Estate Investor Magazine South Africa October 2013 | Page 24

GETTING STARTED

BY KOOS DU TOIT

Enjoy Infinite Returns On Investments
Property is THE way to wealth

M

any so-called financial experts and
those who dispense investment tips
around the braai, advise against
property investment based on the fact that
property is an illiquid asset that cannot be
converted into cash overnight, as is possible with,
for example, shares or fixed deposits.
It is true that one cannot cash out a property
investment overnight, particularly in the current
buyers’ market in which the estimated average
time of properties on the market prior to sale is
around 17 weeks, with 90% of properties sold at
less than the asking price and the average drop in
asking price estimated at 10%.
However, while it is certainly true that
property is an illiquid asset, it is a myth that
this is a “drawback” – a myth based on the
misperception that one can only access the
returns by disposing of the asset. In fact, the
illiquid nature of property assets is a benefit,
for two reasons. Firstly, the illiquid nature of
property investments prevents investors from
making rash decisions based on short-term
developments and, secondly, the illiquid nature
of property investment ensures the crucial longterm investment perspective.

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 that 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
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October 2013 SA Real Estate Investor

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 would 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 of euphoria, it protects
investors from making emotional decisions based
on short-term events and market fluctuations.

The crucial long-term perspective
The illiquid nature of property also ensures
investors to take a longer-term perspective on
the investment. A long-term perspective is a
key investment success strategy advocated by
all financial advisors and investment experts,
regardless of the asset class.
In the property industry, the general consensus
is that a property investment should have an
investment horizon of at least five years. Given
that the property cycles in South Africa tend to
last around seven years, this would be a more
appropriate time frame. However, there is also
a macro property cycle, believed to stretch over
20 years, and from this perspective a 20-year
investment horizon will provide the truly
impressive returns that property can offer.
But if you want to create infinite returns on
your property investment, plan to keep it forever.
The 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 for generations to enjoy the wealth
created by infinite returns on investment.

Accessing your returns
The myth that the illiquid nature of a property
asset is a drawback is in part due to a belief that
an investor must sell the property to access the
returns, as would be necessary when cashing out
an investment in, for example, shares.
But this is a misnomer, because the investment
property is an asset, and as such 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 income-producing
property without selling the asset and losing
future capital appreciation and without giving up
the monthly income the property is generating.

Benefits of an illiquid asset
The fact that property is an illiquid asset is not a
drawback. It is a hedge against investor risk and
against a short-term perspective, and it creates
the ability 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