The Month In Review – The Rise of The Value Investor
The month of February has been a mixed bag but is bringing with it some glimmers of hope. The stock market has hit new highs as economies start preparing for recovery later this year and in 2022. South Africa saw the rollout of vaccinations for healthcare workers and infection numbers are declining – for the time being.
Enter the value commercial property investor.
But what do we mean by value investor? Let’s clarify by way of a simple example.
While attending an end of year presentation last year, a Financial Planner suggested that attendees invest in shares. A woman then put up her hand and mentioned that she had invested in shares in a particular hotel group when those shares were R 120 per share. The share price is now sitting at R 3 per share. She then likened investing to gambling.
I went home looked up that particular share and purchased a whole lot of shares in that stock at R 3.50 per share. My logic was that the price of the share was R 80 at the beginning of 2020; even if they recover to a price of R 40 a share, I would stand to make a good return on this investment. The risks are obvious. The hotel group could find that it cannot sustain itself and close down, in which case I lose all my money or they may delist from the stock exchange in which case I won’t benefit from any recovery.
But if the hotel group recovers, then this will be a rare opportunity presenting itself during the pandemic.
Commercial Exchange negotiated a transaction late last year for a property at a per hectare price of R 860 000. The Seller, an overseas investor had purchased at that same price, in the early 2000s and to add to his concerns, the rand at the time of purchase was trading at about R 6.50 to the dollar. No matter what he did, the owner of the property could not see a way that he could make his existing investment work over the years. However, the rand declined to close to R 16 to the dollar and the property value remaining where it was in the early part of the century. The seller’s perceived loss now presents the buyer with a phenomenal opportunity.
Many experts are not comfortable with property as an investment class in the short term, the medium term and even the long term – and their concerns are valid.
Property values have taken a gigantic knock and we’ve seen sharp drops in the values of property portfolios in Real Estate Investment Trusts. However, for a buyer with cash, now could be the optimal purchase time as prices are at an all-time low.
Building investments as a value property investor.
We would recommend the following principals when looking for value property building investments:
- The deal must be done at the current property value This requires a sober assessment of the real property value and strong buyer/seller negotiation strategies. Do not buy a property at the value you expect the property to be in 3 or 5 years.
- Think long-term. Although you are purchasing at today’s value, the property must be optimally located for future developments. Midrand, Rosebank and Lanseria are good spots for various infrastructure development reasons.
- The building may need to be held and rezoned for alternative uses. Take cognisance of holding costs and again do not assume that you will be able to easily obtain long-term leases at pre-Covid prices in the near future. Vacancy rates are high and lease values in the short term will remain lower as the country starts to revive.
Two properties we would present as good examples of a value property investment:
Midrand, 1600 sqm office building going for R 16.5 million. This is at a price and location. (The original owner paid over R 17 million for this building in 2017 and has improved the site). Link to property
Two vacant stands in Nietgedacht, going for R 15.7 million. (The original owner paid this same price 4 years ago). Link to property