Contrary to belief, there are various options in which to hold property. The extent and type of property investment, one wishes to have is largely determined by the level of personal involvement during the life span of the investment, as well as the reason for the investment. Owning property for the purposes of renting to third parties may require substantial personal involvement as apposed to investing in a holiday home. For the average person in South Africa, property investment means obtaining a physical shelter for their families. Some investors may be interested in property due to its capital growth component as well as its ability to generate attractive yields and returns over time. For others it may be to pursue non financial objectives, such as being able to control a tangible asset. Thus before one decides to invest in property one needs to clearly define the reasons behind the investment. Furthermore, from an investment perspective considerations of ownership tax and management issues are of vital importance. This decision needs to be considered carefully as shifting from one type of ownership to the next may be very costly. The property conveyancing process is a lengthy process which one would not like to encounter more frequent than necessary. In this newsletter we discuss the most prominent ways in which investors can hold property in South Africa
This is by far the most common form of ownership in South Africa. It implies the owner holds direct title over the property. Ownership would be registered in the deeds office in the name of the owner. Freehold property may be owned by both companies and individuals alike. The advantage of this type of ownership is that the owner has maximum control over his/her investment and may dispose of the property as they wish. Ownership in this form also means the property may be used as security to obtain loans and finances.
Leasehold, also referred to as renting property does not give ownership to the tenant, however throughout the duration of the lease or rental agreement, the lessee (person who pays rent for the property) will enjoy virtually the same benefit as in the case of freehold above. It allows them to use and occupy the property for the duration of the agreement. The tenant pays over a monthly agreed rental to the landlord (Lessor) which entitles them to stay in the property. There are various types of lease agreements which include short term rentals, long term rentals or even rentals structured with the option to buy the property. Often the Landlord will have a very important right called a “tacit hypothec” included in the rental agreement, which entitles him to take possession of movable goods in the rented premises should the tenant or lessee not be able to pay their rent timelessly. Rental agreements are good options to consider for individuals who may not qualify for mortgage bonds as well as those who do not wish to settle permanently at a particular residence. Money paid out is money lost, thus this may not be a long term profitable investment vehicle.
Under Sectional Title, there are several owners owning different sections of property. An example would be owners of townhouses and clusters all built on the same portion of land, albeit in various sections. Each owner has exclusive ownership of his own section as well as shared ownership in the communal property such as the swimming pool, clubhouse and staircases. Sectional Title in South Africa is regulated through the Sectional Titles Acts No 95 of 1986. The Act requires that a Body Corporate be created to govern the interest of the various owners. The Body Corporate collect levies, pays rates and taxes, insurance and maintenance expenses.
This refers to the grouping together of individuals to pool finances in order to invest in property. Syndication provides the small investor with an opportunity to invest in a specific property which would otherwise not have been possible considering the size of the total capital outlay.
Property companies are similar to the above however more formalized in the form of a company specifically established for the purpose of owning property. Under this type of ownership, a company is established in terms of the Company Act 61 of 1973. These are largely institutions and individuals who form these companies and use them as intermediary vehicles to invest in property. For the investor, a property company offers the advantage of it being a separate legal entity which has distinct liability from its shareholders. Property companies tend to be large entities that are mostly listed on the Stock Exchange.
Share block Companies
A share block company is similar to the above, however it is governed by the Share block Control Act 59 of 1980. These are specifically formed companies with shareholders each owning a share in the company. Income is taxed in the hands of each individual shareholder, thus making it a convenient vehicle for investors who wish to invest in property, allowing each to have their own tax profile. Owning a share in the property entitles to use and occupy the share of property they own. The rights are stipulated in the memorandum and articles of the share block company. A variant of this form of ownership would be Fractional Title, normally associated with owning a fraction of a holiday home. This form of ownership is also governed by the Share block Act alongside the Sectional Title Act. The difference is that Fractional Title has a management company setting up a defined roster for the scheduled periods of usage throughout the year, whilst usage is informally discussed with shareholders of a share block company.
Unlike the above discussed forms of ownership, owning timeshare is much like Fractional ownership, however it only entitles the owner to usage for a week or more of a particular unit. This is applied primarily to holiday accommodation. Timeshare in South Africa is governed by the Timesharing Contract Act, Act 75 of 1983. Beware of falling for the “Timeshare trap”. Owning timeshare does not equate to holding property, it merely entitles the holder to usage rights for a specific week/s during the year. Furthermore Timeshare in South Africa does not have a good reputation and thus sales agents will often use aggressive selling tactics to lock people into buying timeshares. This is particularly evident along the Durban coastal beaches and holiday resorts such as Sun City. Timeshare is often associated with accommodation establishments which are of lower quality. Exchanging weeks across resorts is also often difficult since it is subject to availability at the particular resort. It will also be very difficult to get rid of the purchased timeshare depending on the weeks during the year purchased, in the meantime levies will still have to be serviced.
Listed Property Investments
There are various ways in which one can invest in property indirectly without having to physically hold the property. This includes Property Unit Trusts, Property Loan Trusts, Investment Trusts and Collective Investment Schemes. Listed property investments are listed on the Johannesburg Stock Exchange and traded similar to equity stocks. As this topic is voluminous, it will be discussed further in future newsletters. It is however important to note that one can invest in property stocks listed on the stock exchange thus capitalizing on trading movements.
From the above it is thus essential that the property investor pays careful attention to the type of property ownership that they wish to use before investing in property. This need to be considered thoroughly since shifting from one property investment vehicle to another may be costly. It is vital to do all the necessary investment research, with focus on the macro economy, property sector performance as well as specific property funds, trusts or companies one wishes to invest in. Holding exclusive freehold title to property is not the only form of investment. As listed below there are various property investment types that can be considered which may also produce generous yields. The secret to building a healthy property portfolio however exists in firstly ensuring ownership to your primary residence is secured and you have the necessary Title deeds to show. Thereafter the playing field is diverse and hungry for new investors to participate.