Piggyback investors make more money

Posted On Friday, 31 May 2002 02:00 Published by
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Profits seem better for speculators than developers
If you want to make money, do not develop a golf estate or large gated community. A big clue to why is that Johnnic (Dainfern, Steenberg and Atlantic Beach) and Anglo American (Silver Lakes) are no longer in property.

They will tell you that it is because property is not their core activity. True, but if they were making real money from these estates, it would have become their core business.

The big international players make money through economies of scale. For instance, Malaysia's Mitrajaya, which is developing Blue Valley golf estate in Midrand, was able to bring its own heavy earth-moving equipment from the Far East to cut costs. It has developed control systems that cut costs, time and marketing effort.
Even then it does not always work. The Malaysian developers of Pearl Valley in Paarl have run into trouble and the project has had to be 'restructured' by their holding company in Kuala Lumpur.

The problem, says Johnnic's Russell Jackson, is that the infrastructure costs are enormous. Montagu Property Group marketing director Kent Gush says a golf estate costs between R85m and R125m. Johnnic might have more than doubled its money at Dainfern, with sales of R300m, but it took 10 years. 'Given the time cost of money, these ventures have not given very good returns,' says Jackson. Steenberg was sold out in two years, but was more complex because it included creating an operational wine estate. Jackson says Johnnic made more profit when it sold the wine estate than it did from the golf estate.

But if you still want to make money, then buy from the developer of a golf estate or large gated community. You will find groups of builders, speculators and investors eager to be part of the main projects.

The builders probably do best. They buy a group of stands - perhaps at a discount to retail price - and build. Jackson says that as a rule of thumb the builder will equal the retail price of the property in profit. If he pays R200 000 for the land and builds a R1,8m house, he will bank R200 000 net profit at the end. By rolling his cash and debt into three or four houses, he can get a 70% return on gross cost in less than a year.

Johan Pauw, chairman of Syfin and who developed Boschenmeer in Paarl, says speculators bought 18 of his 320 plots for between R200 000 and R600 000. They resold them for between R300 000 and R750 000, making profits of between R25 000 and R200 000. The transaction cost of property in SA (see table) limits speculative profits. Most developers insist on buyers taking transfer of properties and incurring legal costs before they sell, to prevent speculators from competing with the developers. Pauw says that so far speculators have bought land and built five houses, making gross profits of between R400 000 and R700 000. He decided to be his own builder, selling 30 houses on a plot-and-plan scheme for about R690 000. His customers have made the real profits. Houses have resold for between R940 000 and R1,5m.

Gush is responsible for sales on a number of Gauteng estates including Cedar Lakes, Cedar Creek, Fernbrook and Dainfern at Fourways; Brooklands at Northcliff; Blue Valley in Midrand; Xanadu eco estate at Hartbeestpoort Dam; and Silver Lakes in Pretoria. Gush says land prices have increased by at least 20%/year on average across the portfolio, which means the price of an investment will double in less than four years. Interest costs and commissions mean you must hold the property for at least three years to make substantial profit if you only get a compound 20% return (see table). But Gush says some properties have increased by 50% or more a year.

Investors who have bought or built homes on Gauteng estates have also made good rental returns. But beware: they have overbuilt on some estates and the combination of high prices and more homes than tenants, notably at Dainfern, has considerably reduced returns.

Some estates such as Erinvale have made money. But two developers have made enormous profits. Both made their returns in buying rather than selling.

Reàn Booysen, a young Johannesburg developer, bought Silver Lakes from Anglo American Properties at a good discount when the entire infrastructure was in and the Pretoria market was beginning to take off. Pauw built Boschenmeer in Paarl around the Paarl golf club after assembling land around it at very low cost. So he was able to keep his infrastructure costs low, and create the first 27-hole golf course on an estate.

But will low returns limit supply and ensure outperformance from this sector for the foreseeable future?

Financial Mail

Publisher: Financial Mail
Source: Financial Mail

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