By Vic de Klerk

Contributor

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THE net rental income on residential property, especially in the slightly higher price class, has probably already fallen to less than 5%/year on the current realisable value of the property. That creates problems for investors who depend on a cash income for their daily expenses.

There’s very little else that one can advise these investors, other than sell the property and look for a higher income among the listed property loan stock companies.

Absa’s latest statistics show that the average price of a house in SA increased by 30% over the past 12 months. Add to that a net rental income - which property economist Erwin Rode says is between 5% and 7% for a middle-class home - and the total investment package with a return of more than 35%/year looks very attractive compared to what can be earned elsewhere.

But remember that Absa’s figures indicate that, on a quarterly basis, the figures are levelling off substantially. In its September report with regard to SA’s financial stability, the SA Reserve Bank makes a similar observation.

The problem with the apparently attractive return on residential property is that 30% of it consists of capital gain and that the cash flow on the investment is often not more than 5%/year.

For the year to date, ordinary listed quality shares, such as those of SA’s leading banks and retailers and even the best industrial shares, have given investors the same or even better returns - a capital gain of 40% or more and a current dividend yield of about 5% on the buying price of the shares a year ago.

Investors who play around with both of these assets know that it’s easier to receive dividends or interest every six months than to collect rental each month. Selling a liquid asset, such as a listed share or property loan stock, is also much easier than selling a house.

A reader recently asked what one should do when a house has a market value of R1,1m but the rent is around R4 000/month, particularly when that’s one’s main source of income.

If it was merely a matter of pressing a button, I’d have no hesitation about immediately selling the house for, say, R1,1m (hopefully net) and buying 475 000 Ambit shares at 228c each.

The shares are in fact listed property loan stock, and investors are paid interest twice a year. The company was listed in January and has just declared its first interest payment of 16,75c/share for the eight months to August. Investors who buy shares before end-November will still receive the interest payment as if they’d owned the stock the entire year. For the next 12 months, interest payment of at least 26c/share is predicted.

After that the annual interest income on the investment in the Ambit shares bought with the money earned from selling the house should be around R135 000. That’s considerably more than the current income that could be earned on the R1,1m house at any time over the next five years.

Any financial adviser who recently passed his exam will, of course, have nightmares about my advice. The principle of letting residential property and living off the income will probably be far more acceptable. Selling the property and putting all the money in a single share is unheard of. Because there’s no spreading of the risk in this case.

Ambit, which comes from the Absa stable, is a well-administered property company with nearly 50 top commercial properties. In its first financial report it says that the vacancy factor for its properties declined during the year from 2% of lettable floor space to only 0,8%. That’s far better than the average for the industry.

The group’s property portfolio in fact offers a prospective property investor far better distribution and hedging than a single house or even a unit trust, which seldom invests in more than 50 shares at any one time.

However, there is risk involved in Ambit. It uses 50% borrowed money to finance its property portfolio and if interest rates were to rise again, its annual interest payments could fall.

* De Klerk holds shares in Ambit.