Competition by banks to finance property investment is more furious than the competition among investors to buy property. Cheap and easy debt is driving the property market. In SA it will get cheaper, but it can't get easier.

"We lend up to 100% of the price of a building if we can discount a long term, blue-chip lease," says Nedbank Property Finance MD Frank Berkeley. "And our average lending rate is about 1% below the prime overdraft rate."

Prime is 10,5%/year.

This may sound like magic to a debutante property investor. You can buy a small strip of four suburban shops or minifactory units at a 12,5% initial yield, says David Green, CEO of commercial brokers Pace. Starting prices are about R1.5m, which would translate into a net income after costs of R187,500/year. A 10-year, R1.5m capital reducing mortgage bond at 9,5% will cost you R158,000/year, giving you a positive R29,500 cash flow.

Berkeley believes yields on most prime listed property funds will drop to 6,5% in the next 12-18 months. That probably means your property yields could drop to 8%, increasing the value of your property to R2.3m.

But the first hurdle you must clear before getting a 100% loan from Berkeley is having the right knowledge. "We look at the track record," he says. "But putting in equity helps."

Madison dealmaker Marc Wainer believes a first-time property investor with some other business record could get a 90% bond.

But both he and Green recommend reducing the bond as quickly as possible. He and Green also recommend sectionalising the property if you can and selling off a few units to eliminate the bond.

"Then you use it as security for a bond on your next purchase and you're on your way," Wainer says.

Financial Mail
Publisher: I-Net Bridge
Source: I-Net Bridge