|
And why some South Africans missed it.
Property investor and founder of Sirius , Wayne Lee, has penned a fascinating article on why he thinks popular Rich Dad, Poor Dad author played a key role in the sub-prime crisis and why unique South African issues are bedevilling SA property investors:
Quite a strong statement bit here's my theory.
In 1991 I studied a Commercial Finance course which explained gearing. In my first job at "The Receiver" my manager had a property and I used to go fetch the rent with him. I put two-and-two together and started buying some for myself, friends and family. Not many people agreed with what I was doing.
Then in 1997 a book "Rich Dad, Poor Dad" was printed. I actually emailed (author) Kiyosaki, and his wife mailed me back. I nearly met him, she said we had just missed each other in Johannesburg. This was before he got Real Big! His books are brilliant, and probably the most user-friendly, in terms of gearing, ever written. Most people just never "got it" before his books. The problem is they did not "get" some other stuff in his books.
His books emphasise "emotional intelligence" all the time. Quite simply, if you want your own business but think selling is not for you - you are not emotionally intelligent. After reading his books if you still want to invest where all your mates invest (and they're not multi-millionaires) you have missed it again.
So Kiyosaki reveals "The secret" and the property boom wheels started rolling. Use the bank's money, buy houses and retire - at about the speed at which I just typed it. But in his second book he says people around the world who are poor and become wealthy do these three things:
* Delayed gratification;
* Use compound interest in their favour;
* Focus on long term concepts.
But no Robert, we're unsure why you're on about these rentals and you call us capital growth chasers "losers". It seems, like Buffett did not understand the IT boom, you just don't understand the new game. But just like Buffett, it seems he saw the bubble. His book, though, had created euphoria not even he could slow down. Everyone climbed in; even the non-believers at least remortgaged their homes to buy boats and jet-skis.
The banks were fighting for the business and saw the unabated growth in front of their eyes. It's as infectious as buying IT companies at R70 a share, because your mate had bought at R45. Neither knew how to read financial statements, and now the share stays below R10. As in all bubbles, fundamentals are irrelevant and for the conservative. So there we go - it eventually collapses.
Now the gurus in South Africa will say it's different here, because we have the emerging middle class that will drive this country into the stratosphere, but they all happen to be black so crime will go up and you must buy security complexes. For full understanding of my comment please read "For Whites Only" by C. Cilliers, which will go down as the best race relations book for South Africans ever written !
So yes the return on freehold has beaten sectional title five years in a row, but when the "swaart gevaar" pull in we're in trouble, and then sectional title will be the place to be. I don't think so. If I want to live on top of someone I'll go to London and earn pounds, but in SA I love the space. Here's a hint - If you believe crime will only go up don't invest here - invest somewhere else. It does not make sense that people will continually choose to live in a crime invested place, so your investment won't grow. Unless of course, you believe black people are more suited to living with crime. Now, if you believe our black government won't or can't fix the crime, same advice: Invest elsewhere.
So the rest of the world had a bursting bubble. What happened here? Some might consider this left field but for those who have read Cilliers's book it's totally understandable. You see our white population, because of the advantages of Apartheid, had greater access to this leverage thing due to higher income. So the early catchers got going. But they got going; at least 90% anyway, with this racial baggage that tells them that black people use loan sharks, are bad with money, make fires in their lounges and will wreck your investment.
So what did they do? They focused on your "white" areas, bought from a white developer and a white sales guy - and to hopefully rent to some white guy or black guy who is ready to act white. So everything is safe except the negative talk gets to its tipping point and the white guys start emigrating and you run out of tenants. And your R2, 5m refinanced property you bought five years ago for R500 000 to live in is starting to hurt because the black government is messing with the interest rates.
And now you can only get R1,8m and the bankers who drive all the nice cars and who consolidated your debt so that you too can buy the car are just not helping you with the increased repayments, probably because they are in the same mess.
That's enough negative talk. It is not uncommon for 30-somethings, white and black, to have properties in excess of R1,5m paid off. In fact Lightstone reports have indicated that 70% of properties bought by black people in SA since 1997 are paid off! So we are all much better off than 10 years ago unless we broke the rules and geared for consumption, but what do you expect?
So there are many areas in South Africa where demand to live there keeps growing, where rental demand remains extremely buoyant. I spoke to someone recently who couldn't believe the vacancies in Chicago and Washington. Now when you watch the white press and see all the "For sale" and "To let" boards in front of townhouse complexes in SA and think we are always behind and the sub-prime is about to hit us hard, think again.
Exchange controls restricted our companies from investing in all these quick money products, not their own intuition. The NCA (National Credit Act) helped slow down the euphoria. And our black population is rather debt-averse. So the R1,5 to R3m market is bloodied but if you are waiting for that R650 000 property at less than 60% of replacement cost to drop, don't hold your breath.
So there are a few reasons this sub-prime thing missed us. Not all of us mind you. The guys who speculated on the basis of "Buy off-plan and make money before transfer" have learnt that an increasing interest rate cycle just is not the same (money) printing machine that a declining interest rate cycle is. But there are large chunks of properties that have still attained at least 30% in the last 18 months. They were however purchased for the holy grail of property investing: rental flow and a demand to live there.
Property Investing that Kiyosaki advocates is based on fundamentals. When every man and his dog becomes an investor, you'd better be a good investor, have a good sniffer dog or do something else. But when every man and his dog say there's no more money in it, it may be time to re-think. Demand and supply really, of an essential good, is something that can be monitored closely. I do not think that the speculators are going to like the next five years but the rental chasers may be in for quite a ride. That is the nice thing about long-term investing: sometimes people are in the mood to buy, and sometimes they are in the mood to rent. Either way the landlord makes the rules.
|
