IS HOLIDAY HOME INVESTMENTS A WISE FINANCIAL DECISION?
Category Residential Letting
Have you been thinking of holiday home investment for a while now? Or perhaps you already have a holiday home and are finding that the costs of running and maintaining this second home are becoming increasingly expensive?
Do you need to put off this purchase, or sell the lifestyle asset, based on the current economic environment?
State of the local market for holiday home buyers and owners
South Africa has always been a prime holiday location for overseas tourists. For many years international investors drove holiday property prices sky-high, making it unaffordable for many South Africans. However, the worldwide financial crises affected even the wealthy and there has been a decline in foreign investment with the resultant drop in prices. This has opened up many opportunities for local buyers to scoop up some bargains which are often distressed and repossessed properties.
A well-chosen holiday home can still, over the long term, be an excellent investment beating the general property blues. While locations globally differ depending on what is happening in those markets, South Africa’s holiday property market remains attractive for property buyers with funds available - local and international.
While many holiday towns, particularly those on the coast, have had their boom days, canny buyers are taking the view that the cycle will turn with these areas outperforming the more stable metro centres in years to come.
FNB’s August 2011 property barometer records that from an estimated 1% around mid-2010, holiday property buying expressed as a percentage of total residential buying has risen to an estimated 3% as at the second quarter of this year. This increase was mostly in the ‘middle class’ leisure section of the property market and increasingly investors in this category are cash buyers. The luxury market has not yet experienced the same upward trend as the luxury market generally lags behind in a property recovery.
Historical performance is, of course, no guarantee of future performance but it’s nevertheless relevant and the holiday rental market has always offered good returns for well-chosen properties.
What are investors still buying – beach or bush?
The property market slump has taken the shine off the host of multimillion-rand golf estate developments, a sector which less than 10 years ago was still being heralded as a major economic driver for the region and very popular with both local and international investors.
However, it is not surprising that well-heeled local and foreign buyers, seduced by the beauty of Fresnaye and Clifton, near Cape Town have helped push these eminent suburbs to the top of the pile once more with the highest average price per transaction thus far in 2011.
A new trend emerging among the super-rich — from Hollywood film stars to Chinese industrialists — is a desire to own a vineyard. The report notes an up-tick in luxury residential vineyard schemes across the globe that allow investors to experience the vineyard lifestyle sans the hassle and hard work involved in actually producing and selling wine. Buyers’ involvement varies from one development to the next. In one scheme, owners may simply receive an annual allocation of bottles; in another, they could be designing their own label.
SA also features on the list of UK property group Knight Frank’s “highly prized vineyard hot spots”, with Western Cape values placed at an average $82000/ha (R558000/ha). That’s roughly on a par with what one would pay for a vineyard in Chianti, Italy, and in Hawke’s Bay, New Zealand. However, the report notes that most vineyard investors are lifestyle buyers looking for a holiday house with a few hectares of vines. Be prepared to fork out around $8m (R54,4m) on average for the latter, which is still considered to be reasonable!
Holiday homes are still predominantly in coastal holiday towns - 90% of the business is conducted with up-country or Cape Town buyers looking for holiday homes along the coast and the balance are overseas investors.
Properties in coastal holiday towns are still underperforming against the major metro markets. The Garden Route have been particularly hard-hit by the downturn in the economy. However, the second quarter of 2011 showed some improvements in demand for holiday properties is this area – probably the result of buyers picking up sales at bargain prices.
Having said this, the ‘game reserve experience’ is becoming increasingly popular with various fractional ownership investments coming on the market. It looks set to replace golf estates as the preferred holiday investment and some are affordable even for the average family that have to rely on obtaining a bond for a holiday home
What is your purpose for wanting or having a holiday home?
So when considering a holiday home you have to be clear about your motives. People often make a holiday home 'investment' for the lifestyle it affords you, and not the investment returns. With this in mind, you should evaluate the usage you expect to enjoy out of the asset against the price you wish to pay and weighed up against the possibility of actually generating an income from holiday letting.
If your sole purpose of such an investment is for your own usage then prudent investors may wish to consider an alternative to outright ownership, and at the same time take advantage of the relative bargains that are available amongst certain lifestyle assets at present.
An option to consider is syndicating your holiday home investment, rather than selling it. Holiday home investment syndication is basically when a group of investors get together to purchase a home (or another asset) and jointly share in the enjoyment, income and expenditure of the asset. This differs from a timeshare arrangement, where you don’t actually own the asset. With syndication the property can still be rented out on agreement by all partners.
Another option could be fractional ownership. Many people around the world can simply no longer justify 100% ownership of a holiday home. Fractional property ownership is a convenient and cost effective way of owning and using one or more professionally managed luxury holiday homes, either for leisure or corporate use. As the asset is owned by more than one individual, this means your capital investment; risk and on-going costs are drastically reduced, with the value of the investment of course based on the resale value.
So, with sales volumes down and prices at levels last experienced in 2006, it certainly is a strong buyers’ market and there are great investment opportunities for the shrewd property buyer. And with the strong rental market, even in the holiday letting section, it might be worth your while hanging onto your investment or buying while the market is right. Consider your options and do your research – it will be time well spent.
Property or offshore investment?
When compared to offshore investing, property in South Africa will not afford the buyer the rand hedge or diversification of portfolio but will certainly give an investor the ideal situation to plan around family financials. Avid property investors insist that investing in the South African holiday property market offers higher returns with average risks compared to offshore investing.
Listed vs unlisted property?
The inability of most investors to resell homes at immediate profits had put a damper on their participation in the housing market this year. With accelerating rental demand in SA one would expect investors to tap into this market, but it seems investor sentiments are still focussed only on the benefit of the final payoff or the sale and not on calculating the monthly dividend potential from rent. But advantages and disadvantages of each asset class aside, what ultimately matters most is the investment returns offered by buy-to-let property versus listed property.
Just Property Group has an active holiday letting section under Just Letting and invite you to entrust us with your property's management.
