How to invest to obtain maximum returns
Most South Africans do not retire with enough money. The main cause of this relates to individuals who leave companies and do not preserve what’s already been saved for them in their retirement fund.
Consequently they lose out on the eighth wonder of the world – namely, the power of compound interest. Money invested on a monthly basis or even a lump sum only starts to really grow 15 to 20 years later.
You have three choices:
- Take the money and pay tax on an amount above R22 500. The balance will be taxed at 18%. This is a very low tax. However, you always get this benefit up to R600 000. If you take the cash now, then, when you retire, the first R300 000 is tax free, the next R300 000 will be taxed at 18%, but SARS will deduct what has been previously taken.
- You could put this into a retirement annuity but then you are locked in until age 55.
- A preservation fund could be an option. Both options 2 and 3 are tax neutral. The advantage of the preservation fund is that you can withdraw the money at any time, subject to the tax formula above.
It’s also possible to service debt with this money. If you choose this route, always settle your most expensive debt first in the following order:
- Micro lending
- Credit card
While I encourage individuals to pay off their bonds, one also needs to save so that by retirement not only do you have a home paid for, but you also have an income. There is no point being asset rich and income poor.
Is property the best way to invest?
It has been long proven that the foundation of wealth invariably starts with the ownership of property.
If you can afford it, then it is preferable to purchase residential property as this has proven to be a sound medium to long-term investment. Because of the challenges presented by the National Credit Act, and a CPIX inflation that hovers above the 6% mark, The South African property market is presently a buyer’s market.
Due to the prevailing economic factors, the supply of property is greater than the demand. This means that you are likely to find yourself in a position to drive really good bargains.
Study recent surveys
The FNB Residential Property Barometer is a quarterly survey of a sample of estate agents in the country’s major urban regions, aimed at obtaining their opinions on a wide range of issues pertaining to conditions in the residential property market.
Estate Agents who took part in the most recent survey believe that the banks’ strict lending criteria and high deposits on home loans are to be blame for the low levels of demand.
In addition, although interest rates have dropped, there is still upward inflation pressure on food, petrol and other commodities, which acts negatively on disposable income.
No one can tell when the market will bottom out, there is also a danger that those who wait too long will miss the boat and find themselves buying on a rising market.
It is wise to educate yourself about the residential market and area in which you are interested. To do this visit show houses in the area, go to the Deeds Office and consult with aligned, independent agencies and mortgage originators to find out what prices homes in the area are really being sold for.
When Ask Entrepreneur spoke to Chairman and co founder of Private Property Holdings, Justin Clarke, to find out where he sees current activity and profitability in the residential market in South Africa, he said:
“This is the proverbial question, and it is best for me to give you an opinion. The four different indices published on house price movement show that the statistics can be translated very differently, but this is how I see it. I have no doubt that the most activity is still in the R300k to R800k house price range, but owners, buyers and sellers in this range are most exposed to the market conditions, they are most affected by interest rate changes, and increases in the cost of living.”
Clarke explains that this market is so active because of the economic climate:
“While employment is on the decrease, and there are fewer jobs in the market, jobs in this range favour new incumbents into the market who may have been in shared accommodation or the upwardly mobile township dweller, who strives to live in the suburbs and now can. Also seller’s activity includes those who are forced to sell due to their own financial circumstances and the overexposure they have to cost of living increases. The majority of economic indices show price deflation in this market, so although it is very active, sellers are accepting lower prices for their properties, and this the effect of the banks tight credit criterion.”
Outlook for the next 12 months
Clarke supports the theory that house prices will remain flat for 12 months. There are three reasons for this:
- Finance: We have entered a more conservative era and I can’t see banks changing their credit outlooks dramatically. They will definitely loosen up, but we will not see a feast like in the previous five years where they “”bought”” business just for market share.
- Supply: There is still some settling which has to happen. The banks have very high levels of distressed home loan accounts, and many of these sellers will need to offload their properties to recover from their high level of debts. Also Developers sit on large volumes of unsold inventory, which they are offloading into the market when the market will pay the price, so the volume is not evident, but I believe it is significant.
- Confidence:“Confidence takes time to build, and property will not be the hot topic it was in the last half decade. It will take time to turn.”
R1 million to spend
If Clarke had R1m to spend in property in the next six months this is how he would invest: “I love property, and have looked around at other investment classes recently. I still will bet on property in the current market. Look at the auctions, especially on privateproperty.co.za because the opportunity is incredible and you can find great buys. We always talk about “average” in the movement of the market, but I have bought property recently at 50% of the banks valuation. It is out there,” he says.
So what would he buy?
“I can only say you have to decide between property with low yield, (that your rental income falls far short of your bond) which is most likely to appreciate faster when the market turns, and high yield, low growth properties which you can pick up at cash positive positions.
“Developers are facing exorbitant increases in getting land on which to build and the restrictions and costs of servicing are becoming ridiculous, and you can be sure that the cost of creating new houses will increase dramatically, which will pull the price of second hand properties up at the same time. Apart from holiday houses, time share or any leisure properties, you will do fine if you buy to the maximum of your price range.”
Where has Clarke recently bought?
“I am buying a small block of flats in the Johannesburg CBD at the moment, it is cash flow positive and you would probably find similar investments in your R1 million price. Otherwise you will be safe with 2 to 3 bedroom townhouse type unit in a secure complex, and try to be close to major places of work, but buy well, because you can.”
Ronald Ennik, managing director of Pam Golding Properties says: “The difficulty at the moment is the shortage of cash and it’s defining the market. South African’s do not have a “savings culture”” so the number of buyers are going to diminish. Little pockets will do well, for example, areas close to the rapid bus system and the Gautrain will result in people changing their lifestyle and these areas will become high-density areas – and great investment options.
“If I had a million to spend now, I would follow my own advice. But I must add some advice. Do your homework. Don’t buy property on rumours. Try to find out if there are plans that will uplift the area that you are looking into. Check your facts – there is no rush because the market is flat, so take your time.
Understanding the Markets
What are primary and secondary, money and capital markets?
Primary markets are markets dealing in the issue of new securities. In a primary market, the security is sold directly to the investor from the company or organisation itself. Primary markets are a vital part of the capital markets and underlying strength of the economy
Once something has gone through its offering in the primary market, it will then be made available in secondary markets such as stock exchanges and through brokerage firms.
Once securities are on the market, they can be bought and sold based on demand. To make it to the primary market, they must go through an underwriting process to ensure that the company making the offering has completed all financial disclosures and has fulfilled all requirements necessary to make the offering.
Market makers are essential in the success of both the primary and secondary markets. These are firms, broker-dealers that hold a certain number of shares of specific securities to be traded. The firm assumes risk in doing so by investing its own capital
Making money off of your savings
While many will concur that is in fact no ‘easy’ way to make money, passive investments demand little to no involvement on the part of the investor. Passive investments include taking equity in someone else’s business or investing in the stock market.
Alternatively, you could peruse our Business Ideas Directory to find a type of business you are interested in starting – this would constitute an active investment. Be aware that all investments contain inherent risks, do your homework and seek professional advice from a business and/or financial advisor.
Share trading workshops
Standard Bank Securities offer courses throughout the country and many of them are free of charge. It’s recommended that one attends a beginner’s workshop such as an ‘Introduction to Investing’ which covers the basics and takes about five hours. From there you can take advanced courses and follow a specialist path.
Log onto the Standard Bank web site, www.standardbank.co.za and then select online share trading where you will find lots of useful information.
Are SA Retail bonds a wise choice as an investment vehicle?
With regard to SA Retail Bonds, the money is invested with the South African Government and is therefore a safe investment. Interest and capital are paid electronically into your bank account. It is a paperless investment (there are no physical certificates) registered in your mother’s name. If she has an urgent need for cash, she can take an early withdrawal after 12 months, subject to payment of a penalty.
“What you need to think about is how often you need to access funds. For example if you invest in the most conservative fund at Allan Gray, such as the money market fund, you would probably earn 6.2%, while a riskier fund, such as equity funds, can earn 8.5%,” says consultant Jaweed Allie of Allan Gray.
The return is high
The RSA Retail Savings Bonds have been designed as a savings product for South Africans. If you have a South African ID number and bank account with a financial institution in South Africa, you can participate in South Africa’s saving scheme. A two year fixed rate offers 8% interest, while a three year rate offers 8.25% and a five year fixed rate offers 8.5%.