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Diversified Economy - Secret to Growth and survival.
Milieu Commercial sales
Despite the fact that the residential property market has been slower over the last 2 years, sales have definitely started to improve in 2010.
Commercial sales in particular Businesses as a running concern received great interest. During the trying economic times people were looking more for a monthly income generating commodity than for a long term investment.
Businesses in general were selling more of the basic needs and less luxuries. Supermarket owners said that people were definitely buying the basic food requirements.
Petrol stations said that people were spending less on gasoline. Less people were seen going away over weekends or for Sunday joy rides. However since the start of 2010 the trend started to change and people were starting to spend more again.
Milieu enjoyed great success this year selling income generating businesses. The value of the business as rule of thumb is calculated on the return on capital. Usually buyers expect about a 20% net return on investment. Other factors are:
- how saturated is the market for the type of business, how much competition exist;
- what is the age condition and quality of the equipment;
- have all the potential of the business been utilized or are there avenues that can be explored to further the potential of the business;
- is the locality of the business in a position where the passing trade (feet) been optimised or would a change of the address improve sales;
- the staff correctly motivated and trained;
- can incentives be implemented to improve the staff's productivity to eliminate the dreaded clock watch and African time syndrome.
A guide for investing in property
The World Cup fever brought with it massive capital and infrastructure spend at a scale and proportion that has not been seen in its history before. World class stadiums, improved highway and road infrastructure and leisure capacity in world class hotels and luxury accommodation. However, the massive government spend will soon wane and the question is; Where does that leave the over stimulated SA economy and property in particular?
If you want to invest in property, it pays to do your homework before you take the step. This is a strategy that can pay off. The shortage of properties to rent, combined with rising prices in most markets, means that if you choose wisely and manage your investment closely, you could reap the rewards.
Listed property appears to be recovering, and at a 3.41% return in the first quarter of 2010, it outperformed the JSE All Share Index by a good margin. According to Arntz of Prudential Enhanced SA Property Trader Fund, property also outperformed cash at 1.2% and bonds at 2.3%.
- The first tip is therefore that listed property could offer a defensive investment position in 2010.
- The second tip is that in direct property investments you should avoid buying overpriced properties. Distressed properties definitely still offer substantial discounts and create the opportunity for real returns in the future on property acquisitions. Property investment during market cool down periods could be beneficial as the real value of property always increases notwithstanding short term fluctuations.
- Consider gearing of properties carefully and do not bond it to the hilt. This will ensure that you will be able to bank roll your investment during vacancies or between rental contracts in a market that may not have recovered fully.
- Property is mostly a longer term investment and therefore one should not expect an immediate upside, but rather budget for at least a 3 to 5 year investment period. However, conventional wisdom supports that one should never sell property unless you have to.
- If possible, build up a property portfolio with a sensible mix of residential, light industrial and small commercial units. Beware of overcapacity and serious fluctuations in any sub portfolio areas.
- Carefully define your investment criteria and include therein a healthy monthly income from your investment portfolio. Many investors have made great capital growth investments but battle to fund the holding cost thereof.
Agricultural Farms as an income generating business
Commercial farms are sold as a running concern and price should be based on the return on capital, but this is not the case. Reasons for this are Farms are sold as a luxury commodity and the purchaser doesn't look at return on investment, this sets a precedent and causes a ripple effect through the market.
Good examples:
Foreigners purchasing a wine farm despite an exchange rate that makes it cheap for a foreigner, it is also purchased for nostalgic reasons where the purchaser had a lifelong dream to stay on a farm or is returning to his/her roots. Here the word lifestyle comes in. A business has worked very hard for many years and purchases a farm as a form of escapism. This has caused the conflict and grey area in price determination. Existing sellers hear of a sale of a farm that was sold for a far higher price than what it is worth as commercial income generating business. Good examples are also a farm in a pretty setting like a beautiful mountainous backdrop. The setting may have no commercial advantage for the income generating business capacity of the farm but for the man who seeks a specific lifestyle it is worth a lot.
Another example is a farm with useless dune land which does not provide any grazing or cultivatable soil, but the romance and nostalgic of the sea inspires a purchaser to pay a top price.
Business - day of take over effective date
On the day of take over the buyer and the seller does a stock take. The purchaser then pays the seller for the stock usually at cost price. The equipment as per inventory is also checked. Specialised equipment is checked by an expert for functionality and soundness.
In the case of a stock farm the animals are counted and in a case of lambs it may be weighed and sold according to weight. Tractor implements are inspected on day of take over. Once the inventory of all items has been checked to the satisfaction of the purchaser the purchase price is released to the seller.
Property slump catalyst for new property BOOM
It may sound like a complete paradox but this is what is really happening. What’s happened is that properties that were sold for very low prices have given the purchasers of these properties a bigger margin for profit return. As soon as this property is sold again these speculants have money to roll over into another, thus the slump have created a chain reaction of property transactions and flow of capital which stimulates the whole property business and the rest of the economy. The flow of capital seeps through from one section to another and the whole economy is stimulated and benefits. One may call it economic cross pollination.
Another example is where vacant stands of especially single residential stands of speculants that bought during the boom between 2004 and 2006 are sold. These speculants that bought at the tail end of the boom so basically they bought at the wrong time just before the slump. Nobody except maybe a privileged few knew that a slump is coming. These investors/speculants that bought at the end of the boom had to bite the bullet. Nobody knew how long to hold on so after 2-3 years of hoping for a turnaround some of them cannot keep their finances intact. These stands are sold at unreserved prices at auctions, the buyer buys at maybe between 25% and 50% of the going price. If he builds a house on the stand he can sell this for a price below the current going rate of homes. This again simulates the whole economy creating a ripple effect through the economy. A win win situation.