Property Investment Overview

realtor workGiven the “flat” performance of the South African property market, lower distressed property volumes, and higher distressed prices, YDL Property Investment has – at least for the time being – exited this market. Our commitment is to go where the best opportunities are to be found, and – in our view – this remains the US. We are currently heavily focused on US “flipping” (buy-renovate-sell) and “buy-to-let” in Atlanta, Georgia, with Deon spending most of his time there.

2014 has already delivered some surprises. The Rand has weakened further, and is currently trading at more than R11 to 1$ (see our special feature article here).

The Atlanta Market

Anton joined Deon for a few weeks in Atlanta over November and December. His focus included an in-depth analysis of the Atlanta Metro residential market. The information quoted in this article is primarily from excellent research by Keller Williams, the number 1 real estate agency in the US (Q4, 2013) and ChartMaster Services.

For years, the Atlanta market was driven down by distressed property sales, but this turned the corner during 2012 and is now one where prices are driven up by low supply. In US ‘real estate’ lingo, if it will take more than 6 months to sell available stock, based on current sales rates, it is a buyer’s market. Less than 6 months is a seller’s market. The current level is 3.7 months, making the Atlanta market a strong seller’s market. This is a complete reversal from the high of 11.8 months seen in May 2008.

YDL Property Investment’s focus over the last two years has been on buying distressed US properties, as this means better purchase prices. But, we’ve been warning for some time that the number of distressed properties are declining fast, and that investors need to act as this particular opportunity will pass them by.

The research supports this: Distressed sales have halved over the last year – 40.5% of overall sales a year ago, to 21.6% today – and new distressed listings have flattened over the last 6 months. There is speculation that banks may be more willing to dispose of distressed properties now that the overall market is improving, but we’ll have to see if this will happen.

This shows that 52.2% of properties priced less than $100 000 are still distressed sales, and that 24.8% of sales in the $100,000 to $200,000 range were distressed. This percentage drops off strongly over $200,000. YDL Property Investment has thus been focusing its efforts on the “below $200,000” market (not just due to the percentage of distressed sales, but also to make the programme as affordable to South African investors as possible).

But, many of the distressed sales are happening in areas where we believe the risk will be too high for our investors (such as inner city areas). We’ve taken great care in selecting “up and coming” areas where renovated homes, priced correctly, should sell fast. In these areas, both the total number of new distressed listings, and the distressed sales as a percentage of total sales, are lower than the average. This means high demand for distressed properties, relative to supply, resulting in “bun fights” with other investors (some properties are snapped up within 30 minutes of them being listed).

The median sales price of renovated properties, as well as the ‘”days on market”, are critical indicators for us. Earlier last year, concerns were expressed in some quarters about a bubble forming as prices increased very rapidly (for example, 41.7% in Q1).  But, the pace of median price growth has tapered to (a still high) 22.3% in Q4. But, it does mean that we are selling in a very “hot”, but stable, market.

For interest, sellers achieved 95.4% of asking prices, compared to 85.7% two years ago, further supporting the stronger position of sellers. The median days on market (DOM) decreased substantially, a further sign of a seller’s market. In the resale market, the average DOM was 48 days, substantially down from a year ago, when it was in the mid seventies.

As a result of the above, we are thus placing greater emphasis on delivering “sellable” homes than on buying distressed properties. Our main driver is to sell as quickly as possible at the best possible prices. One of our responses to the drop in distressed supply has been to give a stronger weighting to the extent and quality of renovations. Our renovations have become a major part of the overall proposition, and renovation costs are typically a high percentage of the purchase price. We’d typically redo the whole interior, including installing new kitchens and bathrooms, and sometimes “lifting the roof”.

But, with the USA’s uncertain economy, short term housing market improvements should be viewed cautiously.  For example, a sharp increase in the number of listings, or distressed properties, could expose the fragile nature of the recovery.

Having said that, there seems to be broad consensus that a recovery has been underway for some time now. According to Corelogic, house prices in Georgia showed the 5th highest price increases nationwide, and are now only 14.6% below their peak of December 2006, which shows the extent of the recovery.

According to the President of Corelogic: “the healthy and broad based gains in home prices in 2013 help set the stage for the continued recovery in the housing sector in 2014 after six years of fits and starts, we can now see a clearer path to a durable recovery in single family residential housing across most of the US”.

What does this mean for a “flip” investor in the Atlanta Market?

Firstly, finding well-priced distressed properties is becoming increasingly difficult. There are still good deals to be done in Atlanta, but the competition for these properties is fierce.

Secondly, substantial renovations have become an important value add.

Thirdly, once a “flip” property has been purchased and renovated, it means that, if the property is priced correctly, it should move comparatively quickly, given the current low supply of properties. This means faster “flips” for investors.

Fourthly, whilst the Rand may during the course of the year recover from its current position of R11 + to $1 (see more on this here) investing in a hard currency market is an excellent hedge against medium to longer term Rand devaluation. And, our returns of between 15% and 30% per annum – in US $ – are excellent.

We are not just focusing on “flip” properties, but “buy to let” as well, for those wanting to generate passive income in a hard currency. Net yields of around 9% are achievable. YDL Property Investment, with Deon based in Atlanta, will continue to find and make excellent “flip” and “buy to let” properties available to South African investors so if you are interested in learning more about this opportunity, contact us here.