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With equity markets once again reaching potentially risky levels and cash struggling to beat
inflation as a result of a lower interest rate environment, many investors are once again
eyeing bricks and mortar as a means of generating favourable returns in 2010.
According to Jeffrey Solomon, Director of Solomon Brothers Property Holdings, the developers of Pepper Club - a R400 million 5 star luxury hotel residence and spa set to open its doors in
Cape Town in March 2010 - while the prospects for the local property market are improving,
investors need to consider various options that are earning the best possible yields on their
investments.
- Buy straight from a developer
Transfer duties in South Africa rank amongst the highest in the world. Property between R500
000 to R1-million is subject to transfer duty of 5% of the purchase price while anybody
spending above R1-million has to pay transfer duty of 8% of the purchase price plus an
additional R25 000.
"Investors can therefore save thousands of rands by purchasing property directly from a
developer as this type of transaction does not attract any transfer duties," says Solomon.
One of the inherent risks with investing in buy-to-let property is that it stands empty for a
period of time, generating no income. Even when the property is let, owners still run the risk
of tenants defaulting on the rent, particularly in the current economic climate.
Solomon says one alternative is to invest in a development that operates a rental pool -
whereby all units are leased out by way of a combined pool. "The income is then shared between
all owners, thereby significantly reducing the risk of not earning a monthly income."
He adds that owners of units in developments utilising rental pools generally have the benefit
that interest payable on all funds borrowed to finance the investment is tax deductable.
As an added incentive, some developers offer investors the option of earning a guaranteed
return for a specific period of time. According to Solomon, investors in the Pepper Club, for
example, can choose to receive the actual yield from the rental pool, or a guaranteed return of 8% p.a. for the first two years of ownership.
- Take advantage of tax breaks
In 2003, the government introduced the urban development zone (UDZ) scheme with a view to
improving the ability of South Africans to acquire homes. The scheme was conceived to promote
urban development and regeneration in specified areas of certain South African cities,
including Cape Town, Johannesburg and Durban.
The UDZ scheme means that the first owner-purchaser of a building or part thereof in a new
development is entitled to a tax break consisting of a tax incentive of 55% on the purchase
price of a unit over a period of 20 years. Importantly this incentive can be used to reduce an
investor's tax liability on income from all sources.
The incentive is also not limited to the taxpayer's current year's taxable income, so if the
full incentive is not absorbed in any tax year it can be carried forward as an accumulated tax
loss until fully absorbed.
- Negotiate with your developer
As a result of the difficult market conditions over the past few years, many developers have
looked at innovative new ways to enhance the investment proposition for investors. Given the
size of the investments being made and their relationships with the banks, property developers
are often able to negotiate improved borrowing rates for purchasers.
"It is worth approaching them to see if you can negotiate improved terms on purchase prices and deposits," says Solomon. "They can also sometimes help secure reduced furniture, appliances and renovation prices through their relationships with preferred suppliers."
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