I have a buy-to-let flat in Centurion, which I have previously written about a few years ago. As anyone with rental property in Gauteng will know, the market has been tough. In fact, in the four years since I have owned the place, rent and agent commissions have remained the same, whilst levies and rates and taxes have increased annually. This means that, when I bought the property, I was paying in approximately R1100/month, four years later, I am paying in R1700/month. This is in those months, where there has been no broken stove or damaged tiles, or faulty electrical wiring.
I bought the property for R640,000, but with attorney fees and bond registration costs, it was closer to R670,000. The yield at purchase was approximately 6.8%. I have now accepted an offer for R635,000, but after agents’ commission, I will receive R608,000, an approximate loss of 10%. Due to the higher rates and levies, the yield for the buyer is lower than my yield on purchase.
I owe R490,000 (I put down a large-ish deposit), which means that I will take out almost R120,000 in equity when the deal has closed. My intention will be to take this money and put it straight into Indluplace (ILU). The company, which owns and rents 9,600 residential units across 170 buildings in South Africa.
Not only will this decision absolve me of single counter party risk, such as the tenant not paying, but I will also be trading into a yield of 13.5%. Indluplace are also struggling in the tough rental market and have experienced severe problems at a complex in Witbank, which they rented to Kusile contractors, therefore they have forecast a reduction in dividend of 3-10% for the coming year. At a worst case, this puts them on a yield of 12.2%.
Better yet, Indluplace is trading at an NAV of R10.10/share, a 40% discount to the current share price. This means that I am literally buying a share of 9600 apartments – just like the one that I sold in Centurion – for 70% of their going price. This would be like buying my Centurion apartment for R450,000.
Yields are higher because Indluplace has a lower cost of debt, they can afford to manage their rentals in bulk, reducing the management fees, and can keep a maintenance team on staff. By putting R120,000 into Indluplace, I expect to receive approximately R1200-R1300/month in dividends (paid twice per year). Therefore, I have traded an expense of R1700 into an income of R1300, by selling my rental property at a loss.
This was done without factoring in any gains in the ILU share prince. In the mean term, I expect that the ILU share price will revert back to its NAV, in the long term, the NAV should grow with inflation at least. Will I wait for these events, I am happy to sit on my 12% yield.