The demand for businesses in the general real estate industry in South Africa is growing massively due to the hiking prices of properties in the country. Reports show that 60% of all construction is centered within the Gauteng region, and this number will continue to rise in the next few years.
Real estate is without doubt one of the most exciting and lucrative businesses to be involved in, and South Africa is a fertile ground to invest your money. A lot of investors buy properties and bank them, and then sell the properties off once they have either served their purpose or have gained value.
Property business is not a simple business and not for the faint of heart, but the adrenaline rush when a major deal comes together would truly be worth it. In this age, property buying or selling is huge, and those that are good value for money can really bring substantial profits.
A lot of property business owners and investors buy run down shopping centers, commercial buildings and warehouses for the sole purpose of fixing them up and selling them off at a profit. These are some of the most sought-after real estate investments. Statistics has also shown that residential property is also big business if you are looking to start your own property business.
There are a handful of areas where you can buy houses in poor conditions but at excellent price, renovate them and then rent them out to tenants. This particular niche is lucrative, but can sometimes prove to be tricky if you are unfortunate to get poor tenants, but on the other hand, if the tenants are reliable and good payers, this can be a wonderful way to earn extra income.
When planning to start this business, you should first put an excellent business plan together. Buying properties at this point in time is a clever move if you have spare money to invest or if you want to get into the real estate business. A lot of property owners are willing sellers as the recession has taken its toll over the past couple of years.
With the real estate market climbing slowly back into recovery mode, it provides you a large opportunity to make more money. Read on as you are pointed towards the right direction on starting a successful property business.
17 Steps to Starting a Property Business in South Africa
1. Understand the Industry
South Africa’s property market has since the year 2000 remained resilient, even with challenging macroeconomic conditions. Growing demand for affordable housing and a host of “new city” projects kicked off in the past year have kept the residential market steady, while A-grade commercial space which is on the verge of oversupply in some areas, is expected to experience strong growth.
Note that all segments of the real estate market have struggled with rising electricity prices, the country’s burgeoning e-commerce, transport and logistics segments.
Reports have it that the rising interest in real estate investment trusts (REITs), a robust retail segment, steady population growth and plans for billions in new infrastructure outlay have brought about a positive mid- to long-term forecast, although the sector will need to face near-term challenges, as slow headline growth, rising inflation, labour unrest, and an expected interest rate hike continue to affect consumer confidence and spending.
Reports have it that South Africa’s residential stock stood at 6.07m properties worth a total of R4.27trn ($368.93bn) in the Q4 of 2014 and in Q2 2015 Housing Review, 2.11m properties worth R2.25trn ($194.4bn) were bonded and 3.96m houses worth R2.02trn ($174.53bn) were non-condensing.
We also believe that the average nominal price of a middle segment home, offering between 80 and 400 sq. metres of space, and priced at less than R4.2m ($362,880), stood at roughly R1.32m ($112,320) during Q1 2015, and went up to 7.3% year-on-year, but then real price inflation in middle-segment housing stood at 3% in the same period, compared to a headline rate of 4.2%.
The report notes that its sample size for luxury properties is smaller than other segments, home prices in this category rose by a nominal 10.6% year-on-year (y-o-y) during Q1 2015 to average R5.77m ($498,528). Residential building activity was subdued in late 2014, however, and contracted further in early 2015, with approved building plans falling by 6.1% y-o-y to 8444 units in January and February 2015.
Reports have also shown that the residential segment is likely to face a number of serious challenges, more especially against rising inflation, falling consumer confidence, labour unrest, electricity shortages and a period of currency depreciation which saw the rand lose 7% of its value against the US dollar between January and July 2015.
2. Conduct Market Research and Feasibility Studies
- Demographics and Psychographics
In this business, your target market will cut across people of different classes and this is why we advise you develop a business concept that will allow you work with highly placed people and at the same lowly placed people who are only interested in putting a roof under their head at an affordable price. You’re target market will include;
- Foreign investors who are interested in owning properties in South Africa
- The government of South Africa (Government contracts)
- Managers of public facilities
- Families who are interested in acquiring a home
- Corporate organizations who are interested in acquiring their own property / properties
- Home Owners who are interested in selling off their home
- Properties Owners who are interested in selling off their properties
3. Decide Which Niche to Concentrate On
You need to understand that the property industry has different types of investment niches. Some of them might appeal to one type of person; some might appeal to another type of person. But you should know that each investment niche uses most of the same basic principles and fundamentals.
- Buy-to-Let
Here you simply buy or purchase property to rent it out to prospective clients with a view of generating rental income from the property.
- Renovate to Sell
Renovate as we know means to buy a decommissioned building or a dilapidated house in order to fix it (flip it), and then sell it off for a profit.
- Repossessed Property
If the owner of a property fails to make bond payments on the property, the issuer of the bond, usually a financial institution will then seize it. The sheriff of the High Court will then sell the property off at a sale price in order to recover losses from defaulting on the bond payment
- Letting Agency
This agency facilitates an agreement to rent out property to tenants on behalf of the property owner. The letting agency, in turn takes administration fee.
Level of Competition in the Business
The South African property sector is valued at R5.8 trillion. The report reveals the property sector’s size is at R5.3 trillion with a further R520 billion land officially zoned for commercial and residential development.
Commercial Property carries a value of around R1.3 trillion, up from some R780 billion, with almost R790 billion held by corporates, R300 billion held by REITs, R130 billion by unlisted funds, and R50 billion by life and pension funds. Note that the retail property has the highest value at R534 billion followed by office properties at R357 billion (R228 billion) and industrial properties at R281 billion (R187 billion).
Hotels and other property accounted for R94 billion in value (R25 billion). We also believe that that formal residential property still accounts for nearly three-quarters of property owned in South Africa, and grew from an estimated R3.0 trillion at the end of 2010 to R3.9 trillion.
Note that underdeveloped urban land zoned for development remained unchanged around R520 billion (1.1% of total land in SA). But then the public sector contributed a total of R237 billion, of which around R102 billion is estimated to be in the hands of the Department of Public Works, R66 billion held by SA’s 19 largest state-owned enterprises, and R69 billion owned by metros and selected local municipalities.
The research is part of a larger project by the council, which provides a point of departure against which various transformation charter imperatives can be assessed.
Experts estimate the property sector’s contribution to GDP at a significant R191.4 billion in 2012 in terms of annual income and expenditure flows generated by the sector and a R46.5 billion contribution. By the end of 2015, the naysayers and the sorry folks who have avoided listed property investing in the past said the sector would struggle in 2016.
Even though it didn’t exactly shine, it beat other equities and remained a tenacious sector. Statistics has it that from January to December 13, equities achieved a return of 3% and were completely battered by property which managed 8.4%. Cash only mustered 7% but bonds reigned supreme with a 14.8% total return. The property sector was hurt by political uncertainty and slow economic growth. The economy has barely grown this year.
Indeed the industrial sector continues to be resilient with landlords achieving above-inflation rental growth and tenant retention on warehouse and logistics properties while the office sector is the laggard with rising vacancies on properties and the oversupply of rental space.
Industry remains the top-performing property sector in South Africa, with a total return of 13.6% delivered in 2016. At a sector level, industrial property was the top performing sector last year with a total return of 13.6%, outperforming retail at 12.6%. The office sector continues to struggle on the back of subdued capital growth and was particularly hard hit in 2016 with a total return of 7.6%.
At a property segment level, Inner City and decentralized offices counted among the worst performing segments for the year with total returns of 7.5% and 7.7% respectively. The top performing segments for the year were High Tech industrial property and Neighbourhood shopping centres which produced total returns of 18.1% and 20.3% respectively. Neighbourhood Centre returns should be seen in a longer term context, which suggests a return to trend growth in 2018 rather than continued outperformance.
4. Know Your Major Competitors in the Industry
Industry experts have speculated that 2016 was the worst performing year for residential property since at least 2012. It is believed that the socio-political landscape and economic climate have also done little to alleviate the pressure.
South Africans are looking for safe investments, and property remains one of the safest ways to grow money. Even though there has been a general slowdown in the property market over the last financial year, a lot of property businesses have managed to stay lucrative.
Property businesses no longer simply depend on traditional selling methods such as hanging ‘for sale’ boards outside houses or advertising in the newspaper. They have had to find more innovative ways to attract new clients. Below are seven property businesses that overcame the economic challenges and managed to not only sell the most property, but also made it artful.
- Rawson
- SEEFF
- Pam Golding
- Remax
- Just Property
- Chas Everitt
- Jawitz Properties
Economic Analysis
Experts strongly believe that population growth will ensure the residential sector is resilient. It is believed that South Africa’s population will rise to 72.9m by 2050, while 62% of its 53m residents will live in urban areas, with urbanization growing by 1.21% annually. This is why with urbanization and population growth rising, affordable housing and new city developments stand as the most high-potential growth drivers within the residential segment.
Reports have it that the price of affordable housing which includes homes of 40-79 sq. metres, priced up to R575,000 ($49,680) grew by 8.3% during Q1 2015 to hit R390,000 ($33,696), equivalent to real price inflation of 4%, compared to 1.9% during Q4 2014.
Note that new master-planned projects are sustaining their popularity among middle and upper income segments, providing self-sustaining, greenfield, mixed-use developments with heightened security and amenities. We believe that these developments have been a prominent feature of South Africa’s real estate market for years, and more projects are in the pipeline.
Although local banks have been increasingly involved in property lending, the size and scope of new cities entails much higher levels of financing. AIH’s finance agreement with Nedbank Corporate Property Group for the Waterfall Business Estate project was the largest of such deal ever concluded by the bank.
With billions in fresh investment and sustained construction efforts needed to deliver new projects, some stakeholders have questioned developers’ ability to maintain momentum and fully deliver all planned features and amenities.
Note that new cities will need significant investment in infrastructure before moving forward. Reports have it that one of the most significant risks to economic growth is the country’s ongoing energy challenges, which began in 2008 and became increasingly problematic over the subsequent 18 months. New city developers, meanwhile, have moved to build their own infrastructure, despite these adding significant costs to the projects’ total price tags.
5. Decide Whether to Buy a Franchise or Start from Scratch
It might seem like the ideal path to start small and grow bigger in the real estate industry, but this may not always be the best option for a property business. We believe that single unit properties and small single family homes are the most attractive to newbie investors, as they usually cost less to buy and renovate.
But the profit from these properties is often swallowed up by the renovation budget, and maintenance on the properties. The more reason buying a franchise is a better option in this business, and you can also partner with a wealthier individual or get more financing in order to purchase a more profitable property.
Note that we are not suggesting you over-extend yourself, but you should know that properties requiring small initial investments often offer small profit potential. It’s advisable that you research very extensively before you dive into a franchise.
6. Know the Possible Threats and Challenges You Will Face
The property business is an intense business where almost everyone works to do their own deals. All these and more makes the industry very interesting and competitive. There are many intelligent entrepreneurs out there who are very ready to do their own deals, however starting your own property business is incredibly challenging. Possible threats you should have at the back of your mind may include:
- Low barrier to entry
- Industrial unrest
- High fatalities due to lack of health and safety compliance
- Tender risks
- Non-payment risks
- Compliance with laws and regulations.
- Timing
- In the industry Investors have unlimited investment choices
- Unlikely to experience a near-term capital event
- Hard to be patient even though that may be the best course of action
7. Choose the Most Suitable Legal Entity
The first thing you need to consider when starting your own property business is the type of ownership to go with. In South Africa, a good option is to open a close corporation (CC). This we believe will make things easier to manage. In a CC, the owners of the company are referred to as members, and you need a minimum of one member and there’s a limit of ten members.
A CC is a legal entity in South Africa, which means the CC is responsible for paying taxes and not one individual. You then need to register your CC by completing a CK1 form (Close Corporation Founding Statement). You can complete this online or download a form to complete.
We suggest you have an accountant sorted out. You’ll need to include the details of your accountant and an original signed letter from him or her agreeing to act for your CC. You’ll also have to provide the letter you receive confirming the registration of your company name. This process takes about five days to complete and costs R100. Once your property business is registered, don’t forget to register with SARS.
8. Choose a Catchy Business Name
- Universal housing
- Wealth contractors
- Target reality
- Sheraton Ltd
- Dream Home Real Estate Service
- Castle Realty
- Apartment Grey
- Four Leaf Clover
- Exquisite housing
- Bumpy Housing services
- Destiny Realty Solutions
- Future estates
- Affinity Investment Group
- Winter suits
- Housing giants
- Exodus
- Integra estates
- Numeric estate services
- Liberty world
- Tower Magnet
- Pitch mantra
9. Discuss with an Agent to Know the Best Insurance Policies for You
You need to understand that the importance of insurance in all phase of our lives cannot be ignored. Even Long-term property investors will want to have iron-clad insurance policies in place that include stipulations about what’s covered by the insurance and what is the responsibility of the renter. Have it in mind that you cannot lock yourself down into a long-term contract if you’re going to offload the property very soon. Note that every type of insurance has its own exclusions.
- General business liability insurance
- Investment property insurance
- Real estate finance insurance
- Loss of rental money insurance
- Equipment breakdown
- Umbrella insurance
10. Protect your Intellectual Property With Trademark, Copyrights, Patents
Indeed no time or moment is too early to begin thinking of intellectual property protection. Have it in mind that keeping a vigilant eye on these assets is an important part of the success of your business. New entrants into the business world tend to face the issue of intellectual property protection while some entrepreneurs will mistakenly believe that a company name is synonymous with a trademark.
You need to understand that trade name is the legal name of a business entity, which appears on the articles of incorporation or bylaws. Also note that a clear search is not a guarantee that the desired name is available.
You also need to know how important it is to have a strong Internet presence to promote one’s business. It is advisable that you consider acquiring domain names with alternative extensions (.com, .NET, .biz, .us, etc.) as a defensive measure to prevent others from doing so.
Also depending on the budget, you should register hyphenated versions of the domain name, common typos or even “(insert business name).” It is called waste of energy when you have to invest time and resources developing your intellectual property and then fail to protect it. It’s important that you seek the help of an attorney who is versed in this field to help you out.
11. Get the Necessary Professional Certification
- IREM Certified Property Manager certification
- Certified Leasing Specialist
- Certified Development Design and Construction Professional
- Certified Retail Property Executive
12. Get the Necessary Legal Documents You Need to Operate
Starting a business in South Africa takes several steps, and it can take several weeks to get it formalized. Most requirements can be completed online, and they do take some time to process. Ensure you have enough time to go through all of the stages such as providing certified copies of the documents required to complete the registration with the CIPC.
Note there is a nominal minimum capital amount of ZAR 1 needed to open a business, but other fees for registration will also apply. You must provide certified copies of some documents which are used to prove the ID of directors, and expect to pay some legal fees too.
- Visit the Companies and Intellectual Properties Registration Office (CIPRO) website and register as a user.
- Register your company name. You’ll need to either download a CK7 (Application for Reservation of Name, or Translated Form, or Shortened Form) or complete it online. CIPRO will conduct checks to ensure the company name isn’t already in use. This process takes about seven days to complete once CIPRO receives the application and it costs R50.
13. Raise the Needed Startup Capital
Indeed the property business is a hub of wealth where large finance brings back large profits. Funding especially startup capital can be very hard to come by but what differentiates your business from others will be your ability to scale through hurdles like this. Note that there are various institution that provide funding to aspiring entrepreneurs in South Africa:
The NEF Imbewu Entrepreneurship Finance, which provides risk capital to new businesses in the property development space. Financial institutions also provide funding throughout the life span of a project, but then you have to provide a financing structure to potential financiers to give a clear and detailed picture of what you are proposing, and also provide reasons why they should take the risk of funding your business. When looking to finance your property business, you should look at the following attributes to boost your chances:
- You should have a sizable down payment
- Ask for owners financing
- Think outside the box
- You should be a strong borrower
- Always shy away from big banks
14. Choose a Suitable Location for your Business
One of the best things that can happen to you in this business is to buy properties where conditions are favourable for renting/selling/lease. It is advisable that you focus on buying properties in areas where rental demand is growing faster than supply. It’s also advisable that you look at the demographics of the neighbourhood.
It is well known that the 25-34 age groups will increase by 1.1 million over the next three years. Also since the home-ownership rate among young adults has recently increased from 35.3% to 39.2% just within two years, places with high concentrations of this age group are favourable places to own properties.
You should also note that zoning regulations is very crucial in this business. In addition to zoning regulations, development is also controlled by conditions of title. These conditions are set out in the Title Deed of each property, and can restrict the way in which a property may be developed.
Note that any development of land that ignores this legislation can result in prosecution. Have it in mind that zoning regulations as well as the property description, and the size, orientation and other details can be obtained from the local municipally office and this department can also provide information regarding the National Building Regulations.
There are other costs to worry about as well. These include preparing the application, i.e. professional fees, the application fee charged by the council and the cost of drawing up plans.
Depending on the type of application, obtaining a decision may take as long as 12 months. After the application is submitted it is circulated to relevant Council departments and agencies for comment. Don’t also forget to find out who owns the land.
Every property in South Africa has to be registered with the Deeds Registries Office in South Africa. Note that the deed constitutes proof of who owns the property. The deeds office keeps a record of all property transactions. If a title deed is destroyed or lost, application can be made to the deeds office for a duplicate original of the deed.
15. Hire Employees for your Technical and Manpower Needs
It will indeed be tempting to reduce the number of processes or workforce so that you can be able to keep the lion’s share of the profits for yourself. We strongly advice you fall not into that temptation. No matter how much market research you do, you will not automatically become an expert the first time or two you purchase a property.
Also you have to know that realtors understand the market within a given geographic area better than you ever would, which is why you have to stage your vision towards finding the worst houses in the best neighbourhoods and pimp them up to reap the biggest rewards.
Also you will need to develop yourself as a business owner. You will need to equip yourself with the skills and knowledge needed to lead and manage this business in order to make it both sustainable and profitable. Note that this will need a substantial investment of time, effort and money from you. The more you commit to this journey of personal and professional development, the better your chances of success.
The Service Delivery Process of the Business
When trying or planning to invest in stocks and shares, a good financial advisor worth his salt would advise you to diversify your investment so that the risk is spread. This same theory or fact would be true for property investments. We strongly advice that you spread your property portfolio across different areas to minimize your risk.
You also need to have it in mind that there is little point in trying to spot a property bargain hundreds of kilometers away. You’re not an expert on the area and are not likely to be able to judge whether the location, price etc. are good or not. A bargain will be much easier to spot in your own backyard. It will also be much easier to keep an eye on your tenants if you live nearby. There are several steps for you to follow in this business.
- Do your real estate research
- Pay the Lowest Down Payment Possible
- Move in and get busy
- Take Action To Maximize Your Investment
- Repeat the process
- Move Up To Larger Properties
16. Write a Marketing Plan Packed with ideas & Strategies
- marketing strategies for the Business
The world has been screaming marketing and the importance of business promotion. Marketing your business is very necessary to help attract customers and create a brand image and reputation. In a competitive environment, there are always several companies competing for the same business opportunities, which is why it is important to tell your potential clients why your service is better than that of your competitors.
- Digital marketing
Never you underestimate the power of the internet for marketing. Clients in this industry are often attracted to businesses that have a website, making them appear more trustworthy than businesses which haven’t set up an online presence. Note that the internet is much cheaper as a marketing strategy than traditional forms of marketing, like print and radio.
Social media is also a strong driver for word-of-mouth marketing. Your website should have a contact form for clients to contact you for quotes. You should also include your credentials and a photo gallery of your work, a list of your building services and testimonials from satisfied clients.
- Educational-based selling
We believe that customers look for information that will benefit them, which is why education-based selling can be quite effective. Instead of focusing on features and benefits, rather educate your customer about your specialized service and give them the information they need to be able to make better-informed decisions.
- Word of mouth
A lot of entrepreneurs may think word-of-mouth marketing is out of their hands, but nothing could be further from the truth. The property industry is well known for unreliable realtors and agents who promise the earth to secure a job and then disappoint through sub-par workmanship, missed deadlines and extra cost.
We believe that this issue presents a powerful opportunity to create a competitive advantage. By giving clients a professional and reliable service and high quality outcomes, you’ll be able to set yourself apart and leverage word-of-mouth marketing.
- Testimonials
Note that your reputation and track record in this business is the most important tool you have to get more business. This is why you have to do all you can to make sure your client’s experiences are positive and impressive. Gather testimonials from previous clients and create contactable references to verify your workmanship. Use these stories on your website, in your promotional material and include stories and references with the quotes you send out.
- Referrals
We strongly advice that you join associations and forums to build up a referral system. Note that by networking you can make your business more visible and attract further business. Create a solid contact list and develop relationships as you network. The aim is to build a relationship that will make sure your business name is thought of first when there is a need for services that you offer.
17. Develop Strategies to Boost Brand Awareness and Create a Corporate Identity
Brand awareness and corporate identity in this business simply means that your local home buyers and sellers know who you are. It shows that you are on top of their mind anytime anything property crosses their mind. You need to understand that people start their property search online, which is why building your brand awareness with digital advertising is the best bang for your property business.
Have it in mind that a lot of businesses have to spend serious time, money and effort creating a brand that speaks their language. Note that as a property business, you have a particular advantage with brand awareness. Here are five secret weapons you already have to help you build brand awareness for your business:
- Mould yourself into an expert
- Know where your customers are
- You are the face of your brand
- You need to be a unique storyteller
- Your business is a service