It is common knowledge that the purchaser is responsible for the payment of the transfer costs and bond registration costs (if applicable) during the transfer process. However, as the seller, you will also be liable for costs during the transfer process.
Estate Agent’s Commission
An estate agent charges commission on the sale of any property, and it is usually expressed as a percentage of the purchase price, but it can also be for a set amount. However, commission usually excludes VAT, except if determined otherwise in the sale agreement. VAT is currently charged at 15% for sale agreements concluded after 1 April 2018. The estate agent’s commission is paid only when the property is registered in the purchaser’s name. Therefore, the transferring attorneys (conveyancers) will pay out the net proceeds of the sale to the seller after deducting the commission and bond amounts (see below). The estate agent’s commission is most likely the biggest cost payable by the seller.
Bond and Bond Cancellation Costs
Besides having to settle the outstanding bond amount if there is an existing bond registered over the property, a bond cancellation attorney will have to formally cancel the registered bond before the property can be transferred to the buyer. It is further important to note that the bond will have to be cancelled even if the bond amount has been paid in full prior to the sale of the property. The bond cancellation and the transfer of the property can be done simultaneously. If the transferring attorneys are on the specific bank’s panel of attorneys, they can also request to act as the bond attorneys. Bond cancellation costs are payable on transfer and, therefore, no advance cash payment is necessary by the seller.
Most banks require 90 days’ written notice of a seller’s intention to settle the full bond amount and cancellation of the bond. If you decide to sell your property, make sure that you give your bank the required notice beforehand. Penalty interest is extra interest payable on the outstanding balance of your bond. You will only be able to cancel the bond and transfer the property after the 90 days have expired, otherwise the bank may charge you a penalty fee for cancelling your bond early. This fee is calculated pro rata depending on the date of registration of transfer and simultaneous cancellation of the bond, which can be a substantial sum to pay unnecessarily. However, some banks won’t charge penalty interest if you will be registering a new bond with them on another property simultaneously with the sale of your current property.
Before a property is registered in the purchaser’s name, various compliance certificates are required. If applicable, the seller is responsible for the costs for electrical, beetle, electric fencing, gas, and plumbing compliance certificates. In some instances, sellers are also required to pay for the necessary work to be done before the certificate can be issued.
An Electrical Certificate of Compliance (ECOC) is valid for a period of two years according to current legislation. If the seller has an ECOC that is older than this, or any electrical alterations have occurred during the applicable two year period, the seller will be required to obtain a new ECOC by enlisting the services of a certified electrician.
If a homeowner has opted to install electrical fencing as a security measure, an Electrical Fence System Compliance Certificate is now also required where applicable. It is important to note that an ECOC and Electrical Fence System Compliance Certificate are two separate and different documents.
Another certificate which might be applicable to the transfer is a Beetle (entomological) certificate. This certificate is to confirm that the wood in the property hasn’t been infested by beetles and is usually only needed if your house is at the coast. While not compulsory, homeowners who are selling their property in the Western Cape and KwaZulu-Natal regions will generally need to provide the purchaser with a beetle-free certificate.
To confirm that the gas lines are safe, and only needed if there are gas appliances in the house, homeowners will be required to obtain a Gas certificate of conformity, which indicates that the installation has been done by a qualified technician.
A Plumbing certificate confirms that the plumbing is sound and is only required in Cape Town.
Inspections will have to be conducted by contractors for these certificates to be issued. These inspections normally take place only after any other conditions in the sale agreement (such as the purchaser obtaining bond approval) have been fulfilled. If there is work needed to be done to achieve compliance, then the contractor will give a quote for it. It is the seller’s responsibility to arrange and pay for the inspections and any remedial work that may arise, but often the contractor will be happy to delay receipt of payment until transfer takes place.
Rates and Taxes Clearance Certificate
The conveyancers will require a rates and taxes clearance certificate from the local municipality, and the seller will need to pay upfront to get this certificate. To provide the clearance certificate, the municipality can ask between two and six months of payments in advance, as well as all outstanding rates and taxes. If the property transfer registers within a shorter timeframe, the municipality will refund the seller the additional amount paid.
Levies Clearance Certificate
In the instance where a property is situated within an estate or sectional title scheme, similarly to the rates and taxes clearance certificate, the homeowners’ association or body corporate may request that the seller pays for their levies a few months in advance to ensure these costs are covered until transfer takes place. The homeowners’ association or body corporate will in any event not consent to the transfer of the property if there are any outstanding levies owed to them by the seller.
This is according to specialist sectional title attorney and director of BBM Attorneys, Marina Constas, who said that it is important to know the difference between the two and how different regulations may or may not affect them.
“The latest buzz words in the property industry are community schemes,” she said.
“The Department of Human Settlements, currently the umbrella body for such schemes, has taken control of their regulation.
“Community schemes include sectional title complexes, homeowners’ associations, shareblock developments, retirement villages, gated estates with constitutions and social co-operatives, which now fall under Section 1 of the Community Schemes Ombud Service (CSOS),” said Constas.
While the CSOS Act covers all community schemes, sectional title stakeholders must also consider the Sectional Title Schemes Management (STSMA), where recent amendments have introduced several new innovations.
“These must be understood and embraced by the sectional title industry. However, they do not automatically relate to homeowners’ associations and other community schemes,” said Constas.
Examples include the establishment of a reserve fund and a mandatory maintenance, repair and replacement plan.
“While many trustees manage their buildings very well and have always had buffer funds, an inordinate number find themselves in financial difficulty, with buildings being run from hand to mouth each month.”
“This reserve fund aims to ensure that buildings do not fall into disrepair. A related maintenance, repair and replacement plan is another completely innovation in the STSMA. From now on, the body corporate must prepare a written maintenance, repair and replacement plan which sets out the major capital expenses within the next 10 years.”
Constas pointed out that other important STSMA amendments include the stipulation that any changes to the management or conduct rules of a sectional title scheme must be approved by the chief Ombud after the necessary resolutions have been taken.
“The duties of owners have also been changed. An owner must now notify the body corporate of any change of ownership or occupancy in his unit. In terms of insurance, trustees are now obligated to obtain valuations every three years and owners may not obtain an insurance policy in respect of damage arising from risk covered by the policy of the body corporate.
“On the financial front, the complex’s budget may now include a 10 percent discount on levies if an owner’s contributions are all paid on the due dates.
“There is no longer a reference to an accounting officer in the sectional title legislation. Consequently, all buildings, even those with 10 or less units, must be audited,” she said.
Constas adde that the new concept of executive managing agents has now been included in the rules for sectional title schemes.
“Distinguishable from an ordinary managing agent, the executive managing agent actually steps into the shoes of the trustees and is liable for any loss suffered by the body corporate as a result of not applying care and skill.
“Even pets have been revised in the STSMA legislation,” Constas said.
“Disabled residents who require an assistance dog to reside with them and accompany them on common property no longer need the formal consent of trustees.”
While the STSMA’s recent innovations do not automatically apply to homeowners’ associations, Constas notes that they may choose to adopt certain provisions from the Act.
“So, if I live in a cluster golf estate development, the maintenance, repair and replacement plan does not apply in my scheme unless the scheme has legally adopted that particular rule.
“If I live in a sectional title scheme, the managing, repair and replacement rule automatically applies,” she said.
The Community Schemes Ombud Service (CSOS) Act, on the other hand, applies to all community schemes.
“The service is there to regulate, monitor and control the quality of all community scheme governance documentation and provide dispute resolution,” she said.
“Whilst the CSOS Act does not specifically talk about a compliance certificate for homeowners’ association rules, the Ombud’s office will be effecting amendments to bring the law regarding registration and rule compliance for homeowners’ associations in line with sectional title schemes.
“In the interim, the Ombud’s service is encouraging homeowners’ associations to send rules in for vetting,” Constas stated.
She added that the Ombud currently has jurisdiction to deal with any disputes in cluster schemes and notes that the Community Schemes Ombud Services levy must be paid by homeowners’ associations whether they are company registered or simply have a constitution.
Constas said that although the Ombud service faced serious challenges in its infancy, great strides have been made, with over 33 000 complexes having paid over monies. Those homeowners’ associations that have not registered with CSOS will be penalised, she said.
“Now that the Ombud’s office is gaining traction, there will be time to augment and improve the provision of services and to flesh out interesting issues in the industry, such as the Air BnB onslaught,” said Constas.
The index released recently MSCI Inc. (NYSE: MSCI), showed the South African property investment sector delivered an ungeared total return of 11.1% in 2016.
This reflects a 190bp decline from 13.0% in 2015 and the lowest recorded total return since 2009.
Income return remained steady at 8.3%, while capital growth came in at 2.6% which was down from 4.4% in 2015. Capital growth was underpinned by an improved base rental growth of 6.2% – however, this was offset by negative yield impact.
Sponsored by Nedbank CIB, the report is based on asset level data collected from a sample of 1,450 properties with a total capital value of R296.6 billion at the end of December 2016. This represents approximately two thirds of professionally managed investment property in South Africa.
Phil Barttram, Executive Director, MSCI, comments: “The Index report, provides a unique perspective on the fundamental drivers of commercial real estate returns in South Africa. In stark contrast to socio-political volatility, investors have benefitted from stable incomes, founded on the sectors’ contractual income base and aggressive cost management. Even given the decline in total returns, the sector has once again proven its resilience by providing real returns in 2016.
At a sector level, industrial property was the top performing sector during the 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 decentralised offices counted among the worst performing segments for the year with total returns of 7.5% and 7.7% respectively.
The Index has outperformed the MSCI SA Equities Index and the JP Morgan bond index (7-10 year) over 1, 3, 5 & 10 year periods.
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 2016 rather than continued outperformance.
Robin Lockhart-Ross, Managing Executive, Nedbank CIB Property Finance said, “The index results show that the performance of the South African property investment sector continues to hold up well despite the prevailing low GDP growth environment. Although, at 11.1%, the total return decreased from 13.0% in 2015, this is hardly surprising in that commercial property returns will over time closely track the general economy. Nedbank CIB, as lenders, look first for stability in income flows and then for sustainability in capital value, both of which this index demonstrates the SA investment property sector to have delivered consistently since inception of the index in 1995.”
The year 2016 has seen volatile financial markets globally with the commodity cycle still in recovery mode, economic growth in many countries still faltering and the roller-coaster political landscape.
At a time when equities, bond and currency markets are under pressure, market watchers continue to find value in real estate markets during tough times – whether hitching their wagons to physical properties or listed property stocks.
On the latter, investors would be normally investing in a property company, which owns physical property assets and collects rental income from its tenants that can be distributed as dividends payouts.
“That’s why listed property is much more defensive than any other sector on the JSE,” said Stanlib’s head of listed property funds Keillen Ndlovu at the Liberty Retire Well Masterclass last week.
Although SA’s listed property sector did not initially pique the interest of many investors, who often had a bias toward equities, the sector has since courted a strong following.
Listed property firmly outperformed equities (JSE All Share Index), bonds (ten-year government bond) and cash over the past ten years in terms of total returns. This has since firmly entrenched the asset class as a bellwether.
The sector has also seen a flurry of JSE listings – from having only 20 property companies on the bourse five years ago to 44-odd companies that invest in student accommodation, shopping malls, office, industrial and residential properties.
Ndlovu said the listings have offered investors choice as SA’s property market has opened up to offshore markets, giving investors access to hard-currency earnings.
Underscoring this is figures from Stanlib which reveal that ten years ago the sector had no exposure to offshore markets and so far this year, 37% of earnings derive from markets including the UK, Australia, Central and Eastern Europe. “If you invest in some SA-focused companies, you are also getting exposure to offshore markets,” he explained.
Having listed property in your investment portfolio helps to boost returns. For example, Ndlovu’s figures show that if your portfolio is 60% invested in equities, 30% in bonds and 10% in cash over 15 years – you would have achieved a 13.7% annualised total return.
“If you add 5% of property exposure, you get a total annualised return of 14%. Add another 5%, you get 14.6% and add another 5% you get as much as 15% in total returns. But you have to focus more on the long-term.”
He believes that listed property allocations in an investment portfolio should be 10% to 20%. But this depends on your risk profile.
Despite SA’s worrying state of the economy and the pesky rand, SA’s listed property sector is achieving an average forward yield of 7% and property companies are expected to post inflation-beating dividend growth of 8% average for the next 12 months.
Residential buy-to-let properties continue to be beset by humdrum rental growth and property returns that have dimmed the allure of owning a rental property as an investment.
Latest figures from credit bureau Tenant Profile Network (TPN) and FNB show a rise in buy-to-let rental yields since two years ago.
National gross rental yields (before the rental properties’ operating costs such as electricity, water, maintenance, rates and taxes are accounted for) marginally rose to 8.6% in the second quarter of 2016 from 8.5% in the first quarter.
Rental yields are a key metric for a rental property’s return on investment, expressed as rental income over costs associated with the property.
To make matters worse for landlords, the upkeep costs of a rental property continue to rise faster than rental growth, eroding returns.
Finding value in the rental market is fast-becoming area specific. For example, if landlords are looking for better rental yields, TPN and FNB figures suggest that they might have better luck Johannesburg (9.51%) than in Cape Town (7.71%).
Despite tenants facing the sustained rise in living costs, interest rates, and unemployment, TPN MD Michelle Dickens said the national rental payments trend is still stable.
Dickens said 66% of tenants nationally and across all rental value brackets are paying rent on time and in full; 6% are in the seven-day grace period; 10% are paying their rent partially, and nearly 6% of tenants are not paying rent at all.
The best performing rental value bracket is the R3 000/month to R7 000/month bracket, which makes up 55% of the rental market share. The below R3 000/month is performing badly due to affordability issues.
“Investment property is still bricks and mortar, and you are still having capital growth albeit it’s not great at the moment. But ultimately it’s about the management of that property,” she added.
The weak post-Brexit pound has opened a window of opportunity for South Africans to invest in the UK property market.
The rand, which was trading at R16.60 to the pound this past week, has strengthened from R24.50 in January as the fragile pound continues to trade around its lowest levels against the dollar since 1985.
The rand’s strength has been bolstered by pound weakness as well as news that the National Prosecuting Authority has dropped fraud charges against Finance Minister Pravin Gordhan.
The weakness of the pound indicates that South Africa is not alone when it comes to political and economic uncertainty and currency risk. In the US, the hotly contested election is also underpinning investor nervousness and the slowdown in China’s economic growth has caused global ripples of uncertainty.
Despite the pressure on the pound, there are positive investment indicators coming out of the UK. GDP in the third quarter, although muted at 0.5%, was better than expected and the property market’s supply shortfall continues to put upward pressure on prices, which reflects in good increases in the value of property investments in the UK.
The number of mortgages approved in the UK was at a three-month high in September, indicating that the market is picking up again after the Brexit fallout.
“Importantly, interest rates in the UK have been cut from 0.5% to 0.25%, against South Africa’s March increase from 6.75% to 7%,” according to George Radford, Director of Africa of property investment firm IP Global.
“I’m still very optimistic about the UK economy. In fact, a World Bank report recently ranked the UK the seventh best country in the world for ease of doing business, while countries such as Germany and France – which are now courting UK businesses to relocate to their cities – were ranked 17 and 29 respectively. The UK has much less red tape, a friendlier tax environment and is, of course, English speaking.”
“If you look at the property market, it is still structurally undersupplied. It needs 250 000 units per year. Currently 156 000 are delivered, which represents an annual shortfall of almost 100 000 units. This continues to put pressure on house prices.”
Radford recommends investment in regional cities such as UK buy-to-let hotspot Liverpool and financial services hub Manchester – both offering value for money and growth potential – or in zones 3, 4 and 5 in Greater London, which are still largely undersupplied.
In line with the IP Global strategy, he recommends residential property investment over commercial property. “I don’t believe the commercial or office market in the UK will do very well in the next few years, largely because of uncertainty on the back of Brexit. Industrial property however can do much better as the weak pound should assist with exports.”
Residential property is preferable as it is a stable asset which investors can buy directly, whereas access to large industrial or commercial property is limited, unless they invest in a fund, Radford says. “Many of our clients want something tangible – an asset they can have physical ownership of, instead of being one of a thousand investors entering a fund.” Most prefer buy-to-let investments which produce income.
IP Global’s Global Real Estate Outlook showed that London, Manchester, Melbourne, Berlin, Chicago and Tokyo were the most sought after destinations for global real estate investors. Sub-Saharan African investors however have shown a preference for Adelaide, Brisbane, Hamburg and Vienna.
Radford says Southern African investors have shown a preference for the UK and Australia, due to the shared historic connection, followed by Europe and the US.