ARE HOLIDAY HOMES BECOMING A GOOD PURCHASE PROPOSITION AGAIN?
Category News
With the holiday season now in full swing many people, says Alexander Swart Property director, Rowan Alexander, are likely to find themselves temporarily in coastal or inland areas that they really like. This will make the idea of buying a second home for use as a holiday retreat (and possibly for renting out when they are not using it themselves) attractive.
"It is perfectly understandable, for example, for a Cape family that has spent a few weeks in a place like Langebaan to feel that they should have a second base there; one which they can visit and enjoy regularly. By the end of this summer the agents working in the holiday areas will undoubtedly have made several more sales. If you do this purely for the emotional satisfaction of owning a home in a place that you love, well and good. If, however, you are hoping to do this AND to make a satisfactory financial investment, you are on the wrong track. There are better ways of accessing a home in the country areas which are financially much more profitable."
The basic weakness of many holiday areas, said Alexander, stems from the fact that so many of them underwent rapid development in the boom years of the early 2000s. At e.g. Langebaan, it was particularly noticeable when other nearby areas saw rapid industrial development and in Hermanus unprecedented growth due to newly opened adjacent land tracts, being far less expensive. Whatever the cause, the boom led to very rapid development and ultimately, in many places, to an over-supply of stock.
"If one looks at the Cape West coast, there was a time when the developers struggled to keep up with demand. Now, however, most of the plentiful unsold stock on offer there is available at very substantial discounts, some as high as 75%, which can increase the appeal of buying there."
Nevertheless, said Alexander, he would advise the average cautious investor to consider an alternative arrangement: take what money you have available and put down a deposit on a second home in the R1, 5 to R3 million bracket in a popular suburban area, reasonably close to the centre of the city, with good schools and retail centres, satisfactory security arrangements and attractive public open spaces. Rent this out and use the rents (or part of them) to rent a holiday home on an annual basis.
Why is it a sound plan? Alexander says the suburban property will appreciate in value at two or three times the speed of the holiday property and its rent in relation to its capital cost will be higher. Suppose a purchaser bought a home in the new Trinity development, Stonewood and paid +\- R2 million; this home would probably bring in a rent of R15 000 per month and he would have no problem finding a tenant. The rent or part of it could be used to rent a R3 to R4 million holiday home monthly, which is very much in the upper bracket. As a tenant he would have no maintenance costs (which on the coast can be high). Furthermore, at the end of a year, he would have the option of going elsewhere.
"You have to look at the basic arithmetic of these arrangements," said Alexander. "Within five years in the current market the Stonewood home bought for around R2 million, will have increased in value to about R3 million and will be readily saleable. The holiday home, valued at the same price i.e. R 2 million will in the current conditions have increased in value only to about R2, 4 million and will not be easy to sell.
"The logic of investing in a suburban home rather than a faraway holiday property is in my view irrefutable - but there will always be those who prefer to own rather than rent. If they can afford to go this route, best of luck to them. Many of my colleagues, who want a holiday base, are working on the plan outlined by myself and seeing satisfactory growth in their asset while also funding their holiday retreat."
For further information please contact Rowan Alexander on 082 581 3116 or by email: rowan@asproperty.co.za
Author: Independent Author
