Property is good business, with the right asset
By Justine Pillay, Client Coverage Consultant at Tuhf Capital
South Africa is often cited as having one of the highest business failure rates in the world, driven by stiff competition, limited access to finance, and price-sensitive consumers navigating a low-growth economy.
South African SMMEs have an estimated 70%–80% failure rate within five years.
By comparison, growing a property business portfolio offers unique advantages for aspiring entrepreneurs.
Property provides a tangible asset that can appreciate in value over time, while generating a consistent stream of rental income to support the business.
Through gearing, entrepreneurs can use borrowed capital to acquire and control assets worth more than their initial investment, creating opportunities to build equity and expand their portfolios.
Over time, as debt is repaid and property values potentially increase, entrepreneurs can grow their wealth and build a sustainable, scalable business.
This does not mean property is risk-free. It means the risks can be assessed, managed and mitigated, with a tangible asset underpinning the investment.
The question then becomes: how do you identify the right asset?
Buy cheaper, but wisely
The price of the property is the first consideration, and most aspiring property entrepreneurs start here.
Affordability must be the first consideration, but more important than ‘how much?’ is ‘why?’.
A property may be very affordable – the why indicates whether it’s a good opportunity or not.
If the price is low because the occupancy rate is low, the building has been hijacked, there are significant maintenance demands or the cost of refurbishment exceeds the building’s potential to generate income, entrepreneurs should pause.
These reasons don’t necessarily rule the property out, but they do add a layer of risk complexity that needs to be managed.
Affordability needs to be a two-part question, especially for new entrants to the property market.
The price is the first part, the second is about financial sustainability.
A property with long-term potential is resilient enough to produce reliable cash flow in the face of changing market demands and economic or political fluctuations.
Evaluating the asset’s resilience
A resilient opportunity has some key characteristics.
Entrepreneurs should examine the demand trends for the type of property they envision, the quality of tenant market they’re trying to reach and the rentals the property can realistically demand.
Operating costs, vacancy trends in the area and zoning rights are some of the considerations that point to the building’s potential to create value in the future.
A property that can produce value from day one is a good investment.
One can’t rely on capital growth alone – the property must make financial sense from the beginning.
Location matters, so does context
The old property adage – location, location, location – is one that aspiring property entrepreneurs often oversimplify.
Location is important, but it’s relative to context. More important than ‘where?’ is ‘what does this area need?’.
A well-located property near amenities, transport, social services and places of work is a must when choosing a property.
But what an entrepreneur intends to do with that property must serve the needs of the community living there.
Building two-bed duplexes in an area where tenants are looking for walk-up bachelor units will make tenanting the building a struggle – no matter how well located it is.
Location and demand must be considered congruently when choosing a property.
Understanding population movement and why is just as important as the location itself.
Entrepreneurs should ask what kind of tenant is moving in, who is moving out, what businesses are nearby, what type of living space do people want, is the infrastructure in the area maintained or improving – and ensure that the project they have in mind makes sense for the people who want to live there.
Understand the worst-case scenario
Falling in love with a building is one thing, but it’s no guarantee that the building will be able to produce income sustainably.
Stress testing the investment before making a commitment can make the difference between success and failure.
First, consider the cost of operating the property as a rental business.
Entrepreneurs should do scenario planning that takes into account operating expenses, maintenance costs, whether the investment still makes sense if vacancy rates exceed the occupancy threshold needed to service loans, and whether the tenant base can accommodate rising interest rates or increased maintenance costs.
Finally, does the property present opportunity to expand the value it can create.
Examples include adding retail space to diversify the tenant base or installing rooftop solar to mitigate utilities costs.
Feasibility studies should take a conservative approach so that the entrepreneur can be sure the property business will remain sustainable in the worst-case scenario.
While most businesses start with an idea, property businesses start with an asset.
Choosing the right one makes for a sustainable business that can create real wealth.
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