One way to view the investment in sectional title property is to compare it to the buying of unit trusts, in contrast to investing directly in shares or substantial freehold property, the investor buys a unit and owns property together with other investors and residential owners.
Since 2004 there has been a significant growth in demand for sectional-title office and industrial schemes. Similarly, an insatiable demand for quality inner city residential rentals has been experienced. It is believed that there will for decades be a demand for entry-level property, because of employment equity and Black Economic Empowerment drives (which includes foreigners from African countries needing to rent) in South Africa. The popularity of rental-market investment-opportunities appear to be very attractive, based on how rapidly new stock is snapped up, often pre-launch.
However, investors are recommended to tread with caution in dealing with sectional title residential, office and industrial schemes. There are a number of things to consider before making an investment, for example:
- How is the sectional title scheme managed? — The better managed, the more its value will appreciate. Conversely, a poorly managed scheme may result in losing value rapidly if not appropriately intervened.
- Property is not for quick in-and-out investment gains and it is not for the feint hearted either.
- A good managing agent (preferably a member of the National Association of Managing Agents) with a good track record is an invaluable ally to an investor, protecting the interests of investors.
Make a careful study the financial state of the body corporate of the scheme if buying into an existing scheme:
- Look for signs of wide scale non- payment or accumulated arrears of levies, because owners of units in such schemes can become liable for the unpaid debts of other owners even if regularly paying and levies up to date
- Review the audited financial statements for the last three years of the scheme
- Consider the funds in reserve for maintenance, as well as the historical expenditure and the physical appearance of the buildings and infrastructure
- Sectional title owners jointly own the land on which the scheme exists but are individually responsible for rates payable to the local authority
- If investing in a new scheme, make sure the developer driving it is reputable — consider obtaining either legal and/or accounting advice from a knowledgeable professional
- Peruse the scheme's management and conduct rules to make sure there is nothing therein that presents an obstacle or problem
- All investors become owners in the scheme and automatically part of the body corporate, with statutory duties (e.g. Section 44 of the Sectional Title Act) and responsibilities
- As member of the body corporate it might not be viable to attend annual and special general meetings, resulting in being reliant on a proxy to take decisions or not being part of the decision-making
- An experienced social-media-friend and regular commentator on Sectional Titles Online (Anne Greening) added that "investing in ST [sectional title] requires an ongoing involvement and financial commitment from the buyer to ensure that his property is internally maintained; that the rates are paid; the levies are paid; that he receives a rental; and that the complex is properly managed. He will not necessarily have a regular income from his investment, as tenants come and go, and he may be without one for some time. Tenants, no matter how carefully screened, can default on payments, or leave the inside of the house [unit] in need of repairs. Another aspect is the volatility of the housing market (although this could be said of Unit Trusts, too)."
Often investors smooth the cash flow of existing schemes in that when owners that are severely in arrears sell, the arrears are recuperated from the value of the sale.
An article by Jennifer Paddock conveniently summarises what investors need to know concerning sectional title scheme ownership. Property Investor Network neatly sums up the role for a Body Corporate by these seven bullet points:
- Budgeting – The Body Corporate must establish funds for administrative expense for the sectional title scheme. That, of course, includes everything from repairs [as well as planned maintenance and occational major maintenance projects] to local authority charges, electrical supply, fuel, sanitary and other services. Basically, everything that is necessary to manage and administrate the complex.
- Set Levies – The Body Corporate must determine levies for owners so that they have enough money to manage and administrate the complex.
- Banking – Yes, the Body Corporate is also obligated to open an account with a financial institution.
- Insurance – The Body Corporate also have the responsibility to take care of insurance and also to make sure it is up to date, all insurances needed of course. It was once found that sectional titles in a scheme did not update their insurance. Each unit was insured at a value less than 30% of the replacement cost. In this case, if the worst happens, for example a fire broke out, the owners would have to pay out some 70% of the total cost of rebuilding their properties. Keeping up with adequate insurance is a very important role that the Body Corporate is obligated to do.
- Maintains Common Property – The Body Corporate must make sure that the common property is maintained, that includes elevators and generally keep the complex or building in good state of service and repair.
- Comply with Authorities – If the authorities ask a body corporate to fix something under any regulations they are responsible to comply.
- Comply with Law – Another interesting point is that body corporate must be in compliance with any law that relates to common property or any improvement of land comprised in the common property [and a whole host of other laws: e.g. Basic Conditions of Employment Act, Health and Safety laws, Income Tax, UIF, Workmen’s compensation laws, the Older Persons Act and its regulations, and in anticipation the Ombud Act]. This is an interesting one as the members of the Body Corporate, in this function, must by definition understand such laws. If they don't then they should hire someone that does, otherwise they can't really comply with something they don't understand.