The world over, people are fascinated with the lives of the rich and famous. While some of us manage to resist the temptation of watching Keeping Up With The Kardashians or take a pass on Bieber’s latest Instagram posts, I’m fairly certain that most of us, at some point or another, have indulged in a bit of lifestyle daydreaming.
My personal escape from reality is to imagine coming into some serious money and then - the fun part - agonise over how I would allocate the funds into a well-diversified and smart investment portfolio.
On a few occasions my lovely wife has humoured me and agreed to play this game together. Even though I am chomping at the bit, I am just about able to keep it together as I allow her to fantasise about how every last penny would be spent. (Without fail, the first siphoning away of her fortune is with the employment of a full time cook...)
Once she’s done, which in all fairness to her, is pretty quickly, I get a turn and by the time I’m finished presenting my detailed assessment, she has either fallen asleep or hung in there just long enough to point out that I haven’t made a single "fun" purchase. My response is usually along the lines of "we could do the things on your list from the income these assets would produce!"
The most expensive square meterage of prime property around the world
This being said, I was shocked this week when I came across a piece of research by Statista who, using data provided by Knight Frank, were able to compile the following chart of the 20 most expensive residential locations, measured by looking at how many square metres of prime property a million US dollars could buy.
I always carve up a healthy section of my imaginary wealth into some property in a city or two from the graphic above. But, this list shattered my thinking in respect to the type of property my allocation would have bought me. R13.1 million rand only gets me 26m2 of prime property in New York City!
This prompted further research, and it appears that the most expensive property in Monaco (the top ranked location according to the Frank Knight data) is currently the 5-floor sky penthouse in the Tour Odéon building (pictured below), the tallest in the principality, standing at 170 metres.
While Monaco does sound fun (and expensive), for the moment I reside in Cape Town. I travel regularly to other parts of our beautiful country and I am often confronted by the assertion that Cape Town property is overpriced and potentially in bubble territory. It is with some degree of relief then, for Cape Town property owners, to then see that their rands can buy 7 times more m2 of prime property here, than in London, as of 30 December 2016.
Transfer tax for foreign buyers?
But what consolation is that to an aspiring citizen of South Africa who may have seen the record selling price of R290 million for a Bantry Bay property in Cape Town, now in the hands of German owners?
If the top end of the market, starting at around R13 million, is potentially being bumped up by foreign interest, perhaps an additional tax like that employed in Australia and particularly in Vancouver, Canada, may be a solution.
Vancouver has experienced similar demand to Cape Town in recent years, but Cape Town’s market continues to zoom higher while exhibiting a bigger income gap relative to its average local middle class resident versus those who reside in Vancouver.
This may be due to the fact that foreigners who buy in Vancouver have to cough up an additional property transfer tax of 15%. Is this enough to cool the fire without putting it out altogether? I’m not sure, but if my daydreams are ever to become reality, it may need to happen.
Physical property vs REIT ownership
In my occupation, I regularly find myself talking through the pros and cons of direct property ownership versus owning a share of a property stock like those REITs listed on the JSE or overseas on the NYSE, LSE or ASX. While there is most certainly a case for a direct property holding, the mantra of "location, location, location" will, judging by the exorbitant prices of the top 20 locations cited above, inevitably mean that the overwhelming majority will be precluded from taking part directly in this upper end of the market.
One of the advantages of REIT investing is that buying into a portfolio of AAA grade properties is made affordable to the mass market. I will be looking at this in more detail as well as many more reasons for REIT investing in my next property related-instalment.
Investment Specialist at Discovery Invest
Mark graduated with a Business Science Degree from the University of Cape Town in 2007. He then joined Sharenet, during which time he also completed his B.Com Honours through UNISA. Mark has helped to build, launch and manage derivative and share trading brokerage businesses. He is also a JSE Registered Securities Trader, and has worked on the trading desk at Sharenet. After seven-and-a-half years at Sharenet Mark then moved to Reitway Global (a specialist Global Listed Property Fund Manager) where his passion for property was further kindled. Mark currently works for Discovery Invest as an Investment Specialist on their Investec Managed fund offering. He has over ten years of experience in the equity and asset management sector and can be reached at: email@example.com
The views and opinions (where expressed) in this article are those of the author and do not necessarily reflect the official policy or position of Discovery Invest.