Property Talk

Sectional Title Or Full Title Homes

The decision between a sectional title property and freehold property as an investment opportunity is something that should be carefully thought through by those investors hoping to grow their wealth the fastest.

When it comes to investing in properties beyond your primary residence the annual price performance reflects how your investment is growing. The report published by FNB analyzing the difference between the freehold and sectional title house price indices reveals that the sectional title homes have seen superior price growth compared with full title homes over the period 2012 to 2016. There is no doubt that the economic slowdown experienced during 2016 has had an impact.

At the same time specific home-related costs, such as municipal rates and electricity, have consistently increased at above CPI inflation rates.

This has constrained house price growth and incentivized homebuyers and investors to actively search for affordability, which sectional title homes have provided to a greater extent that full title homes.

The latest home price growth rates published by FNB show that the sectional title house price index grew by 4,4% year-on-year in the 1st quarter of 2017 in comparison to the 2,4% growth recorded by the full title house index. Interestingly both are significantly down from their recent peaks - sectional title pricing is down from 8% growth recorded in the 3rd quarter of 2015 and full title prices are down from 6,7% growth recorded over the same period.

This overall slowing of price growth figures accurately reflects the general economic contraction we have experienced over the same period. Because we know the property prices can be sticky - i.e. they don't tend to fall quickly in the face of decreasing demand as property owners typically decide not to sell but to hold on for a period. What does however happen during these times is that the volume of property transactions changes more rapidly.

Considering deeds office data for transaction volumes for individuals split by sectional title and full title, FNB found that sectional title volume growth did outperform the full title transaction volume growth for the 5 years from 2012 to end 2016.

The smallest sized sectional title sub-segment, the "less than 2 bedroom" segment showed the strongest price inflation of 7,7% in the 1st quarter of 2017. The 2 bedroom sectional title sub-segment returned 4,8% growth and the "3 bedroom or more" sub-segment provided 3,7% average price growth. These figures are instructive for those investors who have the opportunity of buying units off-plan within a new development and are presented with a range of size and price options.

We do however know that the "less than 2 bedroom" sub-segment is a key target of the highly-cyclical 1st time buyers, and that this group peaked at 28% of total buying early in 2014. Since then 1st time buyers as a group have declined to 21% of total buying as measured in the 1st quarter of 2017. With this key market retracting we can predict a slowing of the price growth of the smaller sectional title home opportunities.