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SIMON BROWN: I’m chatting with Jonathan Kohler, CEO and founder of the Landsdowne Property Group. Jonathan, appreciate the time. When folks are looking at buying property for rental income – and we’re talking here particularly of sectional title – the focus is typically going to be around price and yields and amenities, location – all important things.
But in a recent note that you put out, you talk around it actually being around the levy and its payment and, if there are potentially arrears in the levy, that is a way more important indicator of the success of that property.
JONATHAN KOHLER: 100%, Simon. We find it time and time again. I can look at developments that we manage, specifically in the sort of lower LSM or first-time homeowners that are buying into sectional title schemes. They don’t really understand what sectional title is and they don’t really understand why paying levies is so important. They’re having a look, and they’re thinking, okay, I’m purchasing this property for a specific price. There’s a levy that I have to pay, rates and taxes, et cetera. What they don’t realise is that if they buy into a scheme that’s not financially sound, where people are not paying the levies, they’re never going to be able to sell that property and get any reasonable capital appreciation on their investment.
SIMON BROWN: That’s a great point. Levies are there, it’s security insurance, it’s lights and water, but it’s maintenance. It’s the long-term management of the property. And if that starts to decay, to your point it almost sort of cascades.
JONATHAN KOHLER: 100%. If I look at one of the schemes that we’ve been managing over the last sort of, I’d say, six months to a year, you’ve got sort of first-time homeowners, people who haven’t owned in a sectional title scheme.
When we do the handover from the developer and that first transfer goes through and the body corporate is established, we sit with those new owners and explain to them, for example: Do you know that you bought in a sectional title estate? Do you know what sectional title is? Do you know that you only own the inside section of your unit, and the exterior is part of the common property? Do you know why you pay levies, et cetera?
You do as much education as you can when you’re handing over. But what ends up happening is, say, a hundred units are occupied, the residents get together and they say, ‘Listen, we feel that the levies that we’re paying are too high’.
The community gets together and they decide not to pay levies. And what ends up happening there? They think that they’re going to save money and get those levies to sort of a lower amount, and they’re going to save money. But what ends up happening is the community gets together, they perhaps fire the managing agent or they appoint an executive managing agent. The executive managing agent doesn’t really have the know-how of how to manage these schemes.
What slowly ends up happening is the security company is not paid timeously, the garden maintenance company is not paid timeously. The building insurance isn’t paid timeously, which means that the managing agent or the estate manager is not actually managing the building and it starts to degrade.
In a couple of years’ time, what you have is that the complex hasn’t been painted, the building insurance hasn’t been paid, they haven’t had an AGM that year. And when they try and resell that property, the new purchaser will say, ‘Okay, please can you give us the latest audited financial statements of the building?’ – and there are no audited financials in place.
Then the banks are not going to give a bond for a new purchaser to buy the property. And if they’ve bought a little one-bedroom for R600 000, now they’re actually going to sell it for R500 000 because there’s no clean audit, there are no financials. The maintenance hasn’t been done. So it’s a disaster.
SIMON BROWN: Absolutely. I like the point. It sort of starts slowly, and then I imagine it happens quickly. It also makes me think. There was something else you had in the note, which is, you know, ‘we talk to the selling agent’. That’s if we’re looking to buy something. The agent is who we’re talking to. You’re making a point that speaks to the managing agent as well, because they really understand what’s happening and give you better insight in terms of the financial state and arrears and the like – 100%.
JONATHAN KOHLER: You need to speak to the portfolio manager who’s allocated to that building and ask them questions like: ‘What’s the levy-collection percentage?’ ‘Are people paying levies? Are you up to date from a compliance perspective as a building? When was your last AGM held? Did the auditors approve the financial statements or is there a comment on them? Is it a qualified audit? Why?
You’ll very, very quickly find out whether you should be investing in the property or not, because you get investors, sort of professional debtors – but professional investors as well – who will get a bond and buy into a scheme. And, for example, from day one they won’t pay levies, but they’ll put a tenant in. They’ll be getting a really good rental yield, but they’re not paying their bonds. They’re not paying their levies. They’re not paying their rates and taxes.
And if they are ‘professional debtors’, they can sort of just make settlements in the specific shifts and the auctions, make settlements and move it along for two to three years. They’ve two to three years of rental, but they haven’t paid the running costs for the apartment– and they never intended to. They’ve got an extremely high rental yield for two or three years, and then they’ve bought it into a company that sequestrates the company.
That happens in buildings that we manage as well. They’re professional debtors to go in there. Airbnb – the unit doesn’t pay levies from day one and three or four years’ later, when it eventually gets to the sheriff’s auction, they’ve made R300 000 and they’ve taken debt.
That’s also a problem.
SIMON BROWN: ‘Professional debt’ is not a phrase I’d heard before, but one that now spooks me, and probably rightly so.
We’ll leave it there. That’s Jonathan Kohler, CEO and founder of Landsdowne Property Group. I appreciate the time.
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