Nqobi Malinga, uMaStandi Portfolio Manager
Building a stable, prosperous and income-generating property portfolio is a journey with much for the new and continuing property entrepreneur to learn about. One of the most frequent concerns for property entrepreneurs is around raising capital. Property entrepreneurs working with us may not initially know that we offer an equity release option that may be used to support funding their next project.
It is essential, however, to first define and understand equity. In simple terms, equity means value. Equity release, therefore, is about releasing the value of an existing property asset, calculated by looking at the difference between the value of a property and its liabilities. For example, if you buy a property for R1 million, but it is valued at R1.5 million, then that property provides you with an equity of R500 000. This equity can be released – or used – provided the property is released from performing well and generating ongoing cash flow, which can help you invest in another property and grow your portfolio.
The option of equity release becomes particularly viable when, as a property developer, you already have a successful first property under your belt and want to expand your portfolio. Typically, financial institutions will provide you with finance of up to 80% of the value of the project – and thus, equity release may be used to cover the remaining 20% needed to purchase or construct your next property.
Returning to the earlier example, if you have R500 000 equity that can be released and you want to buy a piece of land on which to construct your second property and that property when completed, will have an estimated valuation of R2 million, a financier will likely offer a loan of R1.6 million (80% of value) and you will then need to inject R400 000 of your capital. As you may not have that as cash on hand, you could opt to release equity from your existing property to cover the outstanding amount needed.
Equity release must meet two critical criteria for working as a mechanism to access capital. First, your existing building must be fully compliant with all municipal regulations. Second, the property must be a multi-let structure that is income-generating and performing. If that property has a bond with another financial institution, we would look to take over that loan before equity can be released. Home loans or mortgages and our refinance/equity release product are considered senior bonds and cannot run concurrently.
We provide a single facility over fifteen years to cover the investment needed in a property, and this makes it easier for property entrepreneurs because it enables them to service one loan for construction and the purchase of the land without having to manage two or more loan obligations. This also improves the property’s cash flows.
For many entrepreneurs, equity release offers a viable option to fund building up their property portfolio and increase their income and wealth over time.
uMaStandi currently operates across Gauteng, KZN, the the Western Cape, and the Eastern Cape. We encourage property developers with projects in any of those four provinces to contact us. Whether it is your first or second development, we look forward to working with entrepreneurs to continue building and revitalising townships in South Africa.