Purchasing a property is a big deal, and as a buyer you will obviously have a list of what you want and what you do not.
This list will also probably also include whether you want to buy a freehold or sectional title property – both of which have their pros and cons.
To decide which is better suited to your needs, Adrian Goslett, regional director and chief executive of RE/MAX of Southern Africa, says you should aim to fully understand what each of these entails.
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Sectional title homes, he explains, are usually semi-detached houses, townhouses, flats or apartments, and duet houses. Unlike a sectional title, a freehold property entitles a buyer to the full ownership rights to the property, which includes all the structures, as well as the land that it is built on.
“When you buy into a sectional title complex, you purchase a section or possibly sections of the common property. This is basically where you own everything within the four walls of your property, but external hallways, gardens, elevators, and so on, are co-owned by the rest of the community and are cared for by everyone.
“When you own a freehold property, you have the right to change anything on your property, pending municipal planning approval, without needing the additional approval of a body corporate or HOA, as you would need within a sectional title scheme.”
However, with a freehold property, homeowners are responsible for all the exterior upkeep, maintenance, and security costs on the property. On a sectional title, these costs are shared by everyone in the complex in the form of a levy.
When it comes to deciding which option is better, Goslett says you need to decide what suits your needs best. Broadly speaking, sectional titles can be more affordable than freehold properties. According to the latest RE/MAX Housing Report, the nationwide average price of sectional titles for Q2 2022 is R1 049 437 while the average price of freehold properties is at R1 422 901.
Annual property price inflation, he adds, also tends to be higher for freehold properties than for sectional titles, which means that a freehold is more likely to show greater appreciation in value over time than a sectional title might show.
“This makes freeholds generally a better choice for those looking to invest in property as a long-term investment strategy. On the other hand, sectional titles generally are a better choice for those who want to generate a steady stream of income through a rental portfolio. Every situation is different though.”
Less than 20 years ago, sectional title sales accounted for only 13% of all property sales, according to John Jacobs & Malcolm Moodie Inc. Now, says Carl Coetzee, chief executive of BetterBond, almost a third of all property sales are for sectional title homes, with investors increasingly looking for buy-to-let properties to add to their portfolios.
Citing Lightstone data, Coetzee says Deeds Office stats show that sectional title registrations have increased by 40% year-on-year and by 50% quarter-on-quarter, while freehold registrations have increased by just 26% and 42% respectively.
“Much of this has to do with the strong tenant demand in parts of the country, and the solid yield which these buy-to-let properties can offer.”
He adds: “While we have seen an increase in buy-to-let property investments, especially among buyers less affected by the recent interest rate increases, we also know that a substantial portion of first-time buyers – who account for 60% of BetterBond’s applications – opt for sectional title properties.”
These buyers are spending on average R1.1 million on their first homes, according to BetterBond’s August 2022 application data.
“First-time buyers who buy in new developments or invest in properties below the R1 million threshold can avoid costly transfer fees, which helps with affordability.”
As the demand for sectional title living shows no sign of abating, Coetzee says property investors can be assured of a considerable rental yield.
“Buyers bracing themselves for more interest rate increases amid challenging economic market conditions would do well to consider an investment that can also generate an income as a way of future-proofing their financial future.”
However, when something goes wrong in a sectional title – the roof leaks, floor cracks, a geyser bursts or there’s a small fire, Susan Grobler, head of Santam Real Estate says there can be uncertainty over who is responsible for fixing the damage. After all, with so many stakeholders involved, ownership of issues can get ‘blurry’, which may cause tension between trustees, owners and occupants.
In 2021, she says Santam’s most common claims for sectional titles were for geyser-related issues and storm damage, particularly in relation to the floods in KwaZulu-Natal.
So how does it really work when it comes to claims?
Grobler explains: “A body corporate usually has adequate cover for all the buildings within a sectional title scheme – whether this be the individual housing units or common property areas – depending on the policy. This means that if a unit’s roof is damaged due to extreme wind conditions, the body corporate insurance pays toward the repair.”
You must note, though, that sectional title insurance only covers the ‘brick and mortar’ part of residential schemes and common property, not moveable contents. These must be insured by section owners or their tenants.
“Sectional title unit owners can ask the insured value of their property and request this be increased (usually at the annual general meeting). This request should come with a recommendation to the trustees to check the value of the entire building is correct. Body corporate rules require that a scheme is never under-insured.
“Owners are responsible for initiating claims via the body corporate. A tenant’s claim needs to go through the unit’s owner, before being taken to body corporate for processing. It must be signed off by a trustee or the managing agent. Owners should never claim directly from insurers. If an excess is due, the owner is responsible for paying it, according to the Sectional Title Act in South Africa,” she says.
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