 Good evening and welcome to the Monday edition of the private property podcast. I'm your host Osama Antonoa Kumailo. It's episode 379 of the private property podcast and if you're joining us for the first time, welcome to the best and the only daily property show in South Africa that helps you on your property needs. And to all our regular viewers watching us at home, whether you're watching us on Facebook, on Instagram, or of course on YouTube, welcome to it. You know how we do every single weekday. You and I have an appointment at 7 p.m. We're always in conversation with a property expert who helps us make better property decisions. And of course, you can also look forward to other great shows across private property's social media pages every single weekday at 8 p.m. As it's a Monday, you can look forward to the Home Shoppers show and that comes to your screens every Friday as well. And Chad brings you that to your screens. And on Tuesdays and Thursdays, Umbalunoc brings you the farming podcast tackling all things agriculture. And on Wednesdays, Estee Classen brings you the first time home buyers show. Those are the great shows every single weekday that you can tune into right here because private property's social media pages at 8 p.m. Do make sure that you set those alarms and you of course do tune in. Now, one of the great things that you know that you're definitely going to find when you go to our Facebook page is the great competition that we are running. We've got a pimp post where we want to find out from your home some of the great property insight and advice that you've picked up as you're watching the show. And when you enter that competition, you send a chance of walking away with 500 grand in cash every single weekday. And all you have to do to send a chance of walking away with that cash is of course comment on that pimp post, then make sure that you watch us live in order for you to be able to claim your price if we call your name. When people don't claim the price, we certainly roll it over the following evening and it goes on into the money bag. Well, that's how you can send a chance of walking away with some cash this evening. We will be announcing who the potential lucky winner is later on the show. So do watch out for that later on. Now, this evening we're talking about something that I'm actually quite passionate about because I think a lot of people always want to have their finger on the pulse when it comes to this. We're looking at property valuations in various areas. We're going to look at what do we mean when we talk about property valuations? What are some of the factors that actually go into how different properties are evaluated? And of course, really unpacking this for you at home, I'm joined by John Jack as the CEO at Galatee Corporate Real Estate. John, good evening and thank you so much for joining us on the show. Thank you. It's only such a pleasure to have you on the show, Jack. I think John, when we look at property valuations, I think let's just first start with what do we typically refer to when we talk about property valuations in the real estate sector, especially for viewers at home who don't quite have a sense of what goes into property valuations and what exactly it is that we mean. Because we know that it isn't just the price that you see when you go on www.privateproperty.co.z. There's quite a bit more that goes into that. So what exactly do we mean when we talk about property valuations? Sure. So it depends. Commercial is quite different from residential, quite different. So they're different markets, really. In the residential space, what you're largely talking about is a comparable value. So they'll go out to market and they'll look for comparable properties of four-bedroom home in a similar area of a similar specification and of a similar size, really. And so they'll perform what they call a comparative market analysis. And largely there, it's the agent's gut feel of what he thinks the hassle, what he thinks the hassle sells for, and they're trying to assimilate it to different properties in that area, which is quite a good way of working with residential. Do you have a pool? Don't you have a pool? Do you have a view? Don't you have a view? Are you inside the security boom or outside the security boom, et cetera, et cetera. So there are a lot of different bits of pieces that go into residential valuation. In a commercial valuation, it's more sort of methodical and more scientific, I'd say. So if you look at a lot of the listed funds, how are their properties valued? They use a discounted cash flow where they try and take into account what's happening in that property today, who the tenant is and what rentals are being paid today and how long that lease is going to last for. And then they try and map out what happens after that lease. So let's say looking for a five-year discounted cash flow, they'll look at what's going to happen for the rest of the lease. Let's say that's three years. And then I'll say now, after three years, how long do we think this property is going to be vacant for? And when it relets, what is our reletting assumption? So we have to work out what market is today. We have to grow that market rate and then work out that sort of value at the end of the lease. Discount everything back to today and then you get your discounted cash flow. It's a bit of a complicated methodology. What are people using when they're looking at an investment analysis to try and value a property today? What should I pay today? Often people are just using a yield. So they take what the net income they're going to receive from that property is at their best sort of guess or maybe there's an underlying lease and they discount it using a yield. And then that yield comes all the way back to what your perception of what that yield should be in the market, which has various different factors that impact it. I'm thinking back to my varsity lectures, internal and external factors that impact your yield. But really, again, it comes back to what's a market yield, what's the tenant like? What's the greater the property like? Which market is it sitting in? How long is that lease? And so there are various factors that are going to impact that and you get back to your yield, which is derived from the income, really. I am this evening in conversation with John Jack, who is the CEO of Galactic Corporate Real Estate. We're looking at property valuations in various areas. What goes into property valuations? What are some of the factors that have a huge impact in how properties are evaluated? And of course, if you're joining us at home, do you show us some love on our Facebook page? Or if you're watching us on Instagram or YouTube, I can already see the gang is in formation there on Facebook. Anelda Everton, Abedah, Albertain, Umeens, Boutelezzi, Avereenshah, Perichia, Kosochumelo, all sending those green hearts, watching us on our Facebook page. Do you keep that love coming along? We certainly love seeing it. And I think, John, then when we now have an understanding of what we mean by property valuation, and of course, as you're highlighting, we work it out differently when we look at RISI versus corporate, and I mean, industrials, also just a completely different beast altogether. What are then some of the factors that go into how properties typically get evaluated? And I mean, we can split it with residential and a bit on the commercial side in terms of just the various factors. I know valuers obviously have their tasks, their certain things that they look at. But certainly at a high level, what are some of the factors that play a role in how properties get valued and the sort of final figure that we ultimately get to? Look, if you're looking holistically and we're talking about commercial property and residential property, everyone's thinking about a total return. So what is the capital growth of the property going to be over the period that you look to hold it? Let's say five years. What's the capital growth going to be? And then on top of that, what's the income return going to be? What is that property yielding? So in residential, often because people anticipate a higher capital growth of that property, they are prepared to accept a lower yield or a lower return on the property. So you'll see six, seven percent net return. So a net return just to kind of get into it. I mean, valuing property gets very technical. So I'll try and be relatively simplistic. But basically what it is, is after you've paid away all your costs, so you get paid a rental for the year, $100,000 and then you've still got to pay your rates. You've still got to pay for some maintenance. You've still got to pay maybe there's some levies or city improvement district or whatever it might be. What you're left with in the end of the day is what your net income is. That net income is then divided by the selling price of the property and that determines your yield. So in the residential sense, you're talking anywhere six, seven, eight percent. It's relatively low. In commercial, it's a bit higher. But again, in residential, people are looking at the total growth and saying, what will the capital growth of this property will be? And you know, you see demand in certain areas. And so you see very high capital growth. We saw huge capital growth before the 2008 period. And again, between I'd say 2015 and 2018, quite a significant amount of capital growth in residential property in South Africa, specifically in Cape Town. There's a lot of semigration to Cape Town. So there was just a lot of demand and that really just drives the capital growth of the property. And then the rental market sort of follows that as there's demand. There's no longer property to, there's less and less property to rent. Lots of tourism coming in. People are looking for rentals. They can't find them. They've got to pay more and more and more. And that then drives the rental growth. So lots of these different little factors that impact it. On the commercial side, you're really looking at, what are guys looking at? Fundamentally, they're looking at the income and how solid that income is. What I mean by that is, who's the tenant? Is the tenant a new business? And if it is a new business, who are they backed by? Are they strong? Is there a strong balance sheet behind them? Are they going to be able to pay their rental into the foreseeable future? Is there any risk of them not paying rental going on? Because these commercial leases of 5, 6, 7, 10 years, are they going to be able to afford that rental going into the future? And obviously, if you're signing a lease with the likes of First National Bank or ABSA, these are very, very bankable assets. And so therefore, when people are looking at their total return, there's less risk that their price into that yield or cap rate. Yield is derived by the selling price or taking the income and dividing it by the selling price. So they're willing to accept a lower yield on how bankable the underlying lease is, how bankable the underlying tenant is. So that's the first thing. That's pretty much the most important thing. After that, you start to look at an area. How prime is the area? Will there be growth in that market? Are the rentals going to continue to grow? So if you look at the far south of Johannesburg, if you look at sort of outlying areas, there's not a lot of demand for properties. So even though you've got a great tenant, it's unlikely that there's going to be a lot of demand for those types of properties driving the rental app. And so the rental stays relatively flat. And therefore, you need a slightly more yield to counter the fact that there's not going to be a lot of capital growth of that asset. Whereas in a prime area, and I would have said a prime area was Sampson, but we've been shown that that's the incorrect way of thinking. But a prime area take Pomona and the logistics hub, let's say where DSV just bought or DSV built the new facility that Equitez bought, those are very prime areas. Those are growth nodes. Rentals are going to continue to, there's going to be demand that continue to drive the rentals higher and higher and higher. And there's a very strong underlying covenant. And there you see the listed funds paying in the in those sort of high 7% yields for those properties. And I'd say those are the critical things. Which areas are then is rental going to continue to grow? Is it an in-demand area or are people going to continue to invest in that area properties going to get better? And then the underlying covenant, those are the two main or tenant as it were, those are the two main things that drive a return and then length of lease. Of course, if you have the greatest tenants in the world in a good area, but you've only got a one year lease, well, you only have that tenant for another year in, as far as you can see, if you had a 10 year lease, of course, that's something that's far more bankable. And when I say bankable, that's something that the banks will happily finance when you've got one year of lease. Well, how much vacancy are you going to have