Overcapitalisation Risk Now At Its Highest

Homeowners planning on renovating and extending their properties today face a greater risk of over-capitalisation than ever before warns luxury homes marketer Ronald Ennik.

“The reasons for this are two-pronged,” says the principal of Ennik Estates – the exclusive affiliate in Gauteng of Christie’s International Real Estate.

“Firstly, there has been an unprecedented rapid pace of change in automation technology, style and design in recent years. So much so, that the shelf-life of new fixtures and fittings has never been shorter. In the past, if you overcapitalised on a house, you generally wouldn’t wait more than five years for value to catch up. Furthermore, it took up to 10 years before homes began to become technologically outmoded.“

“In today’s ultra high-tech and gizmo-driven market environment, however, it can take just two years for contemporary technology features and design elements to lose their appeal to buyers,” says Ennik.

“Secondly, overcapitalisation has always bitten hardest in a declining residential property market such as we are now experiencing in South Africa (on the back of a faltering economy and unsettled socio-political landscape).”

“At worst, the combination of these factors could prevent a full redemption of the capital outlay on a home upgrade – particularly if it pushes the property beyond the ceiling price in its suburb,” says Ennik.

“My best advice to buyers is to avoid improving a house beyond its realistic resale value in these circumstances.”

“Furthermore, make sure your renovation is tailored to suit the neighbourhood. Most residential suburbs have both average and top price thresholds beyond which sales are achievable only in exceptional circumstances,” he adds.

Check area prices

Too much upgrade investment in the wrong suburb will be difficult, if not impossible, to recoup – so check average home prices in the area before you spend a cent.

In normal conditions, the general rule is not to invest more than 25% of market value of a home on improvements and renovations. In the current market, more prudence is probably warranted.

“Care should be taken about an overly-costly use of the ‘3 Fs’ – fittings, fixtures and finishes – as well as buying too heavily into the fast-moving trends in technology and design,” says Ennik.

“The reality is that the long-standing process of expanding and modernising a home and then sitting back and waiting for the inevitable return on investment is itself becoming obsolete,” he concludes.

This article “Overcapitalisation Risk Now At Its Highest” was issued by Ennik Estates –

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