Friday, 27 August 2010

Buying Off-Plan has Pitfalls

Although buying off-plan has the big benefit of no transfer costs, it also holds some pitfalls of which buyers need to be aware।

Paul Henry, the managing director of Rawson Developers, has warned that there is always a danger that the final product may not be as good as the computer graphics and plans have led the buyer to expect।

He said there is also a danger that the specifications list will be vague and non-specific, thereby allowing the developer considerable leeway in his selection of the fittings and fixtures।

Another possible danger, said Henry, is that the contract can be open-ended as regards the time. “With bank finance hard to come by and banks insisting on a high percentage of sales before they advance money, projects can be held up for long periods before the first work begins on site.”

On the other hand, buying off-plan enables the buyer, in return for a small deposit, to get a fixed price related to today’s values and then to watch it escalate in value for a year or two, during which time no further outlays are called for।

“Experience has shown that this can be a highly profitable form of investment – with the huge advantage that the investor is able to gear it। This is seldom possible with the majority of other investments.”

He says the only real safeguard against these dangers is the developer’s reputation.
“If he has been in business some time and has a good track record, you can probably be confident that the final product will be on time and up to standard। If he is a new name on the scene, with little development experience, it will pay to have a good lawyer go through the deed of sale, to insist on guarantees and, above all, to ensure that your deposit goes into a ring-fenced trust।”

Three questions, said Henry, should be put to the clients of all developers।

The first is: “Did the finished product exceed your expectations for a unit in this price range?”। If the developer is good, the answer will always be “yes”.

The second question is: “Has your unit experienced capital growth?”। That, said Henry, may be a tough proposition in today’s market but many good developers can even now show significant value growth on their units over the last year or two, as well as on those due to come on stream in the next year.

The third question, in many ways the most important, is: “Did the developer attend conscientiously to the snag list?”।

All too often, said Henry, developers have been hard to contact once a unit has been transferred. "This is disgraceful behaviour because 70% of units will require some post-handover attention."
Henry added that, although some very big projects have been highly successful, he personally would always be wary of any project on which the work is likely to be ongoing for years and years।

“This type of scenario can lead people to feeling they are living on a permanent building site. Reasonably small schemes – say, with not more than 200 units – in good areas still offer the best and safest investments.”

Friday, 20 August 2010

Six Reasons NOT to buy property

...and why none of them hold much water।

We often hear about real estate investors who have been very successful in building wealth-creating portfolios। We may believe that they have some very special skill or ability, that there is something they know which nobody else does. At other times, we think it was pure luck or coincidence that an investor succeeded, that circumstances have since changed or that it just can't be done. Our cynicism encourages us to do nothing, to avoid the risk.

Yet history proves that doing nothing could be the most risky of all। Apart from the missed wealth creating opportunities, doing nothing translates into a lack of self-development, a missed chance to learn and grow. If we delve deeper, it is clear that most of the reasons people use not to invest are actually based more on emotion than business savvy. We rationalise our fear using calculated arguments as to why it can't or won't work. But the truth is that none of these arguments really hold much validity.

So let's discuss the top six reasons why people decide not to invest in property। And lay them to rest-once and for all.

Reason # 1: Investing in property is risky

Fact: There is a certain level of risk in every investment-and property is no exception। But investing all your money in the bank (or even worse under the mattress) may be the most risky of all as the returns barely keep up with inflation. Also bricks and mortar is more tangible than stocks and you can take out insurance against fires or floods. You can also protect your asset against your death or disability. And yes, there is now even insurance available to cover landlords for non-paying tenants!

Reason # 2: I don't have the time

Fact: We all manage to find the time to do things we really want to do. Time management involves prioritising things that are more important. Anyway, you don't need to do it all yourself. Build a team of competent management agents, brokers and mortgage originators (yes, there are some out there!) and let their specialist skills work for you.

Reason # 3: I don't have the money

Fact: You DON'T need money to make money। Even in a market where 100% bonds are not widely offered, a good below market value deal will attract finance from investors। Network with people who share your passion for property and these investment opportunities will present themselves।

Reason # 4: Below market-value properties don't exist

Fact: No matter what the stage of the property life-cycle, there will always be value for money deals। The key is to identify initially whether the seller is motivated and only negotiate with motivated sellers. As long as there is divorce, relocation or excessive debt, motivated sellers will always be out there.

Reason # 5: The property market will go down

Fact: The property market has never gone down over the medium or long term. Does that mean that it won't in the future? Probably not, simply because property prices rise in relation to income levels which increase over time. Even political factors, crime and other excuses people use not to invest, have not had a serious impact on our or overseas markets. At times, these factors often have the reverse effect-lifting prices as investors choose the safer haven of bricks and mortar.
And if prices DO go down over the next few years? Who cares! Buying for the rental yield and at below market value still ensures the investor comes out trumps।

Reason # 6: I don't know where to begin

Fact: You only learn through action. Educate yourself and when you feel a good opportunity presents itself, take the plunge. It may not be the best deal you may ever do but it will be the most important in terms of confidence. Luckily, over the long term, property is very forgiving of peoples` mistakes.

Strike dashes World Cup hopes

THE strikes in the public service and automotive sectors would deter foreign direct investment in SA, a significant contrast to the global optimism about the country during and straight after the Soccer World Cup, economists said yesterday।

“The timing of the strike is problematic, considering the World Cup created such a good impression to potential investors। These hopes would be surely dashed,” said Stanlib economist Kevin Lings.

He said SA could not afford to have nationwide strikes on this scale, especially as the recovery taking place after the global recession was still fragile ।

“The bottom line is that the strikes come at a critical phase of recovery from recession। Most countries are looking at their own economic recovery so that they can gain momentum as soon as possible, Mr Lings said.

Public service unions are demanding an 8,6% wage increase, a R700 housing allowance and an equalisation of medical subsidies.
Yesterday, the South African Democratic Teachers Union (Sadtu) and the National Education Health and Allied Workers Union — together representing nearly 500000 workers — rejected the government’s revised wage offer।

Public schools, hospitals and other government administration offices are expected to close today because of an indefinite strike by public service workers।

“The disruption of services, particularly schools, comes at the wrong time, especially when the country is trying to lift up its matric pass rate,” said Mr Lings। He noted that wages could not be separated from service delivery.

Sadtu said: “The current macroeconomic policy, which is a political matter, is responsible for low wages in the public services।”

Public Service and Administration D eputy M inister Roy Padayachie said the government remained committed to finding a solution to the public service wage dispute।

“We are in the midst of trying to finalise the negotiations in the public sector dispute,” Mr Padayachie said। “We cannot allow ourselves to be compromised from meeting the obligations that we as a government have committed in our programme of action … the issues of finding an appropriate solution and ensuring that the strike is averted are very central to our commitment,” he said.

Meanwhile, the car strike entered its fifth day yesterday, with workers and employers reaching a deadlock over wage negotiations।

Both the National Union of Metalworkers of SA (Numsa) and the Automotive Manufacturers Employers Organisation (Ameo) kept mum over yesterday’s wage negotiation outcome, saying it was at a “sensitive stage”।

George Glynos, an economist at ETM, said the labour dispute might indicate to foreign investors that SA’s automotive industry did not offer the level of productivity required to justify investment capital।

“When there are significant labour problems, companies prefer to spend money on capital equipment to improve efficiencies। Of course, this is not ideal, but is often the necessary course of action.”

Mr Glynos said that investors were well aware that SA had a powerful labour movement, and this had not stopped investment from entering the country।

“Obviously the unions’ power is a deterrent, but investors realise that SA has massive potential and untapped labour reserves which can and have been used to their advantage,” he said.
However, Mr Glynos noted that the public sector and automotive industry strikes were putting pressure on an economy that was bogged down by rising energy costs and eroding infrastructure।

chilwanel@bdfm.co.za shirleyb@bdfm.co.za

SA house prices - Some recovery signs

Although the growth in SA house prices is not stellar, it has exhibited some recovery signs since 2009 and affordability is on a good path again।

But it is still a lot cheaper to buy an existing house than build a new one.
Based on the outlook for nominal house price growth and a projected average consumer price inflation rate of about 5% in 2010, real price growth of between 5% and 5,5% is forecast for this year and 10,5% in nominal terms।

So says Jacques du Toit, property strategist at Absa, who adds that this will occur after house prices dropped by a real 6,9% in 2009 and declined by 6,3% in real terms in 2008.
“House price growth has improved markedly in the first half of 2010, based on the better economic conditions since the second half of 2009, low interest rates, banks’ less tight lending criteria as well as base effects।”

“However, taking into account house price developments in the recent past, year-on-year (y/y) price growth appears to be near an upper turning point, largely as a result of the base effects of a recovery in house price growth in the second half of 2009। This is expected to impact the trend in price growth in the second half of this year.”

He says after the affordability of housing deteriorated in the second half of 2009 on the back of rising house price growth while growth in household income remained under pressure, affordability did not deteriorate further in the first quarter of 2010. “This is based on the latest trends in the ratios of house prices and mortgage repayments to household disposable income.”
He says the ratio of house prices to disposable income was relatively stable in the first quarter of the year compared with the last quarter of 2009, which was the net result of house price and nominal disposable income growth in the first quarter।

“House prices increased by a nominal 3,2% quarter-on-quarter (q/q) in the first quarter of 2010, while households’ nominal disposable was up by 3,6% q/q in the same period। The ratio of mortgage repayments to household disposable income was slightly down in the first quarter of 2010 compared with the preceding quarter.

“This was the net result of the abovementioned trends in nominal house prices and household disposable income in the first quarter, while the mortgage interest rate was on average slightly lower during this period।”

In the affordable segment of the market (houses of 40-79sqm, priced at up to R430k) the average price of a house increased by a nominal 2,6% y/y to a level of R296,100 in the second quarter (Q2) of 2010, declining by 1,9% in real terms।

Middle-segment house price growth (houses of 80-400sqm, priced at up to R3,1m) averaged a nominal 14,4% y/y in the second quarter of 2010। This brought the average price to a level of R1,075,600 in the quarter. House prices in the middle-segment increased by a real 9,4% y/y in the second quarter of the year.

In the luxury segment (houses valued at above R3,1m up to R11,5m), the average price dropped by a nominal 1,8% y/y to a level of about R4,4m in the second quarter of the year। In real terms prices of houses in the luxury segment were down by 6,1% y/y in the second quarter.

Du Toit said at a geographical level home values increased further in nominal terms on a y/y basis in the second quarter of 2010, while in real terms prices were slightly down in some areas compared with a year ago। On a quarterly basis prices were down in both nominal and real terms in a few provinces, metropolitan areas and coastal regions.

“These trends might be an early indication of expected price developments towards the end of the year,” he said।

At a provincial level, nominal year-on-year (y/y) house price growth varied between 7,1% in Mpumalanga to as high as 24,9% in the Eastern Cape in the second quarter of 2010।

In the major metropolitan areas house price growth ranged from a nominal 3,2% y/y on the East Rand in Gauteng to a relatively strong 22,6% y/y in the Durban/Pinetown area in KwaZulu-Natal in Q2 2010।

Another encouraging trend is the fairly strong rise in house prices at coastal level, where much of the buying activity is centred on second and leisure homes। These properties are being shed by investors at an unprecedented pace as affordability comes under pressure.

Du Toit said house prices in the coastal regions increased by a nominal 7,8% y/y in the second quarter of 2010, after rising by 6,3% y/y in the preceding quarter। “This is an indication that the coastal market is recovering at a steady pace, but is still lagging in price growth compared with some other regions.

“In real terms, house prices in the country’s coastal regions increased by 3% y/y in the second quarter of 2010, after rising by 0,6% y/y in the first quarter of the year।

Moving onto building costs, Du Toit pointed out that in the second quarter of 2010 the cost of building a new house in the middle segment of the market increased by a nominal 7,8% y/y, which is up from a growth rate of 6,7% y/y recorded in the first quarter।

“Although the residential building and construction sector is experiencing tough conditions, judging from the latest trends in the planning and construction phases of new housing, the upward trend in building cost increases over the past two quarters is probably related to rising costs such as wages, transport, etc॥”

“Against this background of faster rising building costs over the past two quarters, the average value of a new house increased by a nominal 15,5% y/y to R1,396,200 in the second quarter of the year (12,9% y/y in the first quarter), which came to a real increase of 10,4% y/y (a real 6,8% y/y in the preceding quarter)।

The average value of an existing house increased by a nominal 14,6% y/y to about R1,067,500 in the second quarter of 2010 (10,1% y/y in the first quarter)। In real terms this translated into an increase of 9,6% y/y in the second quarter (4,2% y/y in the preceding quarter).

“As a result of the abovementioned price trends, it was around R328,700, or 23,5%, cheaper to buy an existing house than to have a new one built in the second quarter of 2010.”
He said land values for new housing increased by a nominal 14% y/y to an average of about R498,100 in the second quarter of 2010, compared with an increase of 7,1% y/y in the first quarter।

“In real terms land values increased by 9% y/y in the second quarter (up by 1,3% y/y in the preceding quarter)। The faster pace of year-on-year (y/y) growth in land values in the second quarter of the year is evident of improved residential property market conditions in many areas up to mid-2010.

“Along the coast, however, land values for new housing still experienced some downward pressure in the second quarter of the year, declining by a nominal 4,4% y/y and a real 8,6% y/y in the quarter। This brought the average nominal value of a coastal stand to a level of about R430,900 in the second quarter.”

More good news is that mortgage finance is now also a lot cheaper than two years ago.
Du Toit says commercial banks’ variable mortgage interest rate is currently 10%, which is at its lowest level since mid-1974।

“Moreover, as a result of the interest rate cuts over the last 18 months, monthly mortgage repayments are 28,7% lower compared with December 2008, when the mortgage rate was still 15,5%।”

Meanwhile, the Lightstone National House Price Index has continued its rising inflation path, reaching 8,3% in April 2010, up from a y/y inflation rate of 8,2% in March and 7,7% in February, it showed on Monday।

The lower inflation rate environment started feeding through earlier in the year, and while coastal properties provided something of a drag until February, those properties have caught up in April via a handsome rate of 8%। They were growing at just 5,3% in February.

The index showed an interesting turnaround occurred for Johannesburg properties as their growth dipped to 7,8% from 8,6% in March and after boasting the highest growth rates in the country for some time।

The best performing province in March was Cape Town at a healthy 9,8% click.
Affordable houses, though, ratcheted up by 14,7% from 12,6% as luxury home growth rates dipped to 7,6% from 8%.

Friday, 13 August 2010

Is a double dip fall in UK house prices on its way?

LONDON - The London-based research group downplayed recent reports indicating the house-price recovery is fading saying "forecasters projecting a double dip have got it wrong" and have "ignored the housing market fundamentals".

Last week, there were concerns among homeowners amid news that UK House prices dropped for the first time in 15 months in July, causing the annual rate to weaken for the first time in over a year, according to property data company, Hometrack. This followed claims by Nationwide and Halifax, two of the UK's largest mortgage lenders that the robust recovery in house prices is drawing to an end.

Despite this correction the CEBR said prices will increase 4% per cent this year and continue rising until 2014, mainly due to a shortage of homes in the UK and low interest rates.
As always with all news relating to the UK property market, the sensational headlines have been appearing fast with the rational facts slow to follow.

I agree with the CEBR's view that the fundamentals point to an increase in property prices, especially in London, and adds that The majority of our South African clients are astute investors, steered by facts and not by media hype. This has been evident in the surge of new enquiries since January from high net worth South Africans looking for help in acquiring property in London for investment purposes. These investors share our view that a tight supply of new housing and an increase population on this small island will drive UK house prices upwards.

Both domestic and foreign property investors have seen the weaker Pound, lower property prices and interest rates of just 0.5% as a buying opportunity too good to miss and reports now suggest that more than 46% of all purchases in London over the last few months can be contributed to foreign buyers.

Not surprising when you consider that residential rental rates in the UK are now close to levels last seen in early 2008, before the financial crisis and fall in housing prices. The Residential Landlords Association (RLA) says the number of new tenants seeking rental properties increased markedly in June, as more than 18,000 Britons decided to rent a home. This represents a 22% rise in the number of new tenants compared to figures from May and continues a trend which began at the beginning of the year. The number of tenants renting residential properties has now increased by 16% since January, bringing more than 50,000 new tenants into the buy-to-let sector over a period of just six months, yet the number of new residential properties available on the rental market has decreased by 6% since April.

This sharp spike in demand, coupled with relatively low supply of rental properties is the main factor behind the continued rental increases since the start of 2010. Monthly rents increased by 1% in June, crowning five straight months of rental rises. This means the average rent in the UK's private buy-to-let sector has now increased by 3.2% over the past 12 months. This is equivalent to an average of £23 extra income per tenant each month, bringing the average UK rent to £673. As always London rentals continue to rise faster than in other parts of the country as first-time buyers find it difficult to afford a home in the capital. London-area landlords experienced the highest rental increases in the country - close to double the national average. Rents in the capital rose by 1.9%, bringing the average monthly rent to £942.

The property pessimists would have you believe that property in the UK is doomed, but this ignores the fact that housing is not stocks and shares. Owning a home is an emotional desire, a must-have aspiration for most Britons, and the demand for property in Britain remains high. Yes, prices may have fallen slightly, but investors in the UK and abroad will simply see this as another good purchasing opportunity.

*Mike Smuts is managing director of Smuts & Taylor, a South African investment firm based in London.