Friday, 24 June 2011

Financial pressure as rentals improve

At least 25% of houses sold in the second quarter of this year were the result of financial pressure on the household. According to John Loos, property strategist at FNB Home Loans, financial stress and pessimism about the future had contributed to the rising stock levels for estate agents.

He says that in the first quarter, low interest rates had been cited by estate agents as a key factor that influenced the outlook for home sales but in the second quarter this changed and houses are available on the market because the owners want to reduce their monthly costs.

Loos says that when interest rates rise – expected later this year or early next year – the financial strain will be even greater for homeowners who are already hard-pressed to meet their monthly commitments.

He says that regional property demand tends to be seasonal and that generally the outlook among estate agents remains rather low in winter.

In a separate development, Saul Geffen chief executive of ooba, one of the country’s mortgage originators, says that banks are continuing to relax their lending criteria and this is having an impact on sales figures.

He says the initial decline ratio fell by 5,8% in the second quarter of the year but remained high at 47,1%.

Loos says that fewer agents see the low interest rates as being a significant factor in boosting house sales and emphasised that agents point out that there has been a significant rise in the number of people seeking to downscale their living costs.

Meanwhile credit bureau and property rental management company, TPN says that 81% of tenants are currently in good standing with their landlords. According to TPN this is a sign that residential tenants are managing their credit better than in previous years.

The rental price bracket of between R3k and R7k proved to be performing particularly well with 84% of tenants in good standing and paying their rent on time.

However, in the price bracket below R3k as well as those above R12k had deteriorated and it says that this is further evidence of the financial strains that are currently facing many consumers. Only 75% of tenants living in homes costing less that R3k a month were in good standing while the percentage of paying more than R12k had fallen to 74%.

Non-payment of rental in both these brackets was 14%. Furthermore in the R12k-plus bracket only 67% of people paid on time while those who pay late was also at 14%.

It says the residential property markets in the Eastern and Western Cape continue to out-perform the markets in Gauteng and KwaZulu-Natal.

Inflation up but interest rates steady

The consumer inflation rate was higher than predicted, rising to 4,6% in May and up from 4,2% in April but economists have not yet revised predictions on a hike in interest rates by the Monetary Policy Committee of the South African Reserve Bank.

SARB’s repo rate was cut to just 5,5% in November last year, dropping interest rates for consumers to a record low of 9%. A spike in interest rates will place considerable pressure on property owners, as many of them try to downscale their costs in orderto meet their monthly commitments.

Elna Moolman, an economist at BJM Renaissance, says that the latest data is unlikely to mean that the interest rates will start to rise earlier than predicted even though the SARB has revised its estimates for higher inflation over the coming months.

The figures indicate that the inflation rate will remain within the Bank’s target range of between 3% and 6% for the rest of this year but will increase to about 6,3% early next year when rates are expected to be hiked.

The spike in inflation rates has been prompted by higher-than-expected increases in food prices, which are up 1,7% month-on-month. Food prices have a weighting of about 15% in the price basket used to calculate the average inflation rate and these rose by 6,3% year-on-year.

Moolman says that adverse weather conditions prevailing throughout the country, coupled with a fall in output from the agricultural sector were contributing to higher food prices.

Higher electricity prices, along with a sharp increase in fuel prices had also contributed to the spike in the inflation rate. Electricity prices have risen by 19% in May compared with a year ago.

Buyers moving South

Cape residential property is about 25 percent to 30 percent more expensive than residential property in Gauteng; a fact, says Anton du Plessis, CEO of Vineyard Estates, that does not deter many Gauteng buyers from moving south, even though they may have to downscale quite appreciably to make such a move possible।

"Gauteng currently," said du Plessis recently on SABC’s Expresso Morning Show, "offers better value for money on plot sizes, floor areas and finishes but, of course, Cape Town has scenery, the sea, winelands and much else. If it is a lifestyle rather than financial reward that is now your priority, this is where you will probably find it."

Most upcountry buyers, he said, arrive in Cape Town with a set budget in mind. Once they discover that they cannot buy the lifestyle that they want, at the price they had anticipated, those buyers who can afford to raise their sights often do so.

"More often than not, a buyer from Gauteng who indicates a maximum spend of, say, R4-million initially will end up buying for R5-million and more."

The housing market in and around Johannesburg, said du Plessis, still has ample space at its disposal. Even in the built-up areas there is still huge scope for densification and redevelopment and whether the buyer looks north, south, east or west, land for expansion is not hard to find. In many Gauteng suburbs the problem lies not in a lack of subdivisions, but in the provision of services to accommodate the additional load.

"By contrast, the Cape Peninsula’s middle class suburbs have been crammed into the limited space between the mountain and the M5 freeway on the east and the mountain and the sea in most other areas.

"As the demand, however, is still strong, and the supply relatively limited, prices will inevitably be far higher than in equivalent sized homes in and around Johannesburg.

"Having said that," du Plessis added, "it is currently very much a buyers’ market and where sellers are distressed good properties can be snapped up for up to 25 percent less than their real value."

"This will not last forever. There are now signs that by the second half of 2012 (as I have said previously) today’s prices could look very low indeed."

Wednesday, 15 June 2011

South African Property: Rent or Buy?

The news that South Africa has now been included in the BRIC group (Brazil, Russia, India and China) can only mean good news for property investment.

According to Maite Nkoana-Mashabane, South Africa’s Minister of International Relations and Co-operation, the inclusion, “legitimises South Africa as a future global power and as an investable country - bolstering its position as Africa’s gateway and champion.”

According to the Sage Property Report from Standard Bank in September 2010, “confidence in the South African property market is returning”.

This is confirmed by the 8.3 percent year-on-year growth rate in the median property prices in August and 7.3 percent year-on-year in July and has given rise to the prediction that the average nominal growth will be around 6 percent for the year.

So is this the time to buy? Herman Slabbert, from Ronnie Matthews Estates in Cape Town says, “The answer whether to buy or lease depends on the profile of the buyer and to what extent current market conditions dictate or influence the choice (or limit the options).

“For an investor the question may be to either invest in the share market or property or both, but after the good bull run of worldwide equity markets the past year, share analysts warn of a dangerously over-bought market and that investors should expect a medium to large correction in the near future.


Buying is naturally the preferred choice for someone or a couple starting out, but the credit crunch and resulting stricter lending criteria of the banks makes it difficult to get loans, unless you can put down a substantial deposit.

The irony for the first time home buyer is that interest rates are at their lowest level in 30 years and home prices are at very attractive levels compared to the property bubble before 2008.

One strategy proposed is to rent and then invest or save the difference between the rental payment and the monthly bond amount one would have expected to pay, in the share market. These ‘savings’ though must to be invested in the stock market. In 10 to 12 years there should be enough accumulated capital to buy a house.


Michael Bauer, General Manager of property management company IHFM,says, “The biggest resistance to buying versus renting is the mental block caused by short-term thinking. People ask themselves why they should buy when they can rent for 30 to 40 percent less than their monthly bond repayments. They are also not responsible for repairs and maintenance and can move on whenever they feel like it.

“However, the fact is that monthly rental will generally rise by 8 to 10 percent per year and by the time the property owner has paid off the bond (are debt free) the rental will be about ten times more than it was 20 years earlier when they decided to buy not rent.

“In contrast, property owners will find that their bond repayments will no longer be a major burden and will probably be less than 15 percent of their gross salary. In essence, if you pay a deposit of 20 to 25 percent on the property, it makes sense to anybody to buy.

“If you compare for example a R400,000 bond issued at an interest rate of 11 percent, the property owner would pay around R990,000 in capital and interest over 20 years, but would own an asset worth R1.06 million.

Bauer continues, “The tenant starting with a rent of R2500 a month (subject to annual increases) would at the end of 20 years find that his total rent payments have been about R1.7m. However, there would be no asset to show for his outlay.

“Rental escalations and capital growth are usually far above annual adjustments to income so it will become less and less affordable to rent in future if you continue living in an area of your choice. When you retire of course and your income is reduced by 30 to 40 percent, rental may be prohibitively expensive.

“For the buyer or investor who qualifies financially to buy, there are many options available in the market. Remember it is still is a buyer’s market coupled with the low interest rates, notwithstanding mediocre capital appreciation expectations. For the shrewd/smart investor who knows the market and the product there are opportunities in the buy to let market.”

Buy to let

Slabbert says, “Recent activity shows a positive sentiment in the buy-to-let market, which is an important segment of property investment.

“According to a report in the Financial Times (in the UK), banks in London have for the first time started to give loan packages, one of up to 85 percent of the value of the property. (Coincidentally it is a subsidiary bank of Investec, the South African bank).

“However, one dilemma for the South African buy-to-let investor is stock. Since 2008 banks and other financial institutions have ceased to provide funding for new developments, resulting in supply constraints – limitations on the ability to deliver new developments. However, the supply constraint also has benefits.

“It must also be remembered,” says Slabbert, “that a market or area where supply is constrained generally will have higher rent levels, greater rent growth and higher capital values.

“The investment strategy focusing on supply constrained areas could potentially provide more durable income and stronger capital appreciation.

“As an example, one can look at the Atlantic Seaboard in Cape Town and then at a specific area like Camps Bay/Clifton area which is considered the most expensive real estate in South Africa has a legal as well as geographic supply constraint.

“In essence local government zoning for development is restricted and geographically there simply is not any scope for extending this area.

“Lastly, local opposition to development is fierce; the Camps Bay rates payer association plays an activist role to monitor any proposed developments and take action where necessary,” Slabbert concludes.

Interest rates, investor confidence in a stable economy, high growth prospects together with some incredible bargains in the real estate market make this a good time to buy if you are able to and reap the rewards over the long term.