Sunday, 4 November 2012

Why a recovering US property market bodes well for South Africa

The United States has long held sway over the global economy and as such its welfare has had far reaching implications for the rest of the world. Cue the sub-prime mortgage crisis in 2007 which effectively crashed the US housing market, and of which the effects are still very much in evidence, particularly in America and parts of Europe.
"Due to the US's incredible economic power we've often noticed that the local property market tends to lag between three to six months behind the American market", says Bruce Swain, MD of Leapfrog Property Group. As such local estate agents and buyers are inclined to keep an eye on developments in the US. "Of course South Africa is a different kettle of fish and one would be foolish to assume all movements in the US market will be mirrored in ours but, it does often give one an indication of what could be headed our way", says Swain.
Even earlier in 2012 many still doubted as to when the US real estate market would begin recovering. Now it would seem that revival is in sight; JP Morgan & Co and Wells Fargo & Co, the principal home lenders in the States report double-digit quarterly earnings growth last week. According to Sterne Agee, a banking analyst from Todd Hargeman as reported in the LA Times, both companies "clearly expressed a view of signs of recovery, if not stabilization".
The "Improving Markets Index" as compiled by the National Association of Home Builders and First American Title Insurance indicates that a 103 housing markets across the US now qualify to be listed, up from 76 in January 2012. Barry Rutenberg, chairman of the National Association of Home Builders (NAHB), believes that; ""This is an encouraging sign that the housing recovery is proceeding at a steady pace as firming prices and employment help spur new building activity, which in turn generates new jobs and more home sales."
Whilst improving markets are still a far cry from stable or even better, growing markets, it is the first sign that the American housing market is recovering. Broadly speaking any recovery in the States is bound to filter through to the rest of the world, which should eventually lead to rallying of exports from SA to Europe and other economic corrections. These corrections will hopefully lead to more job creation, increased earnings and ultimately, the amelioration of the local property market.
That being said, there are local factors that have a greater, and more immediate, effect on the SA industry such as the recent wild cat strikes and the tragedy that took place at Marikana, the staggering level of unemployment and the downgrading of our sovereign debt. These circumstances shake investor confidence, decreases international funding, threaten our exports and ultimately culminate in an impoverished economy.
Factors that contribute more directly to the property market include the lack of household savings, the high level of household debt-to-disposable income ratio, the increase of municipal rates and the difficulty of obtaining a home loan.
Bruce Swain believes that the South African Reserve Bank has done what it can to aid the property market by keeping the repo rate at a low 5%. According to John Loos, Household Sector and Property Strategist at FNB, the greatest problem the market now faces is the lack of household savings. At present the household debt-to-disposable income ratio stands at 76.3% (an increase over the first two quarters of 2012). Loos states that: "This savings shortage is a serious structural issue not only constraining the housing market but also many people's ability to retire financially sound."
Combined with the fact that banks' lending criteria are now considerably more stringent than four or five years ago the reality is that many potential buyers cannot amass the deposit needed to secure a loan.
Of course saving isn't the only problem. Municipal rates and tariffs have increased: Loos points out that where the average house price/average remuneration ratio fell by -24.4% since 2008, the rates and tariffs/remuneration has increased by 6.54%. Savings are less and properties are costing more to maintain – hardly a recipe for a sound property market.
That being said, the local property market is still stable, if sluggish, and there are slight indications that it's picking up. Yes, South Africans need to start saving there's no doubt but, our market didn't take the hit many of its international siblings did and with the stable repo rate and banks easing their lending criteria somewhat there is hope. Sellers are still placing their homes in the market and the buyers are there. "Remember, regardless of the current global and national economic situation, property is a long term game and the industry will correct itself in time. Patience is key during this period", advises Swain.

Monday, 6 August 2012

Olympic Games and London Property Prices

South Africa may be scooping gold medals at the Olympic Games, but experts are uncertain of the immediate Olympic boost to London property prices.

South Africa may be scooping gold medals at the Olympic Games, but experts are uncertain of the immediate Olympic boost to London property prices.

According to Mike Smuts, managing director of Smuts & Taylor Ltd, it would seem from the available data that the Olympics have had little effect on East London property prices.

He points out that it’s a little early for judgement, but there is of course always a big debate about whether events such as the Olympics Games actually have a direct effect on property prices in the host city.

Speaking to Property24.com, Smuts explains that some earlier research has shown that the Olympics may aid property values in developing cities, but has little to no effect on developed metropolitan areas like London.

Knight Frank revealed in a report recently that prime central London property prices reached a new high in June with values almost 50 percent higher than they were in March 2009.

Engel & Völkers in Chelsea, London said at the time many landlords and buy-to-let investors were spotting opportunities for short-term rentals during the Olympic Games hence boosting the rental market.

Click here to read the article.

“One thing that is undisputed though is that hosting cities benefit from an upgrade of transport, cultural/leisure facilities and urban infrastructure, which in turn encourages house prices growth.”

He notes that all of this is true for London saying the “Olympic Legacy”, as the government has dubbed it, will lie in these infrastructure upgrades and not in the event itself.

Smuts says some of the infrastructure improvements are already complete, including parts of the £6.5 billion ($10 billion) investment in London’s transport system, as well as private ventures such as the £1.5 billion Stratford City Westfield Shopping Centre.

“Housing projects are still taking shape and until those developments are complete, it’s too soon to look for an Olympic housing boom,” he says.

Smuts says some of the infrastructure improvements are already complete, including parts of the £6.5 billion ($10 billion) investment in London’s transport system, as well as private ventures such as the £1.5 billion Stratford City Westfield Shopping Centre.

Yolande Barnes, director of Savills residential research explains that the real legacy for the housing market in Stratford will start after the Olympics, and any ripple would follow thereafter.

Barnes says transactions in the London Borough of Newham are running among the lowest in the country – at around 40 percent of their former average levels and it is difficult to discern any price rises above and beyond the background rises in London as a whole.

Over the longer term, the infrastructure improvements and general ‘speeding up’ of regeneration and management of place that has happened because of the Olympics will undoubtedly have a positive effect on local house prices, she says.

“Perhaps more importantly it will have a positive effect on the quality of the local environment,” says Barnes.

Furthermore, she says the legacy will effectively be a managed ‘landed estate’ with an eye on long-term quality, which means that some localities will have the potential to rival the more prime areas of west London.

This should attract newcomers who would otherwise not have considered the location previously, she says.

Smuts is of the opinion that the point to get across is that hosting the Olympics or Soccer World Cup doesn’t do much for house prices in itself - but the infrastructure upgrades do.

“House price increases near Gautrain stations in Gauteng South Africa in the wake of the Soccer World Cup is a good example of this,” he points out.

On home prices in East London in light of the Olympics Games, he says the housing market in the area, particularly around Stratford to the east, has under-performed in comparison to the rest of London.

Data from the Land Registry show house prices across London rose 5.1 percent year-on-year to April 2012, but in the east London borough of Newham, home to the Olympic Park, prices moved up just 2 percent.

This is in stark contrast to Kensington and Chelsea where prices have jumped 11.6 percent over the same period as wealthy foreign investors (including many South African buyers) flock to London looking for a safe haven for their wealth, he says.

Smuts says while capital growth has been lower than expected, rental prices have performed far better.

According to a rental index conducted by leasing company HomeLet, London rental prices in April were up 7.1 percent on the prior year, with those in east London (an area which includes and extends beyond Newham) outpacing the rest of the capital, rising 8.6 percent.

Wealthy South Africans are highly prudent with their investments and with the continued uncertainty around the prospects and timing of the global economic recovery, most favour the tangible and straightforward nature of residential property as an investment, according to Smuts.

London letting agents are reporting a surge in the number of advertisements placed on their websites and a record number of enquiries about properties available for short-term lets during the Olympic period, he says.

He notes that Gumtree.com, a UK-run site for classified ads, has seen 2 321 ads posted for Olympic rentals between January and May and almost 10 500 replies to such posts.

HomeAway.co.uk, the UK's number one holiday rentals site, said landlords taking bookings through their site have achieved rents between 70 and 200 percent higher than standard rates.

According to a BBC report, some landlords believe the opportunity to be so lucrative that they have asked existing tenants to leave to free up their properties for the few weeks during the games, he says.

“Still, much like the expected housing boom, I suspect the moneymaking potential of short-term rentals during the Olympics have been overstated by overzealous letting agents - especially because so many properties are coming on to the market,” he says.

Should landlords achieve higher-than-normal rates for their properties during the games, it will merely be a short-term phenomenon and hardly worth turning out existing long-term tenants, he says.

“Interestingly enough it would seem from the lettings data this short-term boost is likely to benefit other areas of London just as much as the Olympic boroughs.”

Rental companies say properties in central and west London have been equally popular as those local to the Olympic sites, with many visitors hunting out home stays closer to the city’s other major attractions, he says.

This week, Savills revealed in a report that a review of record prices achieved for residential real estate in the top 10 ‘world class’ cities reveals that London still holds gold four years after the record of £8 500 per square foot was set in 2008, making the city’s Kensington Palace Gardens the most expensive address.

The top three ‘world class’ cities closely grouped with records set at over £8 000 per square foot, with Hong Kong and New York just behind London with £8 400 and £8 300 respectively, according to the report.

View the record transaction here.

A property that transacted in 2008 in London’s Kensington Palace Gardens tops the list at £8 500 per square foot and Savills says what sets this home address apart from others is the rarity factor.

Its exclusivity, well established residential streets with extremely limited supply.

This week, Savills revealed in a report that a review of record prices achieved for residential real estate in the top 10 ‘world class’ cities reveals that London still holds gold four years after the record of £8 500 per square foot was set in 2008, making the city’s Kensington Palace Gardens the most expensive address.

According to the Knight Frank Prime Global Cities Index Q2 2012 report, the value of prime property in the world’s key cities rose by 1.4 percent and London ranked number five of the 27 global cities surveyed recording an annual price growth of 10.5 percent.

The same report saw two of Africa’s top home locations in the top 10 with Nairobi Kenya at number three (21.8 percent) and Cape Town in South Africa at number 10 (4.1 percent).

Read the article here.

Barnes says in the longer term, it is possible that to see increasing amounts of overseas wealth flowing into the area, not just from investors buying new build properties but also ‘displaced’ west Londoners taking the value of their property east and getting much more for their money.

In the end, much depends on the skills of those creating and managing the new places that are being created but it is difficult to see how such a good start could have been achieved without the Olympics, especially in the current economic climate, she says.

Barnes points out that Westfield has already had a positive impact on the area and the arrival of Crossrail in four years will certainly give a further boost.

Matt Leitch from the Savills Canary Wharf office explains that Newham, Hackney and Tower Hamlets all represent great value in the current market compared to their neighbours.

Tower Hamlets is the city’s cheapest boroughs and are significantly cheaper than, say, Canary Wharf – but have begun to see the benefits of neighbouring City and Islington prices, he points out.

Leitch says property developers are pushing east because they can’t push west due to high density existing development and this, together with huge investment in infrastructure will boost values over time.

“Individual and bulk property investors have been attracted by this potential and the outlook over the mid to long term is extremely positive.”

Connectivity is key to the redevelopment potential - the East London line extension triggered investor activity, and Stratford already has great connections to central London, the City and Canary Wharf, connected via the Jubilee and Central lines and DLR, plus the area will benefit from Crossrail by 2018.

The extended area will benefit from a great deal of residential and commercial investment over the next 20 to 25 years and this would be positive for both investment and owner occupiers, he says.

South Africans buying London homes

Tell us where many South Africans are buying property in London, prices they buy into and what is driving demand for London property from investors?

Asked where in London are South Africans buying homes, Smuts says central and south west London remains firm favourites with High Net Worth Individual (HNWI) South Africans, while the biggest employer of bankers in Europe, Canary Wharf is also fast growing in popularity.

“Most of our clients purchase in the price range of £350 000 to £500 000 for investment purposes and generate a gross yield of 5.5 and 6.5 percent.”

He says they are also seeing a lot of interest from HNW South Africans who are buying with a view to relocate or as a second property to use for when they visit their children or friends residing in London.

According to a rental index conducted by leasing company HomeLet, London rental prices in April were up 7.1 percent on the prior year, with those in east London (an area which includes and extends beyond Newham) outpacing the rest of the capital, rising 8.6 percent.

“For these buyers, trophy properties in the most desirable locations are at the top of their shopping lists and we have had a number of instructions recently for residential properties in excess of £1million.”

Wealthy South Africans are highly prudent with their investments and with the continued uncertainty around the prospects and timing of the global economic recovery, most favour the tangible and straightforward nature of residential property as an investment, he says.

Smuts says this risk aversion and the consequent trend of ‘flight to quality’ have been the main drivers for South African investors as they attempt to avoid economic and political uncertainty at home.

He points out that wealthy South Africans buyers do not seem to base their decision to invest offshore wholly on fear of the Rand’s fall in value or local political instability but rather by solid financial planning that includes diversification of asset classes and markets.

As a result South African buyers also take a very different view on the London market as a whole in that they do not see their property as a short-term investment.

In fact, some don't view it as an investment at all, but rather as a long-term asset that will stay in the family for generations to come, he says.

This is mainly due to the long-standing view that London property offers a safe haven, the enduring attractions of the city's excellent schools and the strong economic and social factors that makes it the investment destination of choice for the worlds wealthy.

London property prices have none the less vastly outperformed expectations.

Smuts notes that London was the last global market to go down in value and the first global market to recover during the global recession.

Prime London house prices are now 47.3 percent higher than the bottom credit crunch in March 2009 and that’s more than 12 percent above previous peak in March 2008.

Rents in Greater London average £1 177 per month –7.9 percent higher than average rents in April 2011, he says.

Smuts adds that while special events such as the Olympics Games and Soccer World Cup may come and go, investors will be well advised to ignore the hype and fanfare that accompany these events and instead, focus on investing fundamentally in income producing properties. –Denise Mhlanga

Monday, 19 March 2012

Rental Property - do your (Home) work

Johannesburg – If there was ever a right time to buy a house it is now, said Warren Buffett, chairperson and chief executive of Berkshire Hathaway in a recent interview on CNBC.

Buffett, who is worth around $44bn, is the second-richest man in the world, according to US magazine Forbes.

Buffett considers houses the top investment currently, but then not any old house – buy bargain homes that can be financed with 30-year loans, with the idea of letting them out.

He considers it a wonderful plan to buy a few hundred thousand such houses and obtain home loans at very low interest rates.

In the US interest rates can be fixed for long periods, which makes the low cost of finance advantageous.

This is what Buffett would have done if he knew where he would find himself over the next 10 years.

He says five years ago people could not buy houses fast enough because they thought prices would continue to rise, but now they are not buying because they think prices will continue to fall.

“This creates an attractive asset class for residential investors.”

As far as his own home is concerned, Buffett does not flaunt his wealth. According to Forbes he still lives in the same relatively modest home for a billionaire in Omaha, Nebraska, that he bought in 1958 for $31 500.

Rode & Associates property valuer and economist Erwin Rode agrees with Buffett that this is the right time to buy in the US, but he says this in no way applies to SA’s housing market.

“In the US there has been a significant correction in house prices and prices have in real terms dropped close to their long-term trend line, which makes it a good time to buy.”

South Africa’s housing market has not experienced such a correction, according to Rode.

First National Bank property analyst John Loos says that the South African housing market still has to reach the bottom of the cycle. “Although it is currently a better time to buy than four years ago, it's still not the best time.”

Magnus Heystek of Brenthurst Investments says the best time to buy any asset is when the market is down, not when it is booming and everyone is talking about it and boasting good results. “It’s like waiting for shares to reach record lows and then to buy them.”

Heystek says the best profits are generally made in the initial stages of a revival, not the final.

SA’s residential investors have still not regained the healthy appetite for buy-to-let properties seen before the recession.

The percentage of investors in rental properties was an uninspiring 8% of all buyers in the fourth quarter of 2011, as shown by FNB’s property barometer. This is a mere drop in the ocean compared with the 2004 high of 25%.

Rode reckons this shows that buy-to-let investors are probably showing good sense. “Interest rates remain a huge unknown, which is one of the reasons they have not re-entered the market.”

Friday, 20 January 2012

Baby Boomers worth their weight in gold

Although it is the Generation X population, which consists of adults between the ages of 31 and 45, that are leading the property market recovery,  baby boomers are making their presence felt in the market, says Adrian Goslett, CEO of RE/MAX of Southern Africa.
Goslett says that as more and more South African consumers reach retirement age, downsizing boomers aged between 47 and 65 years old could bring about further resurgence in the property market. “With many of these homeowners having built equity in their homes over the years, as well as other investments, boomers may be the first demographic to move in the emerging market when other ages groups are still struggling to meet the stringent lending criteria required by banks,” he says.
Goslett notes that because their children have moved out of home, the boomer generation is expected to trade their suburban homes for lifestyle options that meet their current needs. This, coupled with that fact that many boomers are looking to buy additional property as an investment to supplement their retirement income, or are assisting their children in making property purchases, makes them a valuable asset to the economy. “Many of the real estate agents have baby boomer clients who already own property and are looking to purchase an investment or retirement property. A number of these buyers are purchasing property that they can rent out to generate an income or to move into once they reach the age where they wish to retire,” says Goslett.
Statistics show that the population demographic in South Africa sees baby boomers making up a much smaller percentage of the population than Generation X.  Between the years 1950 and 1965 there were 13,5 million births in South Africa (baby boomers) compared with the 18,74 million births (Generation X) between 1965 and 1985. According to John Loos, FNB Home Loan Strategist, while the most noticeable increase in the property buying share was among the Generation X group who made up 28,1% of the total purchases in the first quarter of 2011, the Baby Boomers buying share increased to 21.17% of the total purchases in the first quarter of this year, despite being a demographically smaller group.  The FNB Property Barometer for the third quarter of 2011 stated that 22% of all buyers gave downscaling with life-stage as a reason for selling their property.
Trends show that boomers tend to favour areas that attract a wide variety of people and they generally purchase property that is close to their original homes or primary residence. Boomers seem to like open-floor plans, lots of storage space and specifically his and hers master bedroom cupboards and gardens featuring decks. Other amenities on the must-have list include fireplaces and bars.
“The baby boomer generation has driven the South African economy for years and continues to contribute towards the property market’s recovery in their retirement.  Many of these investors are looking at buying properties based on the rental income they will generate and not necessarily for their resale potential. The baby boomers are a very diverse group and cannot be described in generalities, but those boomers who are financially secure are actively seeking to buy property and they are taking advantage of the opportunities and value available in today’s market,” Goslett concludes.

Monday, 16 January 2012

Our NEW WEBSITE is up and running !

After more than a year of designing, developing, creating & implementing our new website is finally here !

Please take a look & let us know what you think:


The Horizon Consultancy Team