Foreign investors eye South African real estate

South Africa is seen as one of the growth nodes and the gateway to the continent.

At a recent commercial property conference held in central London, a strong focus was taken on distressed property markets, whereby it was confirmed that advanced countries would still see pain in their property markets for some time but developing economies would strongly outperform sluggish northern hemisphere nations.

According to Auction Alliance, CEO, Rael Levitt, who attended the conference at the invitation of the Royal Institute of Chartered Surveyors, many speakers, economists and analysts felt that China, India, South America and Africa were the regions where property markets would recover quickest and provide the strongest returns as the global economy returns to health over the next five years.

South Africa was mentioned as one of the growth nodes where the country was not only accommodating an influx of foreign labour from other African countries but was rapidly becoming the gateway to the continent.

According to Levitt, several delegates believed that when international behemoths such as Walmart, NTT and Zara invested in Africa, they would use South Africa as their regional head office for a pan African roll out strategy. "This creates demand for local, commercial real estate," says Levitt who followed the conference with a four day tour of the UK's largest auction houses, including Allsop, Cushman and Wakefield, Barnard Marcus and others. ‘'This is an annual trip I take to see whether our auction business is lined up with the world's most established and reputable auction companies."According to Levitt, this was the first time that he felt that South African property was way ahead of European markets, which are in great distress at the moment. "They see South Africa as an exciting emerging economy and, despite the global downturn, a strong investment destination, which would still grow sharply."

A strong Rand, first world infrastructure and renewed foreign investment will make South Africa a popular choice for global property investors, explained Levitt. One must remember that on the commercial property side, besides the investment in Cape Town's V&A Waterfront, there hasn't been enormous foreign investment in local real estate. With the strength of our emerging economy, now palatable to offshore investors, we may finally see foreign investors chasing South African industrial, office and retail property.

Unlike the UK and the USA, credit growth in South Africa was pushed up mainly by demand from the household sector, and this sector is likely to remain the main driver of credit growth during the second half of the year, following the interest rate cuts, income growth and some improvement in employment prospects.

Although many analysts believe that interest rates are likely to remain unchanged at the next meeting of the Reserve Bank's Monetary Policy Committee, given the uncertain nature of the recovery, a favourable inflation outlook and a strong rand, a further rate cut remains a possibility. "We have already found that the last rate cut gave impetus to the market and increased buyer demand.

Another rate cut will lower yields and boost the market," said Levitt. This is a positive for foreign investment and we see interest growing in both the physical and listed real estate sectors.

Unlike many banks globally, the five major South African banks are extending credit, albeit cautiously. Growth in mortgages was firm in August, rising by 1.1% m-o-m and 4.8% y-o-y. Despite the fact that the overall trend remains weak, consumer confidence is likely to remain firm during the remainder of the year as worries about job losses abate with better general economic conditions compared to last year.

Foreign investors take comfort in the strength of South African banks and, despite HSBC not pursuing the acquisition of Nedbank, South African banks are held in high regard for the way they are weathering the global downturn. Another positive factor for foreign investors is the fact that household balance sheets should improve following high wage settlements reached during the negotiation season. This, together with lower interest rates and inflation, should keep household spending positive and stimulate demand for credit.

However, part of the benefit could be offset by tight credit standards and high debt levels, which will prompt some consumers to use the favourable interest rate environment to settle their debt rather than applying for more credit.

Whilst corporate demand for credit is likely to remain weak as the private sector remains wary of accelerating capital expenditure in the face of ample spare capacity and the fragile economic recovery, foreign investment in retail, services and mining may boost business confidence in the medium term. T

hese are all optimistic signs for the commercial property market and the reasons why South Africa is being viewed as an attractive investment destination.

Property recovery still '12 to 18 months off'

The residential property market in South Africa is still coming to terms with the fallout from the economic crisis, said Auction Alliance CEO Rael Levitt on Monday.

According to SA's largest auction group, sales trading activity is increasing as home buyers take advantage of a slower recovery.

"South Africans are now seeing a repeat of the lengthy property downturn last experienced in the early 1990's. Opportunistic buyers are finding great deals which is boosting trading volume.

"What is unique about this property contraction is that low values are coinciding with low interest rates. It's thus bargain hunting season for those with access to funding," says Levitt.
According to Levitt, the outlook for the second half of 2010 is flat.

The world cup has been a great shot in the arm for local tourism and retail trading but a full property recovery is still 12-18 months off, even in a reasonable interest rate environment and even with reasonable market stability, says Levitt.

"Those who were expecting the South African real estate market to quickly recover in the second half of 2010, after the world cup, may be in for a long wait."
Alliance is predicting a flat real estate market with no increase in value through December 2010.
This is echoed by Absa senior property analyst, Jacques Du Toit, who says that year-on-year growth in house prices may peak soon.

Du Toit says house prices rose by 14,8% year-on-year last month and that Absa was forecasting slower growth at 8% to 9% until the end of this year.

Levitt concurs with this view and believes that from the beginning of next year prices are projected to increase at a stronger rate.

"Depending on global macro-economic trends we could end up running through a strong cycle only next year," warns Levitt, adding that a property contraction can last for several years and house values could move up more strongly or more weakly, depending on any number of circumstances."

"Certain sectors in the residential property market, such as leisure property, new property developments and vacant land sales may weaken over the next six months as a delayed pipeline of distressed properties begins to liquidate," says Levitt.

"Signs of stabilisation and growth in over supplied sectors cannot be hailed as part of a recovery and may soon recede as an overhang of the shadow inventory of distressed properties waits to enter the market."

The general outlook that the housing market has finally bottomed may well be "premature" optimism.

The single largest impediment to a recovery in the housing market is the large number of loans that are either in a delinquent status or are destined to liquidate.

"We have seen a slowdown in the number of distressed properties hitting the market, but this doesn't mean that the banks have not been developing a pipeline of future delinquencies due to clients who were assisted with short term bond relief.

"One must remember that many banks have assisted their debtors reschedule debt, but if property price inflation levels off for the next 6 months, these debtors will have to start normalising their loans," Levitt added.

"The distressed backlog is due to a longer timeline for loan foreclosures in South Africa", explains Levitt.

"In other words, loans continue to transition into the delinquency pipeline at a rapid pace, but are moving out at a very slow pace."

He said that many distressed loans are "destined to liquidate" and will impact on the recovery but at the same time allow cash-flush buyers the ability to go bargain hunting over the next few months.

"We are concerned that, in light of this housing overhang, the stabilisation we have seen in home prices the last few months is temporary," says Levitt.

"That said, there is a window of opportunity for investors to get into a cheap market that will recover in the medium and long term."

Source: I-Net Bridge