UK commercial property an investment for South Africans

The continued recovery of the UK commercial property market, coupled with the strengthening of the rand relative to pound sterling, has presented South African investors with a unique opportunity to invest in the UK while capitalising on the recovery cycle.

This is according to Eric Mounier, CEO of the Pam Golding Properties/Athanor International Property Investments joint venture which markets direct offshore commercial property investments.

"Since 2000, the joint venture has been involved in property asset transactions valued at over R5 billion and currently is involved in supporting over 40 active property investments,he said.

Despite commercial property values in the UK being devalued by over 40 percent following the global credit crisis, the asset management team has been successful in ensuring all properties under management remain operational and income producing, and favourably positioned to take advantage of the expected recovery cycle.

Illustrating the UK commercial property market's recovery is the Investment Property Databank (IPD) UK monthly index, which indicated a 0.1% growth in un-geared commercial property values for the month of October 2010.

This growth concluded the 15th consecutive month of capital appreciation, bringing the compounded upturn in values since the recovery to 15.9%, according to the IPD.
While there had been significant growth during this period there was still a long way to go to get back to the values prior to the global credit crisis.

"This trend is supportive of the market commentary which indicates that investors are starting to re-enter the market, with the UK providing a popular investment destination.

During the period of downturn following the global credit crunch, the UK experienced a significant re-pricing of commercial property values, and as a result investors were taking advantage of the favourable prices which were now possible.

In addition, during the past year we have seen a significant strengthening of the rand against the pound with a slight reversal of this trend more recently, Mounier said.

For those taking the view that the pound was likely to remain strong against the rand and the euro, the timing seemed opportune to invest in a solid pound-related asset class, he added.

The aim of the Athanor/PGP JV is to facilitate property investments which derive the vast majority of their returns from the large net yields currently available as a result of the positive gap between the rental income and the cost of finance. "

Consequently, less dependence was placed on capital growth to achieve the expected return which reduced the risk associated with these investments.

As an example of such an investment, a recently launched property in Parkhouse West Industrial Estate in Newcastle-under-Lyme in Staffordshire, England, is expected to produce cash flow of around 11 percent per annum, from which a portion will be used to pay down the bank loan and the remainder available to return to investors.

The majority of the projected return will come from the annual cash flow," he said.

SA property falls in global rankings

The rapid deceleration in house price growth in recent months has seen South Africa slip markedly in the global performance rankings.

UK-based Knight Frank’s latest Global House Price Index shows that South Africa ended the third quarter of 2010 in 22nd place, down from 6th position in the second quarter.

UK-based Knight Frank’s latest Global House Price Index released earlier this week shows that South Africa ended the third quarter of 2010 in 22nd place, down from 6th position in the second quarter. Knight Frank tracks price movements in 48 countries across the world.

According to the latest index, South Africa managed house price growth of an average 3% in the third quarter. That is significantly down from the 14,8% recorded in the second quarter (year-on-year).

However, it’s not only South Africa where the housing recovery has lost steam. Liam Bailey, head of residential research at Knight Frank, says a number of countries have even tipped back into negative growth in the past three months. A total of 14 mainly European countries saw negative growth in the third quarter after they had experienced several quarters of rising prices.

Bailey says there is a growing gap between the less debt-afflicted European economies of Austria, France and Finland who rank in the top 10 and their neighbours to the south and west of the continent like Greece, Spain and Ireland who rank in the bottom 10.

The world’s top performing housing market in the third quarter was Latvia in Eastern Europe with growth of 26,1%. Ireland ended the third quarter at the bottom of Knight Frank’s global house price rankings with negative growth of -14,8%. The report shows that in Dublin declines of up to 50% have been recorded over the past two years.

Bailey says although there is some good news in that for the first time since late 2008 prices are rising in each of the six world regions -- Asia-Pacific is up 9,9%, the Middle East 5,1%, North America 4,2%, South America 3,5%, Africa 3% and Europe 0,8% -- the headlines don’t tell the full story.

Says Bailey: “Digging into the data we can see that there are still considerable issues playing out across global housing markets. While a majority of countries are reporting positive annual growth, 56% saw prices fall in the third quarter of this year.”

Bailey notes there is growing evidence that the global housing recovery, which began in early 2009 following desperate conditions in 2007 and 2008, may just be beginning to run out of steam. Nearly 30% of countries that experienced strengthening conditions in early 2010 saw quarterly price growth turn negative in the third quarter. - Joan Muller

Property Predictions for 2011 - South Africa

In 2011 the greatest challenge for the auction industry will be to refocus on a buyer's market still constrained with a shortage of demand and an over supply of non-income producing properties.

As the country gets used to a long, hard and bumpy recovery, the economic headwinds will still be strong and unemployment rates alarmingly high.

While the lowest interest rates in 30 years will boost sentiment and cause a bounce in properties with reliable cash flow, the favourable interest rate environment won't be a magic pill which quickly relieves the downturn.

Finding the right buyers at auctions and getting funding will remain challenging.

Business confidence will be dependent on a host of local and international issues; including fears of a potential sovereign debt crisis in Europe.

While distress at retail level may slow with lower interest rates, and banks now well geared up to assist defaulting clients, corporate distress will grow with larger liquidations bringing higher value assets to the auction floor.

High value bankruptcies will increase throughout the year, presenting opportunistic purchasing like never before seen in South Africa.

As liquidators and banks get more desperate to offload bad debts and an oversupply of development land, a sweet spot will emerge for investors with access to financing as they pick up these assets at bargain prices.

The residential property market will remain flat for most of the year with a stronger recovery at entry level. Investors will snap up properties below R1 million, which for the first time in many years will provide stronger returns than cash in the bank.

The middle market will remain flat for some time as it deals with oversupply in newer residential areas.

The luxury residential market across the country will remain weak all year, with little help from interest rates, and a strong Rand constraining international demand.

Leisure residential properties at the coast, on golf courses and in other non-urban areas will also remain flat with many properties being sold at auction below replacement value.

Next year two pieces of legislation may have a major impact on the auction sector. The Consumer Protection Act will change a wide range of issues regarding the auction process, mandates and sales processes; these are all designed to look after the consumer's interests.

The new Companies Act will also have a material effect with the introduction of Business Recovery.

This may cause an initial slowdown in liquidations as companies go through the business recovery process.

It is possible that liquidations may increase later in the year as banks rush to secure their positions on property exposures. Either way, it will have a material impact on the auction sector.

The commercial property market will become two-tiered; good properties with strong covenants and reliable cash flow will experience a surge in demand as investors look to place their cash in areas that achieve greater returns than bank deposits.

Blocks of flats, retail property and key industrial sites will form the strongest part of the market.

The office market will remain mild but A-Grade properties in prime locations will attract strong demand on the auction floor.

An area of concern will be hotels, guest houses and leisure resorts which will battle in 2011 and may hit the auction floor with little demand.

Foreign buyers now few and far between.....

There was a time two or more years ago when residential property estate agencies, some with international connections, earned considerable kudos by publicising impressive figures on the number of foreign buyers to whom they had sold South African property.

That time, says Bill Rawson, Chairman of the fast expanding South African property group that carries his name, is now by and large past.

"At present I regret to say we are just not seeing foreign buyers in territories like the Western and Southern Cape where their presence previously - and their ability to buy in the more expensive brackets - very definitely did help to keep prices up."

Sales of upper bracket homes, adds Rawson, have been the hardest hit by the recession and the lack of overseas buyers here has been felt in this sector to a far greater degree than elsewhere.

In the circumstances, he says, the government's investigation some years back into the impact of foreign buying had become almost irrelevant today.

"Those who have had to sell in the upper brackets have been forced to accept fairly drastic price cuts," says Rawson. "For example, a seven bedroom Constantia home originally on the market at R17 million was knocked down recently on auction for R10 million.

"However, it is also true that in this market there are relatively few distressed sellers and those planning to sell are often able to sit back and wait for better times. Prices in areas like Constantia have, therefore, remained fairly satisfactory."

Buyers in South Africa who are not adopting a wait and see attitude (as some are), says Rawson, are currently getting exceptionally good prices - for which, he is convinced, they will later be grateful.

"This applies particularly, I think, to those buying currently in Rawson Properties' three “academic belt” (Rondebosch) multi-unit projects - Rivers Edge, Rondebosch Oaks and The Rondebosch. Buyers here are taking up units at the same pace we saw in the boom years."

Investors, says Rawson, have in recent months been able to arrange bank finance far more easily and at better rates than was possible earlier this year - "and it looks if the trend will continue".

Commending Dr Andrew Golding and his research team at Pam Golding Properties, Rawson says that their publication of the best areas in which to invest is "exactly the sort of information buyers and the whole industry needs. It will very definitely facilitate investor decision making".

The report, says Rawson, once again shows the importance of close proximity to good schools and efficient transport systems as well as upper bracket retail areas. It also emphasises the absolute necessity of increased security for private homes.

A further finding of the report, which, says Rawson, is particularly important and which has reinforced the long-held convictions of many Capetonians, is that the Southern Suburbs of Cape Town have been and are likely to remain the safest and steadiest appreciating place in SA to make a long term property investment.

Reserve Bank cuts again, but will it matter?

Last week, Reserve Bank governor Gill Marcus announced yet another rate cut, bringing the repo rate down to 5।5% and prime down to just 9% - the lowest rate the country has seen since 1974.

The move was not unexpected. Inflation has been close to or within the 3-6% target range for about a year (see chart) and has for several months surprised on the downside, while growth remains somewhat feeble, as illustrated by recent weak manufacturing data. In addition, the rand continues to display Schwarzenegger-like strength against the dollar (see chart), and, as Ireland teeters on the verge of a debt meltdown, the global economy looks more and more risky.

Against this backdrop, then, the decision to cut rates was not a surprise। It is an open question, however, whether or not the cut will have the kind of beneficial economic effects that many hope for.

In general, rate cuts tend to have two stimulating effects on the economy. First, they encourage households and businesses to borrow (and hopefully spend and invest) more, and second, they tend to weaken the currency and thus to stimulate exports. But will either of these things come to pass in South Africa, given the current context? Let's look at each in turn.

It's highly questionable whether the latest rate cut will have much effect on consumer or business borrowing.

On the consumer side, people just don't have much capacity to borrow. As the FNB Property Barometer noted last week, "The most recent Reserve Bank Quarterly Bulletin indicates that household levels of indebtedness remain stubbornly high, with the debt-to-disposable income ratio for the 2nd quarter (of 2010) at 78।2%, not far below the all-time high of 82%.

This would suggest that households as a group are not able to aggressively grow their borrowing off such a high base."

Given this, it's unlikely that the latest rate cut will boost borrowing; more likely, South Africans will try to pay down their debt as their monthly repayments decrease.

This isn't written in stone, of course। After all, last week's retail sales numbers showed that sales rose by 0.4% month-on-month in September, and 6.1% year-on-year. This growth soundly beat analysts' forecasts of around 4.7%, and suggests that South African consumers are still willing to spend.

But being willing to spend is not the same as being able to borrow and it looks like South African households are still too deep in hock to think of taking on more debt just yet। Backing up this view, last week's FNB/BER consumer confidence index reported a slight fall in the fourth quarter. Overall the index has been stuck between 14 and 15 this year, suggesting that consumers are no more upbeat now than they were at the beginning of the year, and making major new borrowing unlikely.

On the business side, there's nothing to suggest that South African businesses will borrow more at lower rates। Businesses borrow primarily when there are opportunities available for them to profitably invest in, and the current climate of uncertainty is not encouraging of such investment.

When it comes to weakening the currency, it's again not clear whether or not the rate cut will help. There's no doubt that the government is keen to see the rand weaken against the dollar; finance minister Pravin Gordhan announced measures to weaken the currency during his recent Budget speech, including further exchange control relaxation and the further accumulation of foreign exchange reserves, and economists have speculated that a general push to weaken the rand was behind last week's rate cut, although Marcus was adamant that this wasn't the case।

Either way, however, it seems very unlikely that South Africa can actually do much about the level of the rand. As Marcus noted, "Since the previous meeting of the Monetary Policy Committee [in September], the rand has appreciated by over 3% against the dollar. This has been despite lower domestic interest rates and the higher pace of reserve accumulation."

In large part the problem is that even after 650 basis points in cuts, South Africa's interest rates are still high by global standards (see table), and will doubtless continue to attract hot money (foreign money from investors looking for better yields), which will keep the currency strong।

In addition, a lot of rand/dollar volatility is actually just dollar/euro volatility in disguise, and so events in the US and Europe, which South Africa can do nothing about, are often the major drivers of the currency। Overall, then, it's unlikely that a 50 basis-point cut in domestic rates will have much effect on the rand.

What, then, can we conclude about the latest rate cut? While the reasons behind it are obvious, solid, and sensible, it remains an open question whether or not it will pay off। Given current circumstances, there seems to be no easy way for the cut to boost the economy through currency weakness or increased borrowing. Only time will tell if we can cut our way to faster growth.

Write to Felicity Duncan: felicity@moneyweb.co.za

*This article first appeared in Discovery Invest

Buy a house – but how?

If you buy a house that has been lived in for a number of years it will cost you about 30% less than if you buy a brand new place that has never been occupied before according to figures released by First National Bank last week.

That got me thinking about the high cost of building and the more research I did – and the more thinking I did too – the angrier I became. Angry because building materials suppliers and property developers are ripping off the South African consumers.

A brand new ‘affordable’ apartment of 30 sqm costs around R300k in different parts of South Africa. It can be considerably more if you’re buying something in Clifton or Camps Bay but the average cost per square metre for an ‘affordable’ property in reasonable suburbs (including Mitchell’s Plain or Cosmo City) is around 10k per square metre.

Talk to the developers and they say the high costs of developing a site, combined with the high costs of labour and materials determine the price of the property when it is released onto the market.

All the developers are really quick to claim that the profit levels are minimal particularly when the money is tied up for so long before the first unit is sold. So if they’re not making good profits, why are they doing it?

The answer is actually that they are making huge profits and they’re just fudging their answers to dissuade me (and you) that they’re making lots and lots of bucks.
Much the same pattern applies to material suppliers. These organisations blame everybody else except themselves for the exorbitant prices of cement, bricks, plaster, tiles, fixtures and fittings and even glass.

The manufacturers and suppliers point fingers at the retailers claiming that they are the ones who are keeping prices high; then they point another set of fingers at the high costs of transporting their products from the factory to the site (or the retail outlet). They even blame the low productivity of workers for the high prices of products made for the building industry.

Do they blame themselves or do they reduce their margins? Not a chance. In fact year after year your large material suppliers provide handsome dividends for their shareholders. So, like developers, they too are making money – and lots of it.

The final culprit in this rather depressing cycle of profiteering is the banks themselves. You see it’s the banks that are prepared to fund the developers and then grant the bonds for each pokey little flat measuring five metres by six metres into which has been crammed a kitchen and bathroom too.

Recently, Human Settlements Minister Tokyo Sexwale urged developers, material suppliers, architects and engineers to come up with innovative ways to resolve the housing problems that face South Africa.

Well, here’s a thought Mr Minister: how’s about getting the developers, the materials suppliers and the banks to stop profiteering. How’s about getting them to stop driving prices higher and higher?

How can we do that?

Well let’s look at the existing position first of all. One of the attractions for buying a new property – particularly for first-time homebuyers – is that a new property is free from transfer duty and, in many cases, first-time buyers even qualify for 100% bonds.

Sometimes buyers are supported by a developer who offers a cash-back advance to them if they sign the deal. In fact, on a 140 sqm house costing R1,4-million I was offered a R50k cash-back (to spend on new furniture or other things I was told) if I agreed to buy the home.

If I was prepared to buy a slightly bigger place, costing R1,6-million then I’d get R100k cash-back advance. Sign the deal, get the money and spend it on a new plasma TV for the lounge, curtains for all the bedrooms, new furniture for all the rooms, buy some new appliances and so on. Even spend it on having a holiday after all the stresses of moving if I choose to.

And developers tell me that they’re not making handsome profits. Pull the other leg Mr and Mrs Property Developer.

Do you ever hear about a cash-back advance on the sale of an older property? Do you get any relief on transfer duties, bond costs, legal fees or any of the other charges that are added to a property transaction? You don’t even get a discount on stamp duty.

So what we know, clearly, is that the deposit, the transfer fees and the other charges make older properties unaffordable for first-time buyers unless they have a large amount of cash in their pockets to spend on the property.

So the stumbling block that’s preventing sales of second-hand homes is the additional costs that must be covered. That being the case, Mr Minister, why don’t you and your advisers come up with a way to reduce those costs or at least make them affordable for many millions of South Africans?
Of course the argument is that developers are paying Value Added Tax on the materials they buy and because of the VAT the property doesn’t attract transfer duties.

So what about a VAT amount that gets included in the sales price of older properties (and therefore is included in the price) instead of transfer duties.

That way people could get a bond (including VAT) for the second-hand property they want to own and not pay any transfer costs at all. Sure, they’d have to cover the legal fees to feed the ever-hungry attorneys that do all the paperwork but those costs are relatively small compared with the many other charges.

Perhaps there are other ways that you, Mr Minister, can come up with to resolve the sales of property in the second-hand market and I think that there are many possible solutions too. But the reality is that the problem of transfer fees, deposits and other costs must be addressed.

More importantly than that, though, is that if you re-energise the second-hand property market the bottom will fall out of the market for new properties. Particularly so if banks come to this party and provide the bond finance required to buy older properties.

If that happened, the price of new homes would plummet.

And, if developers stop developing new properties, the materials suppliers would find that their sales levels fell sharply and they’d be forced to do something about their prices too. Like a pack of cards, the materials prices would come tumbling down too.

And so the entire cycle for reducing costs would start to work: Materials prices fall; new property prices drop correspondingly and stay there until new buyers come into the market and start buying properties that are actually affordable.

But to claim, as developers do right now, that a pokey little apartment costing R10k per square metre in a distant suburb far is ‘affordable’ is nonsense.

If you ask me, affordable is about half of that?

*Hartdegen writes a regular column for Property24.com. The content of his columns constitutes his personal opinion and doesn’t pretend to be facts or advice.

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.

1000s of repossessed houses up for sale

Anyone wanting to buy a house right now should start by checking out the repossessed properties that all the banks have listed on their websites (or websites hosted by some other company on their behalf).

This week I was wondering what prices were like in the repossessions and auction markets because, frankly, I’m flabbergasted at just how much money people are currently spending on properties.

I regularly see sales of luxury homes costing R38-million in Constantia, R54-million in Sandhurst or a staggering average price of R11,8-million in Clifton. That’s not for some mighty mansion, but for one of those pokey little apartments with no parking that scorches under the blaze of the setting sun.

I set about researching some of the auction and repossession websites and found some interesting information lurking in the pages: first of all, if you thought that houses in the middle- and low-income groups were the only ones being auctioned or repossessed, think again.

There are screeds and screeds of properties with bonds of R3-million and more listed by the banks. There are even properties of close to R10-million listed alongside the rather quaint commentary that the estimated bond repayment is R87,973,38.

To afford that sort of bond, the monthly household income would have to be at least three times that, at about R265,000. Some people in South Africa are obviously earning great sums of money.

None of the banks’ websites give any clear indication of whether or not the offer you might make will be accepted but there are guidelines: for instance, on one property I saw the asking price was R2,5-million but the best offer received so far was R1,8-million or R700k less.

It hasn’t yet been accepted (so I guess the bank is waiting for someone to offer a bit more) but if no-one does offer more for the property then it will probably be accepted and somebody will have just saved himself or herself a fistful of money.
I tried to establish exactly how many properties in possession are listed by the banks but they clearly are not too keen to publish this information so you have to laboriously count the properties that are listed. And, predictably, some of the information on the website itself is bound to be out of date too.

My calculations reveal that there are at least 5,000 properties in possession among all the banks but that is probably a hopelessly low estimate because the banks do not provide any kind of full disclosure when it comes to these figures.
What it does tell me though are some other interesting things:

- At least 5,000 families have lost their homes and are probably living in rented accommodation or have moved back to the family home;

- The banks will have to protect these properties from being vandalised at an enormous cost to their shareholders. Any property that stands empty for more than a couple of days is bound to have its fixtures and fittings stripped out by greedy thieves;

- There are at least 5,000 bargain properties to be had in the current market in places that many people would like to live;

- The prices that are reflected on the websites are a guideline and nothing more.

Of course the range of properties on offer is enormous and, I suppose, in the main centres of Johannesburg and Pretoria, Cape Town and Mandela Bay, Durban and Bloemfontein the number of properties in possession is predictably higher than in the more remote, smaller cities such as Kimberley.
Absa, which has an unusually unfriendly website of repossessed properties provides simple guidelines on the asking price only and it lists the least number of properties in possession despite claiming to be the largest mortgage lender in the country.

I find this strange but I must admit that I find a lot of things about Absa strange and I’m not sure that the information on its website reflects the true picture. That’s academic, however, because the real point of the exercise was to establish whether there are bargains to be had from the banks directly.

And it certainly seems that there are.

Of course, some people might like to actually attend the auction sales when a distressed property is sold in a particular suburb. But for those people like me who have to work for a living, it makes sense to browse through the properties that are available and then make an offer directly to the bank (or in some cases, to the estate agent working for the bank).

Of course this was another anomaly for me: why, if the bank is advertising properties in possession would it want to pay an estate agent to market the property for them. That’s me being naïve because, I suppose, the banks are putting the house on show (via the agent) every weekend to prevent vandalism and, hopefully, to get an offer that vaguely resembles the price being asked.

And, worse than that, they’ve probably negotiated a specially low commission rate with the agent too because that’s the way the banks work.

So if I were about to buy a house I would start off with the properties in possession and then I would make a ridiculously low offer for the property. The worst that can happen is the offer is rejected and you have to revise the price.
More importantly, where there is an agent listed for the property, I’d insist inspecting the property as soon as possible. The reality is that these properties do get stripped, vandalised and damaged. And the garden, the swimming pool and those pretty ponds soon become an eyesore and you will have to pay for all the necessary repairs yourself – or insert special conditions in the purchase agreement stipulating what remedial work must be done before occupation.

The other thing to ensure is that you will be absolved of all liability when it comes to electricity, rates and taxes. While these charges are obviously not for your account, more and more councils are refusing to reconnect services or provide clearance certificates if there is an outstanding amount on the previous account.
This means, of course, that the bank would have to pay these charges and not you. But what’s the point of moving into a new house and then discovering that you can’t get the electricity supply connected until the outstanding account of R69,781 has been paid. So make sure that these things are tied up and sorted out when you sign the offer to purchase.

If you can’t find a house that you like through the properties in possession of banks then scour the neighbourhood for auction sale signs and watch the Thursday and Friday editions of the newspapers as these usually carry details of auctions that are pending or properties about to be repossessed too.

There are thousands of bargains to be had in the auction and repossessed property market and while it may seem rather mercenary, the reality is that the banks and the auction houses want to dispose of the property as quickly as possible.

So keep your eyes open wide.

*Hartdegen writes a regular column for Property24.com. The content of his columns constitutes his personal opinion and doesn’t pretend to be facts or advice.

Commercial property under pressure

The outlook for the commercial property market is bleak with developers and bankers taking a far more cautious view of this sector says property economist Francois Viruly of the University of the Witwatersrand’s School of Construction Economics and Management.

He warns that there has been a dramatic drop in the number of developments underway and even existing projects are being reassessed to avoid adding to the widespread over-supply of office accommodation.

“Office vacancy rates have increased since last year and this picture is unlikely to change before 2011 or perhaps 2012,” he warns. “Increased spending in the retail sector might have an impact on reducing vacancy rates in retail shopping centres in the short term,” he claims.

Hyprop Investment’s Mike Rodel says that the time is ripe to get particularly good rental deals from agents or developers who are keen to boost occupancy levels. Rodel says that Hyprop is expecting national retail sales growth of between 7% and 10% over the next two years with regional centres growing by up to 12%.

Rodel says that the margin of operating costs to gross rentals has continued to rise and increased from 30% two years ago to 40% now and high vacancy rates have made it difficult for owners to pass the rising costs on to the tenants.

Viruly warns that the biggest difficulty facing developers is to keep the operating costs in retail centres under control as the operating margins are too high at the moment and need to be brought back under control.

“There are likely to be some retail opportunities that do arise in the short term – such as for retail space on Gautrain stations – but the retail property market will remain under pressure until at least the second half of next year,” says Viruly.

Broll says that while there has been pressure on the retail and office market, there are still some impressive deals being done. The company recently sold two investment properties in Cape Town.

The first, 43 Bloulelie Crescent in Plattekloof sold for R13,5-million and 5 Ravenscraig Road in Woodstock sold for R33,75-million.

The Bloulelie Crescent property is let out to medical professionals while the Ravenscraig Road building is home to a large printing firm in a traditional industrial area.

According to Sean Berowsky, national property investment specialist at Broll, the interest levels from investment buyers has remained high, particularly for prime commercial and industrial properties.

He concedes that transactions have been restricted by the limited negotiability of sellers because of prevailing low interest rates and the limited stock that’s available.

“The difficult funding environment facing buyers means that there must be a substantial injection of equity,” he says. “Well-tenanted properties with good income streams are still easy to sell whereas buildings with high vacancy rates are not attracting much interest at all,” he adds.

State of the Nation: South Africa (Oct 2010)

Latest trends

Year-on-year (y/y) price growth in the value of middle-segment homes for which Absa approved mortgage finance, slowed down significantly in recent months up to September this year

The average nominal value of small, medium and large houses increased by a weighted 2,9% y/y in September, after a revised growth rate of 5,4% y/y was recorded in August.

On a month-on-month basis the average nominal value of a home in the middle segment of the market is declining since May this year, bringing the average price to R1 012 200 in September - down by R42 700, or a cumulative 4%, after peaking at R1 054 900 in April.

The real value of middle-segment homes increased by 1,8% y/y in August (4,2% y/y in July), based on consumer price inflation slowing down to 3,5% y/y in August from 3,7% y/y in July.

The current downward trend in year-on-year house price growth can to some extent be ascribed to base effects, as a marked recovery in price growth occurred in the second half of last year.

However, month-on-month declines evident in average house prices over the past few months are probably related to developments on the economic front (lower real GDP growth in the second quarter of 2010; tight employment conditions in the first six months of the year; trends in consumer finances (lower second-quarter real income and consumption growth, while the ratio of debt to disposable income remained high); interest rates dropping by only 100 basis points so far this year; and consumer confidence remaining flat in the first three quarters of the year).

In the category of small houses (80m²-140m²) the average nominal value was up by 18,6% y/y in September, down from a revised year-on-year growth rate of 21,1% in August.

The average value of a small home came to about R779 200 in nominal terms in September. The real value of a house in this segment was up by 17% y/y in August, after rising by 18,6% y/y in July.

The average nominal value of medium-sized houses (141m²-220m²) increased by 4,1% y/y in September (a revised growth rate of 5% y/y was registered in August this year), which brought the price in this category of housing to around R953 600.

Real price growth of 1,4% y/y was recorded in August, down from 1,9% y/y in July.


In respect of large houses (221m²-400m²) the average nominal value increased by only 0,4% y/y in September (1,5% y/y recorded in August after revision).

The value of a large house came to a level of around R1 411 200 in nominal terms in September.

In real terms the average value of a home in the large segment was down by 1,9% y/y in August, after declining by 0,8% y/y in July this year.

Outlook

In the first nine months of 2010 the average nominal value of middle-segment homes increased by an average of 9,1% y/y, with real price growth averaging 4,9% y/y in the period January to August.

Real price growth recorded over this period is based on an average headline consumer price inflation rate of 4,7% y/y in the first eight months of the year.

Based on the abovementioned house price trends up to the third quarter of the year, nominal year-on-year price growth of about 7% is expected for the full year. Real house price growth for 2010 will be dependent on nominal price trends as well as average consumer price inflation for the twelve month period.


*Jacques du Toit is a senior property analyst at Absa Home Loans

Home buyers need 40pc higher deposit

The average deposit reached 43 per cent in September, up from 30 per cent in December 2006.

It is a fresh blow to first-time buyers as it equates to £70,000, based on average house prices. This is almost three times the average salary and £20,000 more than the deposit required four years ago.

However, it is not the highest average deposit since records began four years ago. Levels reached 49 per cent in December 2008 as the credit crisis began to tighten its grip.

It comes after the Bank of England warned last week that banks are becoming even stricter about who they will lend money to amid fears that higher unemployment will lead to home owners defaulting on their loans.

The latest mortgage research by surveyors e.surv also found that not all buyers are being treated equally. Those buying cheaper properties are being squeezed the most, typically needing a 35 per cent deposit compared to 25 per cent four years ago. It means they can borrow 11 per cent less than previously.

By contrast, those buying properties worth at least £500,000 can borrow just 4 per cent less.

Richard Sexton, business development director of e.surv said: “Tighter loan to value criteria have hurt everybody, but those at the bottom of the ladder have been hit disproportionately.

“One in five borrowers wants to buy a home worth less than £125,000. They are the classic first-time buyers, but they are still trailing far behind wealthier home buyers in their access to finance.

“Those financing homes in the £500,000 price bracket are only around one twentieth of buyers. For them, it’s as if the credit crunch hardly happened. This is a concern as first-time buyer participation is central to any sustained recovery in house prices.”

It comes after property experts warned declining house prices are “inevitable” after Nationwide revealed its latest house price index last week.

It reported typical values rose 0.1 per cent in September to £166,757 compared with the previous month. But this was not enough to halt the drop in annual house price growth, which slid from 3.9 per cent in August compared with the previous year to 3.1 per cent in September.

Mr Sexton added: “House prices today are almost exactly at the same level as four years ago, but the size of deposit needed has risen £20,000 to buy a typical home.

“Lenders are nervous about the state of the economy and the future direction of house prices, and their ability to fund their mortgage lending is constrained by the demands from regulators to bolster their capital reserves.

That means only the best quality borrowers are offered loans, and on much tighter criteria than before.”

Outlook for UK housing market bleak

House prices in Britain fell by 3,6% in September, the largest drop in prices since 1983 according to mortgage lender Halifax.

It says the figures show that the housing market there is rapidly losing steam after a brief recovery last year.

However, rival mortgage lender, Nationwide claimed last week that house prices actually rose by 0,1% and analysts point out that the drop in prices may just be a seasonal blip rather than a worsening trend for the property market.

Halifax says that for the three months to September house prices in Britain were down by 0,9% compared with the same period last year and points out the rate of decline is significantly slower than the quarterly changes of between 5% and 6% seen in the second half of 2008.

Mortgage approvals data supports Halifax’s views that the outlook for the property market in Britain remained bleak. The September data conflicts with the data released in August when house prices rose by 0,4% and showed an increase in the three-month annual rate of 4,6%.

Halifaxexpects the housing market to fall slowly for the rest of this year and it to continue to decline in 2011.

UK mortgage approvals hit 16-month low as housing market slows

Published: 10:35AM BST 23 Sep 2010

The number of mortgages approved for house purchase in Britain slumped to a 16-month low in August as activity in the housing market continued to decline.

For most of the year the number of loans approved for people buying a home has been running below 36,000 - a level economists consider to be consistent with house price falls Photo: Reuters

Only 31,767 loans were approved for people buying a property during the month, the lowest level since April last year, according to figures from the British Bankers' Association on Thursday.

It was the third consecutive month during which mortgage approvals fell, despite the fact that the property market usually sees a bounce in activity during the summer months.

The number of loans approved for people buying a home has been running below 36,000, a level economists consider to be consistent with house price falls, for most of this year.

David Dooks, BBA director of statistics, said: "Demand for mortgages continues to be weak despite more properties coming on to the market.

"Even with stable or falling house prices, the current economic climate makes it unlikely that demand will pick up in the near future."

Today's figures are the latest in a run of gloomy data on the housing market, with Nationwide reporting price falls of 0.9% in August.

The Council of Mortgage Lenders said earlier this week that lending in August fell to its lowest level for the month for a decade, while HM Revenue & Customs reported a fall in the number of homes changing hands during the month.

The drop in activity since the beginning of this year has prompted some economists to predict the market could be heading for a double dip.

But others have said recent falls in house prices are not unhealthy as the recovery in the property market had got ahead of improvements in the wider economy.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "The BBA data showing mortgage approvals sinking to a 16-month low in August heightens our belief that house prices will trend down over the coming months.

"We suspect that house prices will fall by around 10pc between now and the end of 2011.
"In our view, the housing market really has not got much going for it at the moment, apart from low mortgage rates - and that is if you can get a mortgage."

But there was some slightly better news in the BBA figures, with net lending, which strips out redemptions and repayments, rising to £2.55bn - its highest level since February.

However, the figure was well down on the £3.35 billion advanced in August 2009.
The BBA attributed the ongoing weakness in net lending to the fact that homeowners were focusing on paying down their mortgage.

Credit card repayments were higher than new spending during the month, but once interest and charges were factored in, outstanding plastic debt rose by £172m.

Borrowing through loans and overdrafts contracted for the 16th consecutive month, with consumers repaying £187m more than they borrowed.

Savings levels bounced back in August to reach their highest level since March, when figures are often boosted by the approaching end of the tax year.

The amount consumers deposited rose by £2.19bn, up from an increase of £514m in July.

Airports let property markets take off

The development of airport infrastructure around SA is fuelling nearby commercial and residential property markets and while there are many who decry the effects of noise pollution, the impetus seems unstoppable.

So says Gerhard Kotzé, CEO of the ERA South Africa property group, who adds that airports and their expansion still generate mixed reactions, but there’s little doubt that the economies of surrounding areas benefit.

“South Africa, under the impetus of the Soccer World Cup and other influences, has extensively upgraded its airport infrastructure recently in terms of both international and regional feeder services.

“Unsurprisingly, the biggest investment of late has come from the Airports Company of South Africa (ACSA), which has now come to the end of a R17bn development programme, including the commissioning of spectacular new terminal buildings at OR Tambo International, Cape Town International and KZN’s King Shaka International airports among others.”

This kind of parastatal development is to be expected, he says, particularly in support of a major sporting event such as the World Cup but it’s interesting to note the private sector development of airports in recent years as well, including the major upgrades of Lanseria and Wonderboom airports.

“And new property development flows in the wake of these projects - in the case of Lanseria International for example, now Gauteng’s second biggest airport, a new R200m industrial estate with further investment of some R7bn over time is in the pipeline which in turn is expected to spark off additional residential development.

“Surrounding Wonderboom, a residential air park is being constructed along the lines of much talked-about developments of this nature in the US elsewhere in the world, while in the Welkom area a R3bn, three-phase development project including residential, entertainment, cultural and sports facilities is reportedly on the cards.”
Similarly, the development of King Shaka International north of Durban has definitely stimulated property markets in La Mercy, Umhlanga, Ballito and other north coast centres while in Mpumalanga, the Kruger Park

Mpumalanga International airport is credited with spurring all manner of economic activity in Nelspruit and beyond, Kotzé notes.

“Clearly there will always be those who avoid acquiring property in airport approach areas, but on balance it would seem the benefits of airport development for the property sector are very positive.”

Elwyn Schenk, Pam Golding Properties (PGP) area principal in Umhlanga, Umdloti and La Mercy areas, says the Umhlanga node north of Durban is firmly entrenched as the area of choice for residents, investors and commercial end users alike.

“Thus prices in the area have remained fairly stable during the difficult economic conditions. Part of the reason for this, we believe, is that the potential for the area has been enhanced by the King Shaka International Airport and the Dube Tradeport.”

Durban's north coast has all the ingredients to develop into a similar, but still different, version of Cape Town's Atlantic Seaboard.

“The mild and sunny climate year round, beautiful beaches – add to this the rapid growth of the Umhlanga node and proximity to Gauteng (one hour's flight) and you have all the ingredients for rapid future growth. While certain areas such as Umhlanga and Umdloti are heavily developed, there is significant coastal land still available for expansion, in particular La Mercy, 5km from King Shaka Airport, offers substantial potential.”

“Global trends have shown that areas in close proximity to an international airport benefit from sustained and rapid growth. Commercially the Dube Tradeport will serve as a catalyst for economic development which will see KZN emerge as a major SA business node, serving Sub-Saharan Africa and the Far East in particular.

Experience has shown that property prices, both residential and commercial, will benefit from these developments. Commercial demand will come for hotels, engineering and other industries which service the airport, such as food services and import/export companies.”

Schenk says apart from the normal infrastructural development around airports – fuel depots, catering services, maintenance etc. – history the world over has shown that a new airport in particular will bring substantial additional development in peripheral industries such as freight companies, import/export agencies and related activities. “Passenger services and hotels are also attracted to a new airport facility.”

“Thus airports bring in their wake a substantial permanent population, together with a transient population ranging from contract workers to every day tourists.”

The effects of these demographic changes on the property industry are profound, especially in the medium to long term. “The trend for big businesses to move from the CBD into the north has been evident for some years and Umhlanga has been a prime beneficiary of this.”

He says future expected trends arising from the airport area will be a demand for mid-price housing from the blue collar workers, a surge in rental demand for the same reason and an increase in investor demand.

Clive Greene, PGP principal in Ballito, says the King Shaka Airport has created positive sentiment in the market. "Rental enquiries have increased twofold."
He says enquiries on properties for under R1m in the vicinity of the airport have picked up. “Sales on these lower cost properties are selling well. Caledon estates are nearly sold out with over 100 units sold.

In Sheffield Manor Estates there have been over 50 sales in the last five months and Sheffield Manor over 100 sales in the last 10 months. Simbithi Estate continues to sell very well, offering a secure lifestyle for old and young families.

He says commercial development will definitely increase as land has been allocated around the airport for development and Ballito is starting to offer large tracts of land for commercial use. “This, in turn, will increase demand for more residential property. The future for this area in the medium to long term is exceptional.” – Eugene Brink

Strand Beach Road sales pick up

The Strand Beach Road property market has showed positive signs contrary to the general SA sectional title market during the 2008/9 period with growing sales figures since the latter part of 2009 – comparative to the depressed sales of the 2008/9 period

Benhard Wiese, principal associate of Cape Coastal Homes, says these better-than-national sectional title sales figures are attributable to the area offering much better value per square metre than the similar property offerings on e।g. the Cape Atlantic seaboard.

“The buyers interested in Strand Beach Road are also buying with a long term view – mostly viewing the property as their second home to be converted into their retirement home.”

He says only 7% of the registered sales of apartments older than three years on Beach Road have during 2010 been for less than present comparative property values per sqm – a sign of a solid market that escaped the storms of 2008/9 relatively unscathed.

“The availability and affordability of credit coupled with the surplus of available new development apartments on Beach Road since 2007 had suppressed capital growth during 2008 to 2010. According to CMA Info, there had been 46 sales in Strand Beach Road during 2008 - that is about four sales per month.”

The volume of sales, however (excluding inheritance), during 2009 grew to 86 transactions of which 25 were new developments and 61 were older complexes.

Excluding all new developments registered in the Deeds Office, there was still a growth in sales volume of about 37% from 2008 to 2009 on Strand Beach Road - totally contrary to statistics from SAPTG which indicate that nationally sectional title (apartment) property priced between R300k to R5m reported an overall decline of 39% in transfers between 2008 and 2009.

The average price per sqm for the 61 registered sales in 2009 for all apartments older than four years on Strand Beach Road (i.e. excluding the new developments which occurred at a higher average price per sq/m) was about R12,900/sqm whilst the new developments registered average prices in 2009 was R17,725/sqm.

The first semester of 2010 has seen a continuation of the growing sales trend on Strand Beach Road with 41 sales being registered according to SAPTG in the Deeds Office of which 14 were new developments built since 2008 (e.g. Hibernian Towers and Topaz).

The average price per sqm for the registered sales in the first semester of 2010 for all apartments older than four years on Strand Beach Road (i.e. excluding the new developments) was about R13,462/sqm.

The new developments average registered prices in 2010 have been ranging between R12,686/sqm for Ocean View to R23,225/sqm for Topaz.He says total registered sales for the first semester of 2010 for the 4 new developments on Strand Beach Road had been R30,524,151 at an average of R15,439 for the 1977sqm sold. That is about 13% lower than the average registered sales prices achieved for new developments during 2009 of R17,725 per sqm.

Interestingly enough, there has only been about a 13% difference in average prices obtained (registered) between older apartments and new developments (less than four years old) during 2010. The present price structure of Beach Road properties can be roughly categorised in different groups according to "age, finishes and size".

The smaller the apartment, the higher the price achieved per sqm. The quality of sea view also has a big effect on the property’s value.Prices obtained in 2008 varied between R7,600/sqm (Strandsig) to R24,700/sqm (Cape Sands). The apartment prices in 2009 varied between R8,500 per sqm (Welgelegen and Jacomahof) to R23,900 per sqm (Hibernian Towers). Beach front apartments were selling in 2003 from about R6k/sqm to about R9k per sqm.

Beach Road property in general has not been subjected to the same forces which have been experienced in e.g. the buy-to let investor property sectors where capital growth has seen fairly substantial drops. The growing foreclosure or bank repossessions trend created during 2008/9 and during the first semester of 2010 effected a strong downward pressure on prices obtained in the buy-to-let property market.

Some auctions at the entry level investor sectional title market (priced at up to R450k) have towards the end of 2009 seen prices drop by as much as 50% of what was the perceived value of the property in 2007. Auctions on Beach Road have, however, been a very small part of the transactional horizon and were therefore not a distinct negative capital growth factor at all.

Only a few distressed sales in some of the new developments took place – without any real effect on the rest of the older blocks, where most of the owners opted to keep their apartments from the market – especially if they did not need to sell.

From the 27 sales which had been registered in the Deeds Office during the first months of 2010, only two transactions took place at prices which seem to be much lower than other comparative properties per sqm – a Romilly apartment at R8,426/sqm and an apartment in Strandsig at R7,432/sqm.Only 7% of all transactions on Beach Road during 2010 amongst the older-than-4-year-old apartment blocks had been registered for much lower than comparative market value.

The last two years has been a sobering period for all property owners in the country – including Beach Road Strand. The unrealistic capital growth expectations have been tempered to pre-2003 growth levels.

Although apartment prices got far “out of touch” with incomes levels during the boom, it is to be expected that inflation will in the next few years close this gap considerably.

“Strand Beach Road has during the last few decades always operated on an eight to ten year tide pattern – with surges of new developments coming every eight to ten years. Buyers who are waiting for Beach Road prices to drop are doing it at their own peril,” he concluded.

How Affordable is Cape Town Property?

Amid tough economic times and ongoing difficulty in obtaining mortgage finance, the importance of affordability in the housing market remains paramount.

Accessible pricing remains a major obstacle to many new entrants to the housing market, and is a crucial factor for many other buyer types, including those downscaling for retirement or wishing to upgrade to meet the needs of a growing family.

Yet affordable homes are not a myth, says Pam Golding Properties’ MD for the Western Cape metro region, Laurie Wener.

“There are a number of suburbs in the Cape Town metropolitan area where one can obtain decent, well-built homes in the R600k to R3m price range, ranging from compact apartments ideal for young couples and professionals, to larger free-standing homes. If one only knows where to look, one may be surprised by the value for money which can be obtained, and the large variety of stock which is currently on offer.”

Western Seaboard Cape Town’s Western Seaboard has long been a popular area for first-time buyers, young professionals and downscalers seeking compact, affordable homes which are easy to maintain.

In recent years as the residential area has expanded in size, so too has the offering of schools, shops, hospitals and other amenities, making these suburbs increasingly popular with young families as well.

PGP’s area manager, Ivan Swart, says there is a wide variety of affordable housing options to choose from in suburbs like Parklands, Sunningdale, Flamingo Vlei and Bloubergrant, as well as in the Melkbosstrand area further to the north.

These range from studio apartments to secure complexes and even free-standing homes. “Newer areas such as Big Bay and Atlantic Beach Golf Estate are growing rapidly in popularity with this segment of the market, and we continue to see a lot of offers from first-time buyers, older buyers downscaling for retirement, and young professional couples.

Unfortunately the limited access to mortgage finance remains an inhibiting factor, but the demand is certainly there.”

For R600k to R1m, one can obtain a two-bedroomed apartment, ideal for new entrants to the housing market and young couples. In the R1m to R2m price range, one can buy a sizable free-standing family home with three bedrooms and a double garage in Parklands, Sunningdale, Flamingo Vlei, Bloubergrant, or Melkbosstrand. This price bracket will also secure a starter home in the secure Atlantic Beach Golf Estate.

“For buyers in the R2m to R3m bracket there is even more choice, from a free-standing starter home in the Atlantic Beach or Sunset Links Golf Estates, Big Bay estates or Sunset Beach, to a two-bedroomed beachfront apartment, suited to those who are retiring or for those wanting a lock-up-and-go lifestyle.

We have a wide selection of stock in the latter category at present, with some excellent value for money on offer.”

South Peninsula

The towns of the South Peninsula also offer a number of options for buyers seeking property below R3m – and they often come with a view or even walking-distance access to the beachfront।

One can obtain a free-standing three-bedroomed home in Kommetjie for under R2m, or a cottage in Scarborough for R1,25m.

PGP’s area manager Sandi Gildenhuys says there are also a number of homes in this price range in Fish Hoek. “One can obtain a one- or two-bedroomed apartment in central Fish Hoek for just R500k to R600, while most free-standing homes in the valley sell from around R850k to R1,4m.”

Mountainside properties commanding panoramic views are a little pricier, but still a very affordable R1,8m to R3m. The town has always been popular with retirees due to its lovely flat and easy-to-access beachfront, but is also attracting young families and even professionals who commute into town.

Towns like Kommetjie and Noordhoek are also attracting increasing numbers of young families who are choosing to raise their children in a more rural environment, and who want affordable, sizable family homes.
Southern Suburbs
Cape Town’s leafy Southern Suburbs are widely perceived as offering quality family homes on large plots, located close to the University of Cape Town and a number of top schools. The reputation is fully justified, and such homes frequently come with substantial price tags.

But, says PGP’s area manager Howard Markham, it would be inaccurate to think that the Southern Suburbs are out of range of smaller budget buyers. “There are a number of options for entry-level buyers and young couples wanting to obtain a foothold in this sought-after market, and even for family buyers needing larger homes.

“Suburbs such as Observatory, Claremont, Kenilworth and Pinelands offer plenty of homes priced under R3m, as do Bergvliet and certain pockets of Tokai. One can still obtain a three-or four-bedroomed home on up to 800sqm, within this range.

And Harfield Village, for example, is growing steadily in popularity with first-time buyers and young couples without children, who love its manageable-sized plots, attractive homes and central location. One can buy a four-bedroomed home with a double garage here for R2,35m.”

Markham says there is also limited activity in the investor market under R3m at present, mainly from parents buying sectional title units for their student children.
Atlantic Seaboard and City Bowl

The growth of residential opportunities in Cape Town’s Central City has opened up many new options for entry-level buyers and those seeking homes under R3m.

One can obtain starter apartments in the heart of the business district for around R500k for a bachelor unit, or R1m to R2,5m for larger two-bedroomed options. These are extremely popular with young professionals working in the city, and are also considered by investors due to the rental returns they can command.

Those wanting to live close to the sea might consider Mouille Point, where one can still obtain a one-bedroomed apartment from R1,25m. And in neighbouring Green Point, bachelor flats are priced from around R500k, while larger two-bedroomed units can be obtained for closer to R2m.
Although more upmarket areas of the City Bowl, such as Oranjezicht and Vredehoek, tend to attract higher prices, it is still possible to obtain older homes in these areas for under R2,5m, says PGP’s area manager Basil Moraitis – if one has the budget and willingness to carry out renovation work.

Lanice Steward, MD of the Cape Peninsula estate agency Anne Porter Knight Frank (APKF), says the emerging middle class will boost prices in the traditional Cape suburbs.

“Anyone buying for investment purposes in the Cape Peninsula right now will be onto a sound investment no matter which suburb he chooses,” said Steward.

“The reason is clear: with a mountain and a nature reserve taking up 65% of the available land, property in the traditional Cape suburbs will increasingly be in short supply. It is in these traditional suburbs that the emerging middle class aspire to live.

“This does not mean that Cape Flats suburbs like Grassy Park, Mitchells Plain and Ottery will not gain in value, but areas like Lower Wynberg, Rondebosch East, Diep River, Retreat, Goodwood and Sea Point, which are still low priced are set to take off.”

The best long term prospect, and the one she would tip to any person looking for a lifestyle as well as a sound investment, said Steward, is Simons Town.

“With commuting problems hitting the outlying areas, the convenience of a comfortable 53 minute train ride to the city is increasingly appreciated. Add to that a charming Southampton-type main street, good restaurants, a flourishing yacht club, a challenging golf course (currently in near-perfect condition), a lively cultural life and wonderful mountain walks and minimal crime, and it is quite clear that a decade from now Simons Town will be the place to live.”

This fact, said Steward, is already recognised by buyers who can expect to pay anything from R2,5m to R4m for a standard three bedroom house, but who are still able to find bachelor pads below R1m while at the upper end of the price range there are many homes priced in the R10m to R20m bracket. – Eugene Brink

Home owners must reduce prices by 10pc to sell properties

A total of 32 per cent more estate agents reported a fall rather than a rise in house prices in August, compared to 8 per cent the previous month, according to the latest housing survey from the Royal Institution of Chartered Surveyors. That is the lowest reading since May 2009.

It comes amid a decline in the number of first-time buyers – a key component in maintaining values.

Stuart Allan, a RICS member from Bishop Auckland in Co. Durham, said: “There is a dearth of first-time buyers principally due to difficulties in obtaining mortgages and this has depressed the value of houses at the lower end of the market.

“These houses are typically selling for up to 10 per cent less than the estate agents advertised prices and this is reflected throughout the market.

“Vendors or property are required to be more realistic in their sale price expectations.”

Tom Goodley, a RICS member form Norfolk, said: “There appears to be a lot of over priced houses on the market, and a shortage of buyers. The basic economics of supply and demand must prevail.”

The share of the market occupied by first-time buyers dropped to 34 per cent in July, down from 38 per cent the previous month and the lowest proportion since the beginning of the credit crisis in August 2007, according to the Council of Mortgage Lenders.

First-time buyers are struggling to get on the property ladder as banks further tighten lending criteria.

These buyers have a typical deposit of 24 per cent of the value of their home, up from 21 per cent in April.

The CML also disclosed an increase in the number of loans approved to those buying a new home to 56,000 in July, up from 52,000 in June - although this remains significantly below long term averages.

Howard Archer, of economists Global Insight, said: “This mortgage data for July remains very low compared to long-term norms and does little to dilute suspicion that house prices will remain under pressure.

“It is also notable that mortgage approvals to first time buyers actually weakened in July, which suggests not only that they may be becoming more reluctant to move into the housing market in the current uncertain economic environment. It also suggests that first time buyers are finding it hard to get mortgages.”

Nicholas Leeming, of property website Zoopla.co.uk, said: “A crucial indicator of the health of the housing market is activity by first time buyers. The lack of attractive mortgage deals, combined with uncertainty around the economic impact of the government’s spending cuts affecting both lenders and borrowers, is seeing many frustrated first-time-buyers opt for renting in the short term.

“The mortgage market remains dominated by the cash-rich, with deposits on new homes increasing once again this month.”

High number of distress sales in Western Cape

The level of indebtedness in the Western Cape is the highest in SA and this is having an obvious and adverse impact on the property market in the province.

The latest Cape Metro FNB Property Barometer reveals that just over 15% of home sellers in the second quarter of 2010 sold because they were forced to do so by financial pressure or as a result of having their homes repossessed by a bank.

The 15,5% was some 3% higher than the number selling to upgrade their homes in the same quarter – a complete reversal from the situation in 2006 – 2007.

Clinton Martle, FNB Home Loans’ regional sales manager for the Western Cape, says the Western Cape is believed to have the highest level of indebtedness, or a debt-to-disposable income ratio of 88%. Well lower in second place in Gauteng with a ratio of 88%.

“While the 15,5% is a big improvement on the figures for all four quarters of 2009 (where financial pressure caused up to 33,5% of all sales) it is still a cause for serious concern,” said Lanice Steward, managing director of the estate agency Anne Porter Knight Frank (APKF).

“This type of seller is often so desperate that they will take an unjustifiable drop in their price to get some cash in hand. This, of course, retards the growth in prices and the recovery of the housing sector generally.”

The latest review, said Steward, also indicates that only 6% of sellers are doing so now due to a relocation within South Africa. This, she said, indicates that new jobs are few and far between at the moment, “which is exactly what we would expect in a post-recession period”.

As many as 12% of sellers, however, she said, are moving to be closer to work or amenities, including schools.

“In the Greater Cape Town area, I would guess that up to 15% of those living in the Northern Suburbs and the popular fast growing areas of the West Coast are contemplating a move of this kind so as to be closer to the city.

This is because the commuting times at peak hour traffic have become intolerable. However, the problem may be alleviated by the introduction of the Integrated Rapid Transit System in 2011.”

“The good news is that this has come about because the Western Cape’s per capita income is the second highest in the country. However, an average debt level of 101% in relation to income, i.e. a debt level of just on a total of an individual’s annual earnings, will limit borrowers’ ability to get loans from the banks – who, by and large, like to see their mortgages awarded to those with little or no debts elsewhere.”

Martle says when it comes to indebtedness, it is difficult to say for sure as to how much the Western Cape’s high level of estimated debt-to-disposable income ratio is due to its high property values. “Nevertheless, I think it must have some effect.

But it is also difficult to ascertain what level of indebtedness means trouble.”
“What we do know, however, it that during the last interest rate hiking cycle, which wasn’t extreme by our historic standards, SA’s level of indebtedness caused a high degree of pain in terms of bad debts.

With the Western Cape being on the high end of the indebtedness caused a high degree of pain in terms of bad debts. With the Western Cape being on the high end of the indebtedness spectrum, therefore, one can’t help but feel that we are vulnerable to nasty surprises such as interest rate hikes and economic downturns,” he said.

Many leaders in the property sector, said Steward, have been campaigning for an easing of the National Credit Act (NCA) criteria. She, however, does not go along with them.

“If well applied, the Act does protect the purchaser in the long term. What really needs to be looked at are the onerous lending criteria applied to self-employed buyers. Although many have been forced into becoming self-employed they have become very successful and are entrepreneurial – exactly the type that South Africa needs right now.”

In most cases, added Steward, the FNB Property Barometer shows that the higher the earnings, the larger the debt incurred. People earning above R750k per annum, she said, have an average debt in relation to income of 156% - over 50% higher than the average for the Western Cape. Under the NCA rules, this makes it very hard for them to qualify for a bond of the size they would probably feel necessary.

Martle concluded by saying that “if you are not on the housing ladder, now may be a good opportunity to get on”. “However, I continue to urge people to buy well-within their means, bearing in mind that interest rates ultimately do rise, not to mention huge electricity and possibly other utilities tariff hikes to come.” – Eugene Brink