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Property 24/10 - 150

4 April 2013

Would you buy your own house?
A sound way of determining if your house is market-ready is to ask yourself, would you buy your own home? This is the word according to Richard Gray, CEO of Harcourts Real Estate South Africa, who says it’s a question that calls for an honest answer, best arrived at by an objective analysis of its best and worst features. 

“And if you find it difficult to be objective, get input from someone else who will be honest since an honest answer will help you arrive at a realistic selling date as well as an achievable selling price,” he advises. 

Sellers generally don’t see their homes with the same eyes of prospective buyers, he continues. He says broken windows, peeling paintwork, missing roof tiles, sagging gates and mould in the shower – these tend to go unnoticed by owners after a while. Yet, he says, they are detractors that will stand out a mile to buyers, who will either be put off the property completely or they’ll use them to justify a low offer. 

“Buyers who are prepared to upgrade or renovate will not pay a premium for the property because of the danger of over-capitalising. It’s therefore critical for sellers to ask themselves what they would expect to get for their money and if their home offers this.” 
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Tips on buying commercial property
According to many economists, the outlook for the local commercial property sector for 2013 seems to be dim.However, according to Gerrie van Biljon, executive director of Business Partners Limited, on the back of these dismal views, the current environment in fact provides a good opportunity to purchase commercial property, due to the market still offering reasonable returns.

He says that some analysts are talking about rental renewal rate increases of very low percentages or even no escalations for commercial property.

“Well-known property economist Erwin Rode predicts a real drop in office rentals of between 7 and 14 percent throughout South Africa.

“However, even with low escalations investing in commercial property should be considered - it is after all a long-term investment”.
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SA shopping mall boom not sustainable
The retail industry in South Africa has boomed in recent years, supported by an increased supply of retail space, as well as a greater number of shopping centres in the country.  Indeed, over the past eight years, the retail sector has shown an average growth of eight percent per annum. However, according to Mark Souris, managing director of Periscopic, this market has finally reached saturation point, for a number of reasons.

The growth of the retail sector is primarily dependent on the consumer.

“Here we look at issues such as income, employment, increases in food and fuel costs, interest rates and the like,” says Souris.

That said, there is another challenge that this industry faces and that has little to do with the consumer: the saturation of the market.
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Mortgage growth to slow in 2013
The value of outstanding credit balances in the South African household sector showed growth of 9.8 percent year-on-year (y/y) to R1.311 trillion up to the end of February 2013 (9. 9 percent y/y in January).  According to Absa Home Loans, the components of instalment sales and unsecured credit (comprising personal loans, micro finance, credit card debt and overdrafts) continued to record relatively strong growth of 19.6 percent y/y and 27.4 percent y/y respectively in February.

The growth in outstanding household mortgage balances, however, remained low in February.

Jacques du Toit, Absa property analyst, explains that outstanding private sector mortgage balances, which include both commercial and residential mortgage loans, increased by only 1.6 percent y/y in February, impacted by a further contraction of 1.4 percent y/y in commercial mortgage balances.

“The value of outstanding household mortgage balances was again marginally lower at 2.8 percent y/y in February from January.”
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Property total returns reach 15.2%
The Sapoa/IPD South Africa Annual Property Index released recently showed that the South African property sector delivered an improved 15.2 percent total return in 2012.  This is the highest return on property since pre-recession levels, and represents a marked upturn over the 10.3 percent generated by the sector in 2011.

Income return was relatively steady at 8.9 percent, while the uplift was provided by a 5.8 percent capital growth.

Property, however, still underperformed against both equities at 20.6 percent (MSCI South Africa Equities) and bonds at 18.2 percent (JP Morgan 7-10 Year South Africa Government Bond Index).

Property values were driven higher, in part, by a 132 basis point bond yield firming over the year, although this growth was also underpinned by an overall above-inflation rental growth of 7.2 percent.
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With low interest rates, pay off debt
The prolonged low interest rates offer an opportunity to reduce household debt levels and this is likely to be the best time for consumers to fix their rates.  According to Arrie Rautenbach, head of retail banking at Absa, interest rates are currently at their lowest level in more than 30 years.

He says the bank welcomes the Reserve Bank’s Monetary Policy Committee (MPC) to keep interest rates unchanged at 5 percent with the prime lending rate at 8.5 percent.

“Although interest rates are not expected to be cut further, rates are likely to remain at current levels for the rest of 2013, taking into account trends and prospects for the global and domestic economies, as well as consumer price inflation.”

Rautenbach identifies paying down debt as a number one financial priority to be considered for 2013, noting that with low mortgage rates there is an opportunity to take advantage of today's low mortgage rates to reduce the mortgage principal balance faster.
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Student accommodation solutions
Partnerships between the private property sector and the country’s academic institutions is a credible solution to providing safe and affordable accommodation for thousands of students, says managing director, Kirstin Schubach of student accommodation specialists, the Aengus Property Group.  Schubach was commenting after shortages of student accommodation led to protests at the University of KwaZulu-Natal (UKZN) when hundreds of students were left on the street. UKZN registers up to 44 000 undergraduate and postgraduate students each year, but can only provide accommodation for 10 917 students - about 25 percent of its student body.

“Universities around the country are suffering from a shortage of student accommodation, mainly because of the massive investment needed to build and maintain student residences and the surge in the number of students attending tertiary institutions,” says Schubach. 
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