Drivers of the Property Market (The Bugle)

The fundamental drivers of the property market are the price and availability of finance. The price is measured by the interest rate and the availability by the bank’s willingness to lend money and the criteria they attach to this. Not all banks have the same lending criteria and these do change from time to time. At Seeff we regularly update and provide our clients with the most current published banking lending criteria to assist prospective buyers to understand how an application for mortgage finance will be viewed.

The published statement of the South African Monetary Policy Committee (MPC), which was delivered by Governor Gill Marcus on 19^th July 2012, provides a detailed insight into economic developments both locally and globally, and stated that the SARB repurchase rate would decrease by 50 basis points (0,5%) to 5% from Friday 20^th July 2012. This is significant as it is the first interest rate relief our economy has had in 610 days. Interest rates were last reduced on 18 November 2010. The immediate impact is that all the major banks immediately decrease their prime and mortgage lending rates by a similar amount, taken these to 8,5% from 9%. 

The MPC’s inflation forecast has been revised downwards. They now expect CPI inflation to reach a low of 4,9% in the second quarter of 2013 and to remain fairly stable around the 5% level to the end of 2014. The breakdown of CPI inflation is interesting as it indicates that some components have increased more significantly than the overall published rate. Year-on-year CPI inflation for all urban areas was 5,5% in June 2012, down from 5,7% in May. Food prices increased by 6%, petrol by 14,2% and electricity by 17,1% on a year-on-year basis. Core inflation, which excludes food, petrol and electricity is currently measured at 4,6%. Those households, which spend a higher proportion of their income on food, transport or electricity are therefore actually exposed to a higher personal inflation rate. 

The MPC statement highlighted the deteriorated global economic outlook with the Eurozone crisis unresolved, a slowing US economy in the second quarter and a UK economy currently in recession. China’s growth was recorded at 7,6% in the second quarter, its slowest since 2009, and even Brazil and India are experiencing materially slower growth. With the world being a global village, our domestic economy has also slowed and the current GDP growth forecasts are 2,7% for 2012, 3,8% for 2013 and 4,1% for 2014. The MPC is however quick to say that the risks are on the downside as South Africa, as a small open economy, will be impacted by developments in the US, the Eurozone and our other large trading partners.

Property Investment: Case Study (The Bugle)

Can you make money in property? A recent transaction in our area has provided an astonishing case study of what can happen when things really do go your way. On 23^rd May 2012, according to our deeds office records, Portion 13 of Erf 1566 in the suburb of Port Zimbali was transferred at R100m. The extent of the property is 7,2ha. The seller was Michelle Mauvis and the buyer, Formate (Pty) Ltd, under title deed T14082/2012. Ballito residents would have known this property as the Pottery Gallery, located next to Hilltop Estate. This deal followed immediately on the heels of the sale of Portion 9 of Erf 1566, the property to the north of the pottery gallery (also 7,2ha in extent) and which borders on three sides to Zimbali Coastal Resort. This property was owned by Martin Sherwood, and in fact is still registered in Straight Props 92 (Pty) Ltd. Martin Sherwood had lived on the property for a while after building a magnificent 1,300 sqm manor house, with registered name Villa D’Afrik. He had bought the property on 4^th September 2002 for R1,600,000 under title teed T50737/2002. By purchasing the company the new buyer avoided a deeds office transaction being recorded (but not transfer costs either in the form of vat or transfer duty) and would have retained a certain level of anonymity had it not been for the persistent investigative journalism. Shortly after the transaction had been recorded, massive earthworks commenced on site, raising the suspicions of the locals. Rumours that a wealthy Zimbabwean by the name of “Robert” had acquired the property, lead to the inevitable speculation that Mugabe was the actual purchaser. As the subsequent media reports have indicated, the purchaser was in fact Zimbabwean Robert Mhlanga, who had been a helicopter pilot in the Zimbabwean Air Force, and subsequently an investor in diamond mines. Contractors on site were sworn to secrecy by signing non-disclosure agreements. The sale of Portion 9 has been reported as being close to R90m. Our deeds office searches cannot reveal the original purchase price that Michelle Mauvis may have paid for Portion 13 of erf 1566, but as this property had been acquired long before the sale of Portion 9 to Martin Sherwood, my guess is that it was bought at significantly less than R1,6m. To realize profits of close to R100m on each of these transactions by the respective sellers clearly emphatically answers my original question and is nothing short of astounding! The fact that the new owner is currently embroiled in a legal dispute with the local authority has lead to further media coverage. Additional public revelations regarding the work done on site can be expected.

Rental Market Review (The Bugle)

The state of the South African Rental Market was the subject of a recent seminar I was fortunate enough to attend. Interestingly the overall number of residential properties, in the formal market, rented today is approximately 700,000. The key insights that emerged from this session related to the rate at which current rentals are increasing, the level of delinquent tenants across various rental price brackets and the buy-to-let hot spots around the country. The days of escalating annual rentals by the standard 10% are over. Actual CPI rental inflation according to Stats SA is 4,47% on average. Townhouse rental inflation was slightly higher at 5,2% than freehold house inflation of 4,34%. 

Payprop, SA’s largest processor of rental transactions, at approximately 50,000 per month, were on hand at the seminar to provide some insightful analysis of their valuable data set. Their figures indicated rental inflation at 4,9% in May 2012, down from 7% in the fourth quarter of 2011. As a landlord negotiating an escalation clause in a lease agreement, using 6% as an acceptable increase in the rental after the initial period, would be advisable. Overall CPI Inflation is currently at 5,7% and Producer Price Inflation is sharply down to 6,6% in May 2012 from 10,6% in October 2011. This indicates that the short-term direction for inflation is downward. Increases in municipal rates have impacted on the costs incurred by Landlords, while the substantial increases in municipal utilities, such as electricity, has impacted mostly on tenants who typically pay for these services over an above the rental. 

Tenant Profile Network (TPN), South Africa’s leading Credit Bureau servicing the property rental market, indicated that the best performing tenants, in terms of paying their rental on time and in full, are across the middle rental price bracket. For the R3,000 – R7,000 p.m. bracket, 84% of tenants paid on time, and for the R7,000 – R12,000 p.m. bracket 83% paid on time. The lower rental bracket, below R3,000 p.m. showed the worst performance, with only 72% paying their rental on time. Furthermore, 19% of all tenants renting below R3,000 p.m. did not pay any rent in the second quarter of 2012, up from 14% a year earlier. For buy-to-let investors this is a red flag, indicating which price bracket to be more cautious of. For those renting above R12,000 p.m., 75% paid on time, well below the 81% overall average. Current rental hot spots around the country include smaller towns in Mpumalanga and Limpopo centered around mining or power station investment activity. Our greater Ballito area is sizzling across the R7,000 to R15,000 per month rental range as more and more families migrate to the Dolphin Coast.

Search for Value: Westbrook Beach Estate (The Bugle)

Our search for value along the Dolphin Coast this week reveals a true gem, a mere stone’s throw from the southern tip of Zimbali Coastal Resort. Situated on a very well elevated site, with spectacular sea, beach and coastal views, is the Westbrook Beach Estate. Driving northwards along the M4 you will notice some of the new homes that have been built on this ridge with commanding sea views. The estate is 10,3 ha in extent, relatively small when compared to the other estates within the area, but similar in many ways to Hilltop Private Estate and Port Zimbali Estate. 

There are a total of 82 freehold properties within Westbrook Beach Estate, of which 16 have been developed. The estate has one sectional scheme, known as Sea Breeze, which is developed and consists of 29 units. Two of these apartments have been registered this year to date, and these transactions were recorded at R1,250,000 and R1,400,000. With selling prices of under R9,000/sqm this represents very good value for an opportunity located within a secure gated community. The estate levies are currently R1,055 p.m. and the sectional scheme body corporate levies are approximately R1,500 p.m. The property falls within the Ethekwini municipal area as the Tongati river to the south of Zimbali is the boundary line between the municipal districts. 

Our five year transfer data analysis for the estate indicates the following level of recorded trade: 2007 – 14 sales  with a combined value of R11,48m; 2008 – 14 sales at R10,12m; 2009 – 10 sales at R6,5m; 2010 – 9 sales at R6,13m; 2011 – 15 sales at R9,96m; and 2012 year to date – 6 sales at R3,25m. The average selling price, across all transactions, is currently R1,543,211. This places the Westbrook Beach Estate within the strike zone of the most popular price bracket in the market at the moment. 

The relatively low level of sales volumes over the past few years also provides the opportunity for current buyers to buy low before the prices start moving upwards. For anybody looking for great value for a large new completed home below R4m, this estate is a must see option to add to the list. With such excellent sea views, and conveniently positioned close to the popular Westbrook Beach, the amenities of Ballito and the airport, it is only a matter of time before these properties experience more and more demand and prices are forced upwards.