Aug 2012: Sharks Rugby vs The Property Market (The Ballito Mag)

What do Sharks rugby and the Property Market have in common? Well according to leading FNB property economist, John Loos, possible quite a lot. In a light-hearted approach to how statistics can be applied, Loos has produced an amazing correlation between Sharks victories and recessions, as measured by real economic growth rates. Loos makes the point that economic models have only successfully predicted two out of the last ten recessions, while his “Economics of Rugby” economic model has predicted three out of the last three recessions. 

Plotting real economic growth rates against historical Sharks victories, it implies that each time the Sharks reach an important milestone in their rugby history, South Africa has suffered a recession. In 1984, the former Bulls legend Wynand Claasen led the Sharks to the Currie Cup Final, emerging from the Currie Cup B section at the time, having dealt the Free State a stunning defeat in the semi-final. Western Province proved too strong for the Sharks in this final, but the stage was being set for the dramatic rise of Sharks rugby. This event was immediately followed by the 1985/86 recession. In 1990 Ian McIntosh’s underdogs caused a massive upset at Loftus taking down Naas Botha’s highly favoured Northern Transvaal 18-12 after a match winning try from winger Tony Watson, and securing the Shark’s first Currie Cup title. This inaugurated the “Golden Era” of Sharks rugby, which lasted until 1996. And what happened to economic growth over this period? South Africa experienced the mother of all recessions spanning almost three years, and anemic economic growth for most of the 1990’s decade. A 12-year trophy drought set in from 1996 until 2008 for the Sharks. Loos, a Blue Bulls supporter, refers to this period as the “Bull Run”, where we see real economic growth rates boom. In October 2008, the trophy drought was broken for the Sharks. With Kiwi John Plumtree in charge, the Bulls were defeated 14-9 in the final, with a slightly younger Beast Mtawarira, JP Pietersen, Bismarck du Plessis, Keegan Daniel and Ryan Kankowski making their presence felt. South Africa was again plunged into recession in 2008/2009. The amazing Super Rugby run of the Sharks to make the final against the Waikato Chief’s on Saturday 4th August 2012 therefore alerted Loos to send out his “warning” of a pending recession. The only consolation Sharks fans such as myself can take from the nasty 37-6 defeat to the Chiefs, is that this could mitigate the extent of the “almost certain” decrease in real economic growth to follow. 

This superb analysis delivered by Loos is said tongue in cheek and goes to the heart of statistical causality, which first year Statistics students are introduced to at University. Co-inciding or even leading events do not imply causality. The adage “Lies, Lies, Lies and Statistics” comes to mind, which is rather cynical but does indicate that an intelligent application of statistical analysis is required if we are to be able to determine causality between various time series of data. Fortunately the world’s markets, including property markets, move in cycles. As long as we can determine the trends and where we are in a given cycle, this provides an excellent guide as to what we can expect over the medium term. We are currently on the initial stage of the upward curve following the 2009 low point. Although the economic recovery is fragile and threatened by the European banking and sovereign debt crisis, a slower than expected recovery in the US and the large emerging, resource hungry, countries such as China and India now experiencing far slower growth rates, our current state is significantly better than three years ago. 

Property companies that survive and thrive are those that adapt quickly and are able to see where the market opportunities emerge. Within our greater Ballito area, the most active segment of the market is below R2m, and the least active segment is currently the properties priced above R15m. Value remains the driver for attracting buyers to any given property across all price segments. Over-pricing is probably the most common mistake made by Sellers. Pricing of many properties along the Dolphin Coast is on average 25% below market peak levels experienced in 2006/2007 and is unlikely to recover significantly until the availability of mortgage finance through the main South African commercial banks is considerably easier. The decrease in the Reserve Bank’s repurchase rate by 0,5% on 19th July 2012 and the resultant decrease in mortgage interest rates to 8,5%, the lowest level since January 1974, is a positive sign that the cost of money can be expected to remain low for a while. The impact on demand for property due to a slightly lower interest rate, is not what it used to be and we are not expecting any significant change in buying behavior due to this. Households are currently re-building their balance sheets, reducing their overall household debt to disposable income ratio and adopting a far more cautious approach to acquiring assets that require debt finance. Non-income producing properties are being sold as quickly as possible. Vacant land opportunities abound, many at such competitive pricing which would have been regarded as unlikely a few years ago, as people holding land become fatigued by the cash drain the monthly rates and taxes and financing costs impose. The excess supply of homes that developed during the boom times is slowly disappearing. Rental rates are beginning to recover as more people rent than buy and the available stock of rental opportunities decreases. The resurgence of first time buyer activity is a positive sign and is providing mortgage lenders with a large component of their business and developers focusing on the price bracket between R800,000 and R1,5m a willing and able market for their product.

Most Expensive Residential Property in South Africa (The Bugle)

Did you know that the most expensive residential property ever sold in South Africa was one of three ultra exclusive penthouses majestically positioned at the top of Sol Kerzner’s One & Only hotel in the V&A Waterfront? This property was sold by Seeff Atlantic Seaboard. A deeds office search on the registered sectional scheme of the One & Only reveals that a transfer was registered on 15^th December 2009 for Section 3 (the apartment @ 1,076 sqm) and Section 13 (the garage @ 79 sqm) for an amount of R108m. The other two penthouses remain for sale and are exclusively marketed by Seeff. (check out www.oneandonlypenthouses.com ). The one unit is advertised at R99m (1,435 sqm) and the other smaller unit at R75m (800 sqm). 

A mortgage bond for R65,000,000 in favour of First Rand was registered over the sold property. Assuming a 20 year term of this loan and an interest rate of 8,5% (I would assume some rate concession would have applied to this client however), this translates into a monthly repayment requirement of R564,085.10. Affordable? Probably, especially when it is your holiday home. The total amount repayable over the term of this loan is a whopping R135,380,424.41. At a loan to value of 60.2% this is a good deal for the bank. 

If Seeff was able to sell this property, there is a pretty good chance of them selling the other two apartments – and your exclusive property. A search for the most expensive South African residential properties reveals several in the R70-R100m bracket – a Stefan Antoni masterpiece in Nettleton Road, Clifton at R90m or a R71m multi-level Bantry Bay home. A handful of extensive Franschoek wine estates would potentially trade up to R150m. 

All of these do not however come even close to the extra-ordinary development we have witnessed and recently wrote about (and seen in the national press) on the 14ha site bordering Zimbali and Hilltop Private Estate which was purchased by Zimbabwean Robert Mhlanga. Having paid just under R200m for the two large sites (excluding transfer duty) and then having spent conservatively another R200m on infrastructural upgrades (my unconfirmed guestimate), I am calling this South Africa’s most expensive ultra luxurious residential property (until proven wrong). Now how about owing property bordering onto this amazing residence? In neighbouring Hilltop Private Estate you can currently purchase beautiful vacant land sites from R895,000 or a 144 sqm two bedroom apartment from R1,250,000. Its all about being in the right neighbourhood.

Simbithi Eco-Estate Review (The Bugle)

Our current theme focuses on the local powerhouses for property transactions and we consider Simbithi Eco-Estate this week and the level of sales activity experienced recently. Simbithi is going through the same life-cycle phases that Zimbali has already been through, which helps us to understand where the market may be heading within the next 12-24 months. Simbithi has had an incredible run in vacant land sales over the past few years. Considering our methodology of only recognizing sales that have been transferred and registered in the deeds office, the data indicates that in 2010 there were 221 transfers of Simbithi properties with a total value of R288,4m. Of these 65 (R145m) were sectional title transactions and 156 (R143,4m) were freehold (i.e. mostly vacant land). In 2011 there were 225 transfers registered with a value of R294m, of which 57 (R118,3m) were sectional title transactions and 168 (R175,7m) were freehold. For the 2012 year to date, 102 transactions have been registered with a total value of R141,6m, of which 32 (R65,1m) were sectional title properties and 70 (R76,5m) freehold properties. 

The vacant land has been selling so well that the availability has shrunk considerably and the pricing has been edged up. The current status on first time vacant land options from the master developer is that on the Eco-Estate side 16 sites are available which are priced from R820,000 to R1,400,000. The stock has been supplemented from a large development site, which has been cut up into smaller single residential opportunities. Had this not been done the stock of vacant land on the Eco-Estate side would have been far less. On the Golf Estate side, only 37 sites are still offered for sale by the master developer and these are priced from R920,000 to R1,460,000. There is however a pool of re-sale options available and these are often prime sites with good pricing, and must not be overlooked when shopping for vacant land. Simbithi is a relatively young estate with 74.38% of existing owners having owned the property for less than 5 years. The fact that 69.72% of recent sellers have owned the property for less than 5 years, indicates a reasonable level of speculative buying and selling within Simbithi. Looking at the age analysis of recent Simbithi buyers and sellers the data indicates 20.63% of recent buyers are aged between 18-35 whereas recent sellers within the same age category measured only 9.64%. There is somewhat of a shift to younger buyers. Whether you are a first time buyer, a holiday-home buyer or a retiree, Simbithi has something for everybody.

Zimbali Coastal Resort Review (The Bugle)

With the third quarter of 2012 well under way, and deeds office data having been updated, we can get a clearer picture of property market activity for the year to date. Having been in the industry long enough to understand that a sale is not a sale until transfer has been registered we use only actual transfer data in our analysis and do not consider sales which are still to be registered. The two local powerhouses of property transactions have been Zimbali Coastal Resort and Simbithi Eco-Estate. 

We will focus on Zimbali for this week. For the 2012 year to date, within Zimbali, 32 transactions have been registered to the value of R144,1m. Of these 8 sales were sectional title registrations with a gross value of R33,3m and 24 were freehold registrations (which include vacant land sales) with a gross value of R110,8m. Having progressed a little past the half way mark for the 2012 year it appears that the overall market position for 2012 could be down on the 2011 year. For the 2011 year 70 transactions were registered at a gross value of R280,8m. This was approximately 10% down from the 2010 year with 78 registrations and a gross value of 309,7m. Transaction volumes in 2011 were only 52,2% of what they were at the height of the market in 2007, when 134 transactions were registered with a gross value of R330,6m. Although the number of transactions dropped off in 2008 to 104, the value of these peaked at R378,1m. It appears that the glory days of 2006 and 2007 are a distant memory only and that it will take some time for that level of trade to return to the market.

The last four and a half years have been hard for those in the property and building industry. The result however is an industry that is more efficient and ready and willing to serve. The average value of Zimbali transfers is currently R6,775,626 which is only marginally ahead of Pearl Valley Estate in the Cape winelands with and average value of R6,772,090.  However Zimbali has over 1,200 properties whereas Pearl Valley has fewer than 550. Comparisons between flagship estates are inevitable, but should always take into account the relative size and number of properties. Current vacant land pricing in Zimbali ranges from R895,000 to R12m, and the pricing for completed homes ranges from R3,5m to R40m.

EAAB Board Dissolved (The Bugle)

Who governs the Governor? In a dramatic intervention from the highest level of government, the Minister of Human Settlements Tokyo Sexwale last week announced that the Estate Agents Affairs Board (EAAB) would be placed under administration and that the board of directors had been dissolved. Sexwale had resolved to address the pressing allegations of mismanagement at the EAAB at the anticipated sector summit in September. However the resignation of Ina Wilken, the EAAB board chairperson, soon after her appointment, must have precipitated some decisive action. Sexwale referred to “shenanigans” that had taken place, possible criminal charges that could follow the full investigation he has called for by the Special Investigating Unit, and allegations of improper conduct, fraud and abuse of the EAAB’s fidelity fund. Sexwale reportedly referred to the EAAB’s “house being in disorder” and the “windows breaking from the inside”.

The role of the EAAB is to provide protection to the public at large in their dealings with estate agents. As an insurance scheme, all estate agents make contributions to a fidelity fund and are issued with an annual fidelity fund certificate. This fund provides resources to compensate members of the public in the event that they fall foul to fraudulent activity by an estate agent. It is illegal for any estate agent or estate agency business, even those “in-house” sales people of master developers of large estates, to conduct business without a valid fidelity fund certificate. 

The real estate industry has been through a battering over the past few years. The EAAB put Wendy Mechanik Properties out of business overnight, by withholding their fidelity fund certificates after allegations of trust fund mismanagement became evident. The implosion of Auction Alliance followed active media interrogation of their activities. The need for an industry regulator with strong leadership, a clear mandate and hopefully representation on its board by members of both government and industry is evident. Having spent my working career to date within KZN, it is the norm for estate agents here to always have the appointed transferring attorney handle deposit funds directly and not the estate agency. It was therefore surprising for me to learn that in other parts of the country the estate agent often holds funds received from a Purchaser in a property sale transaction in their own trust accounts. In light of potential mismanagement, it could be instructive for the rest of the country to take a leaf out of KZN’s common practice book.

Holiday Towns Property Review (The Bugle)

Holiday towns around South Africa have been particularly hard hit by the general economic conditions of the past four and a half years, as far as demand for residential property in these areas. When compared to the typical primary residential property markets found in Gauteng, the price behaviour of holiday properties, which in many cases are coastal properties, have been far more volatile. When the markets were booming in 2005 and 2006, holiday home price escalations were far higher than the primary markets. However, as the demand and supply balance changed from as early as 2005 onwards, the rate of growth of holiday home prices, as measured by the FNB Holiday Town House Price Index, started to fall off dramatically. The smart money would have sold off these assets in 2006 after the price index peaked at over 50% growth rates and potentially bought back the same properties, for less, a few years later. That is with the benefit of perfect hindsight and is the theory only. For those eternal optimists, like myself, the second quarter of 2012 provided a glimmer of hope. The Holiday Towns Price Index grew in nominal terms by 3.8% year-on-year, up from the previous quarters 0.5% growth rate, and is only the second consecutive quarter of increase after almost two years (7 quarters) of consistent year-on-year decline. In nominal terms the Holiday Towns Price Index was reported as being  minus 5% down since the first quarter of 2010, the quarter after which the lengthy period of nominal house price decline set in. However, nominal house prices do not fully explain the market conditions. Adjusting nominal prices for consumer price inflation, the second quarter 2012 prices were minus 13.1% down from the 1^st quarter of 2010 and a more significant minus 22.9% down on the 1^st quarter of 2008, which represented the national real house price peak at the very end of the property boom. For those that had bought in 2007 or 2008, it often becomes a challenge today, to be able to get the market to pay the same nominal price for the property. The recent increase in nominal prices represents a change in direction, which indicates that we are moving (hopefully) away from the bottom of the cycle and up along the recovery segment of our price growth curve.