Full Title vs. Sectional Title (The Bugle)

Full Title versus Sectional Title? In a market where one often finds design and size similarities between the two, it is interesting to analyze the relative price growth performance over the past few years to get an understanding if any clear advantage exists of one form of ownership structure over the other. Traditionally apartments in high-rise buildings or cluster developments have been sectional title and freestanding homes have been freehold. This will continue to be the case, but often nowadays a development of freestanding homes may be sectional title. 

In the pre-2008 boom years, the sectional title market was buoyed by 1^st time and buy-to-let buyers and caused a “boom-time overshoot” in values of smaller sectional title properties relative to larger full title properties, where the less cyclical family demand plays a bigger role in underpinning values. As an example, and according to FNB’s published 3^rd Quarter 2012 House Price Review, during the pre-2008 house price boom, the average price of a 3-bedroom sectional title home was in excess of 20% higher than the average 3-bedroom full title home. Over the past four years however this gap has narrowed to an insignificant 0.6% as full title house price growth has exceeded sectional title price growth.  The year-on-year price growth of the FNB Full Title Price Index in the 3^rd quarter 2012 was 6.7%, down from the previous quarter’s 9.3%,  but still ahead of the FNB Sectional Title Price Index which grew by 4% in the 3^rd quarter (down from 4.4% in the previous quarter). 

As demand for full title homes has exceeded sectional title demand in recent years, many developers have preferred to develop freehold homes on any given vacant land opportunity. Whereas the two-bedroom segment dominates the sectional title market, the three-bedroom family home dominates the freehold segment. Although not directly comparable as freehold typically offers more space, and sectional title typically offers lower running costs due to shared amenities, it is interesting to note that for similar sized properties, the difference in average price between the two legal structures has all but disappeared. With the advent of large gated communities, which characterize our Dolphin Coast development landscape, the security consideration is no longer any different between sectional title or freehold properties, within any given development. We do however find a significant difference between pricing of both freehold and sectional title properties, which are not within the larger estates. 

A common misperception in the market is that sectional title levies imply that for sectional schemes within an estate, the owner pays a “double levy” in that an estate levy and a body corporate levy is payable. While this is true, this does not mean that the running costs of a sectional title property are higher, as you have to consider what cost line items are included in the body corporate levy budget. These costs are also typically incurred by freehold property owners, in one form or another, and when the detailed comparisons are made, a sectional title property will typically cost less to run than a freehold property.

(Author: Andreas Wassenaar, Published in The Bugle, 28th Nov 2012)

To Build or Buy? (The Bugle)

To build or buy, is the question often asked by many people looking for their ideal home? We are fortunate to have a range of vacant land options available along the Dolphin Coast at pricing, which is very competitive in some areas, to relatively high in other areas where the scarcity factor has started to excert upward pressure on the pricing. The price difference between exceptionally well located sites, very often defined by the outlook, shape and steepness of the property, and sites which can be considered less prime, has widened significantly over the past year and can be expected to continue as those buyers with the available funds chase an ever smaller selection of the best sites. 

Building costs vary significantly and depending on what is actually included in the pricing can be a point of debate. In general you get what you pay for. Homes in Zimbali are regularly being built at a cost of R15,000/sqm and represent the very top end of the market. Very few homes are being built at the higher end of the quality spectrum at less than R11,000/sqm. Of the 32 vacant land options available for sale within Zimbali Coastal Resort, the gross price range is currently from R895,000 to R8,000,000. There are a few sites listed for sale at higher pricing which are excluded for the purposes of this exercise. The site size range is from 1,001 sqm. to 2,283 sqm. The selling price per sqm. ranges from R577.04/sqm. to R3,996.00/sqm. The average rate/sqm. for vacant land in Zimbali across the current available stock is R2,213.29/sqm. Interestingly the highest selling price/sqm. in this pool of properties is not for a beachfront site, although we can expect the large prime beachfront properties to trade at pricing close to R4,000/sqm. for land only. A recent example registered in the deeds office was the sale of a 2,386 sqm beachfront site at R10,500,000, which represents R3,981.56/sqm. 

If, as a home builder and developer with the aim of selling your newly completed residence, you are starting at R4,000/sqm. for the vacant land, and building at a rate of R15,000/sqm., the existing stock of re-sale options will provide keen competition. These will typically trade at pricing 25% below the newly built options. This experience in Zimbali is re-enforced by the FNB published “Full Title Property Replacement Cost Gap” statistic which measures the difference between the replacement cost and the property value, expressed as a percentage of the property value. The 2012 third quarter figure measured 23.5%, which is a slight decline on the 24.1% of the previous quarter. It is therefore always generally going to be more expensive to build, but the advantages of designing something exactly according to your needs and being able to employ the latest building materials and finishes typically makes up some of the replacement cost gap.

(Author: Andreas Wassenaar, published in The Bugle, 21st Nov 2012)

REJOICE THE BELOVED COUNTRY - A Response: Economist Magazine Article

“CRY THE BELOVED COUNTRY – South Africa’s sad decline” were the words emblazoned on the front over of the highly influential Economist magazine (week 20-26^th Oct 2012) over an image of desperate stick wielding striking miners. The editorial emphatically declared that South Africa is sliding downhill while much of the rest of the continent is clawing its way up. Why this is important is that the 1,5m hard copies of the weekly circulation of the Economist magazine is read and quoted by the world’s most influential business and political leaders and decision makers. In addition the Economist.com website attracts over 14m unique visitors per month. As a country and as a public relations exercise, you simply do not want to make the front cover of this highly regarded publication for all the wrong reasons. The Economist is known for its well researched and brilliantly written editorials and special reports. The world’s two most influential ratings agencies, Moody’s and Standard & Poor both downgraded South Africa’s sovereign debt during September and October respectively. Moody’s also downgraded a spectrum of South African corporate investment instruments, including several South African residential mortgage-backed securities. As the risk profile of these securities increases so does the cost or interest payable on them.

Isaac Newton published “Mathematical Principles of Natural Philosophy” in 1867, which was to become one of the most important books in the history of science, providing what we refer to as Newton’s Laws of Motion. His third law states that for every action there is an equal and opposite reaction. This is so profound and infinitely applicable to so many aspects of life. Something happened in South Africa in August 2012 that has had this type of equal and opposite reaction across the economic and political playing field. The Lonmin owned Marikana mine strike started on 10^th August 2012 and the resultant clashes with police left 34 workers dead followed by extensive CNN coverage. The contagion to other platinum and gold mines resulted and even 20,000 truck drivers went on strike, resulting in fuel shortages in some parts of the country. This labour unrest directly affected Moody’s and Standard & Poor’s downgrading of South African sovereign debt. How striking miners at a platinum mine can impact the market for residential property along the Dolphin Coast may be quicker and more direct than you can imagine. Professor Philip Frankel of Wits, published an outstanding article entitled “Marikana: 20 years in the making” in the Business Report on Oct. 21^st 2012. As a leading political scientist and consultant to the Office of the President and Department of Mineral Resources, he points to structural aspects of how migrant labour is sourced by labour brokers and employed by the mines, the conditions these miners live in and the social and economic consequences surrounding their existence. The high incidence of HIV infection and the questionable safety records and working conditions at specific mine shafts he mentions.

The Economist article declared that foreign investment to South Africa is drying up, it highlighted the government’s failure to provide services, the disgraceful state of our education system (according to the World Economic Forum, South Africa ranks 132^nd out of 144 countries for its primary education and 143^rd in science and maths), our extra-ordinarily high unemployment rate – officially 25% but probably nearer 40%, and our tragic inequality of wealth. We all know that since the end of apartheid a tiny black elite has accrued great fortunes, which according to the Economist has only widened the wealth gap. South Africa’s “Gini coefficient”, the best measure of inequality, in which 0 is the most equal and 1 the least, was 0.63 in 2009, but 0.59 in 1993. It pulls no punches in blaming the ruling political party’s incompetence and outright corruption as the main causes of what it terms South Africa’s sad decline. The essence of the article was that South Africa is experiencing a failure of Leadership, where the independence of the courts, the police, the prosecuting authorities and the press are being undermined. The article does provide some advise on how to spur change and integrity. It calls for more accountability of political representatives through a constituency-based system and more political competition, including the disposal of the president (although most pollsters suggest this is highly unlikely). The office of the President, through spokesperson Mac Maharaj was quick to respond, calling the article grossly incorrect and highlighting South Africa’s inclusion in Citigroup’s World Government Bond Index, the successes achieved in fighting HIV and AIDS, growing inbound tourist arrival figures and the government’s New Growth Path framework and its 20 year infrastructural development programme.

In October, Gill Marcus, the Governor of the South African Reserve Bank, said that the past two months had hurt South Africa’s reputation as a place to invest, pointing to billions of Rands in net equity-market ouflows as evidence of this loss of confidence. Clem Sunter and Chantell Illbury are extensively published authorities on South African future scenario planning. In a widely circulated commentary written on 10^th October 2012, Mr. Sunter stated that they were holding the odds at 50:50 on South Africa progressing to the “Premier League” on the one hand or declining to the “Second Division and Failed State” on the other. He maintains that we are at a tipping point where it could tip either way, and with extreme consequences. Mr. Sunter suggests that we need a new economic accord, which gets rid of waste, inefficiency and corruption. To tighten anti-monopoly legislation to create the space for millions of new small enterprises, to return to a stable industrial relations climate and greater wage parity, better living conditions for workers and a greater sense of common purpose.

Faced with such negative sentiment from so many influential sources an excellent letter addressed by Paul Harris, co-founder and non-executive director of FirstRand to a friend in Australia enquiring after his wellbeing provides the silver lining to the cloud. He makes the point that doomsayers have been predicting South Africa’s imminent demise since the sixties, that we have survived far worse, and as a banker points to our healthy local banking system compared to the crisis Europe is facing. As South African’s he notes that we tend to fluctuate between off the scale euphoria and inspiration on the one hand and the deepest depression on the other. He states that the South Africans he knows get of their butts and do things to build our country rather than whinge from a position of comfort. To this I say “Amen”. Yes we have our challenges but as a nation we are incredibly positive, resourceful, tenacious and have a well-developed sense of the importance of uplifting underprivileged communities. Together we can make a difference. Visit a faith based community project such as the LIV Village in Cottonlands to see this at work and your heart will soar on the wings of eagles. You will be inspired and positive about the future of those HIV Orphans being cared for and for South Africa as a nation. Property investment is by nature a long-term activity. When I am faced with a wave of negative sentiment I get excited and immediately start looking for the buying opportunities, knowing that the money is made when you buy rather than when you sell. REJOICE THE BELOVED COUNTRY – we are not in decline, we are great by choice!

(Author: Andreas Wassenaar, Published in The Ballito Mag, Dec 2012)

Warren Buffett Bets on the American Housing Market (The Bugle)

What is Warren Buffett up to? Apart from being the world’s fourth richest man with a net worth of $48.4bn he is reportedly buying up real-estate brokerages around America as he bets on a housing market turnaround. His most recent investment is a partnership with the Canadian real-estate investor, Brookfield Asset Management, which has operated under the Prudential Real Estate and Real Living Estate brands, which generated in excess of $72bn in residential real estate sales volume in 2011 from its 53,000 estate agents which operate across more than 1,700 U.S locations. This will more than double Buffett’s size of his estate agency business, which did $32bn in sales in 2011. 

They plan to offer a new franchise brand called Berkshire Hathaway Home Services. The combination of the Berkshire Hathaway name, the operational excellence of the existing Home Services business owned by Buffett and the franchising experience provided by Brookfield, is expected to create one of the leading real estate franchises in the US. They see their key strengths as exceptional client service and innovation. Just to put this into perspective, there are fewer than 30,000 registered estate agents in the whole of South Africa and the top three estate agencies combined, of which Seeff is one, do less than $4,3bn in gross sales per annum. 

The US market has experienced its worse housing slump in seven decades, and to take advantage of the expected turnaround, Buffett has also invested in a brick maker and a mortgage lender. It makes perfect sense for a property company to be vertically integrated, as the sales typically require mortgage finance and newly constructed homes have to be sold. Over the past few years our own mortgage origination business has been through dramatic changes, and the leading South African company Ooba, was founded by and is owned by the leading South African estate agencies. It is this close association between the brokerage businesses and Ooba that has ensured its success. 

On the supply side of the property market chain, we have seen developers and contractors become one, so as to remove the margin between builder and developer and therefore become more price competitive. For a developer to survive in the current market, their input costs have to be significantly lower than what the average homebuilder would be able to build at. They manage to achieve this through economies of scale and through sourcing materials at more competitive prices. Innovative designs and the intelligent use of materials have provided competitive advantages to some developers, although these are usually short lived as their competitors soon replicate these.

(Author: Andreas Wassenaar, Published in The Bugle 7Nov2012)