Active Price Brackets (The Bugle)

The Dolphin Coast is buzzing with excitement as the summer holiday season is in full force, the sun has made a re-appearance and most of us are taking time out to be with family and friends over the Christmas period. Despite the warnings of economists and general manufacturing and mining having come under pressure in the second half of 2013 thereby depressing economic growth, the property market activity has accelerated and we as Seeff Dolphin Coast have enjoyed a 40% growth in the rand value of sales concluded in 2013 over the prior year. As a region Seeff KZN have grown 35% and nationally the Seeff group growth is 20% higher. Some of this growth is attributed to market share growth and some is general growth in the overall volume of transactions. As this surge in property buying seems counter to the underlying economic fundamentals of slower GDP growth, stringent criteria for mortgage finance, less disposable income and stubbornly high debt to disposable income ratios, we can only ascribe this activity to an overall equilibrium in the market where pricing of homes is matching the expectations of many buyers who have en masse decided that the market is what it is, and there is therefore no better time to buy than the present. 

Price escalation of residential properties on a national basis as measured by FNB as at November 2013 was recorded as 7,2% in nominal terms. In real terms (after adjusting for inflation) house price growth was recorded as being 1,5%. Is it important to have an understanding of inflation-adjusted growth in house prices? Actually it is, as a market in assets will take into account the relative value of the assets. Increased demand is determined by real changes in prices and since the peak in 2007, house prices have declined by 20.1% in real terms. This is significant and indicates that residential homes are offering good value. The nominal growth since the 2007 peak is only 14,7%. So with real prices down, and sentiment having improved significantly, it becomes an easy choice to make the decision to invest. The recovery has started in earnest across the lower price brackets. A shortage of homes priced below R2m is now a distinct reality and developers who are active within this market segment are seeing their product flying off the shelves. Our recent experience with a 219 sqm home priced at R1,690,000 had an offer on the table with two back-up offers in the event that the finance approval on the first offer was not presented within the time frame provided. No longer can buyers in this market segment take their time to shop around for finance options over an extended period and mortgage bond approval dates are strictly enforced by the sellers. 

The ripple effect is moving upwards and the price bracket from R2m to R5m is showing the same signs of increased buyer activity. New developments and approvals for new projects have lagged this revived activity and we can expect shortages to start to develop within the price brackets up the R7m. For sellers in the R10m plus price bracket the market remains subdued and pricing has to represent exceptional value before buyers in general are tempted to commit. For a US dollar based purchaser, our residential properties today are 50% cheaper than two years ago purely on the devaluation of the Rand exchange rate. Why this has not to date encouraged a lot more buying by foreigners is a little surprising and we can expect a lot more interest if the Rand remains at just over R10 to the dollar.

(Author: Andreas Wassenaar, published in The Bugle, 25 Dec 2013)

Property Rights - Thank You Madiba (The Bugle)

The amazing events of the past week with the passing and state funeral of Nelson Mandela have left lasting impressions on millions of people around the world. How we were blessed with such an iconic and influential leader is extraordinary and the tributes that have been published in the media define a life that makes each one of us aspire to be a better person. As South Africans we are eternally grateful. The question asked by Archbishop Emeritus Desmond Tutu in his Nelson Mandela farewell speech is what would have happened if Mandela had died in prison. South Africa without Mandela’s influence is unthinkable and the millions around the world that have been inspired by him would regard a world without his magical touch as infinitely poorer. As a property professional the question I asked is how do the protected property rights that we have in terms of our constitution, which facilitates the efficient and on-going trade in property, have Nelson Mandela to thank for this. 

An interesting article published on Bloomberg by a Harvard Law Professor, Noah Feldman, contends that the basic deal that Mandela struck from prison with FW de Klerk, and which was subsequently enshrined in the South African constitution, was to guarantee the existing property rights of white South Africans in exchange for an end to apartheid. Feldman’s view is that white South African’s benefitted from this but ordinary black South African’s did not, at least not directly. The threat of capital flight  (largely white capital) from the country at the point of transition would have resulted in a far worse situation.  Feldman asks the question of whether the sacrifice of justice (he would have contented that massive and immediate re-distribution of wealth would have been just) for a richer and more democratic South Africa was the right choice and comes to a tentative “yes”, when considering the history of other post-colonial African countries. He makes the point that a politician is better off making a decision on what is pragmatically most likely to succeed in the real world than what is necessarily fair.

The article by Trevor Manuel, our previous finance minister and the current minister in the presidency in charge of the national planning commission, published in the Financial Mail, gave an excellent insight into the financial realities that faced the country at the time of transition in 1994 and the exceptionally pragmatic approach and political skill demonstrated by Madiba during this time. It is when you have insight into these events that you have to be in awe of his leadership. The decisions taken at the time to protect property rights and embed these in the constitution and therefore pave the way for a prosperous future, even if it meant the protection of the white ownership of capital. The government’s reconstruction and development programme was to follow as a process of redistribution of wealth. Manuel writes beautifully that, “Trust is that aspect of leadership by which you embolden people and encourage them to grow. And if you are smart about how you do it, it becomes mutually enriching. But it can only be done if, as a leader, you are confortable in your position. Madiba was the supreme example of such a leader.”

Our stated Seeff purpose is “Enabling People to Profit through Property”. This would not easily be possible in a country where individual property rights are not protected. We have Madiba to thank for taking the tough decisions to ensure this.

(Author: Andreas Wassenaar, published in The Bugle 18 Dec 2013)

Home Maintenance and Improvements (The Bugle)

Home ownership comes with responsibilities. The on-going maintenance of a property is something every homeowner quickly realizes is essential for the maintenance and improvement of its value over time. The levels of investment in homes by owners is measured by FNB in their national estate agent survey and provides interesting insight into the state of the renovations market and the reasons homeowners make home improvements. From a banking point of view the levels of home maintenance are important as it protects the value of security backing a residential mortgage loan. Distressed properties typically lack maintenance and often deteriorate to such an extent that the cost of repairs exceeds the value of the property. Many people are surprised at the state of properties that end up for sale at a liquidation auction and the end result is bad for the original owner and the mortgage bondholder. The best strategy for anybody who finds themselves in a compromised financial position and unable to afford the bond repayments and maintenance requirements of a property, is to sell the property at whatever the market will pay as quickly as possible.

There has been a gradual increase in the level of home maintenance since the 2009 recession. The most important category in the survey conducted was the “percentage of home owners investing in their properties with a view to adding to its value”. From 2004 this category declined reaching a low of 3% in the first half of 2013. It has since improved to 9% as of the third quarter survey, but is critically below the 43% recorded in the beginning of 2004. The next level down is the category described as “fully maintaining their property and making some improvements”. We have seen a significant improvement here from a low of 27% recorded in 2008 to 45% in the 3^rd quarter of 2013. When money becomes tight people cut back on maintenance, as the result of doing this is often delayed and not immediately apparent. There is a period where you can get away with it, but the problem is then that it costs far more to bring the property back to the level it was at, had it been regularly maintained. 

The next level is described as the “percentage of owners not improving but fully maintaining homes”. Here we have seen a large improvement from approximately 20% in 2009 to 39% by the 3^rd quarter of 2013. The lower two categories are the “percentage of home owners attending to basic maintenance only” and those homeowners who are allowing their properties to “get run down”. The basic maintenance group increased from a low of 6% in 2004 to 34% as at the 1^st quarter of 2009 as the recession took hold and household disposable income evaporated. Since then it has receded back to 5% as at the 3^rd quarter of 2013. The owners permitting properties to become run down remains small at 2%. Stats SA publish the retail figures for the “Hardware, Paint and Glass Products” category and the improved attitude of homeowners to maintenance issues can be seen in the performance of the national sales figures of this category (up 6% in the 3^rd quarter) relative to total retail sales. The reason for making home improvements is overwhelmingly (72%) for the owner’s own use, while 19% do it because they cannot afford to buy elsewhere and 8% do it to sell for speculative purposes.

(Author: Andreas Wassenaar, published in The Bugle 11 Dec 2013)

Critical Success Factors (The Bugle)

What are the two most important attributes of any business of any size? What are those things that set a successful business apart from the “also ran” crowd? I would suggest to you that these two critical success factors, without which any organization is doomed to failure, are Innovation and Marketing. Get these two pillars right and your business will grow exponentially. Get them wrong and it will be hard to survive over the long term. 

Those that I work with know that I am an Apple fan. From my iPhone, to iPod, to iPad and MacBook Pro the beauty of these products are evident and it is clear that there is no substitute for design genius and production quality. Apple is regarded globally as one of the world’s most innovative companies with its marketing genius acknowledged by all, including its fiercest competitors. People do not merely buy Apple products, they fall in love with them. The cult-like following inspires thousands of people to queue outside Apple concept retail stores overnight in anticipation of a new product release. They happily pay a premium for an Apple product. All this made Apple the most valuable company in the world. 

So if Apple is the most admired company, who is the leading management thinker of our time today? There is an organization called the Thinkers50, which describes its awards as the Oscars of management thinking. Every two years it assesses and ranks living management thinkers. In seven editions only four people have ever topped the list. These have been management gurus Peter Drucker, Michael Porter, CK Prahalad and for the past two award years, the man now regarded as the absolute leader in this field, Clay Christensen. He is currently a professor at the Harvard Business School and regarded as the father of disruptive thinking. He has written nine management books, including The Innovator’s Dilemma, which is regarded as one of the five best business books ever written. His latest book, “How will you measure your life” is regarded by some as possibly more influential that Steven Covey’s Seven Habits of Highly Effective People and Scott Peck’s The Road Less Travelled. 

So does a relatively small estate agency on the KZN North Coast consider that the world’s leading management thinker can provide useful insights into the world we live and work in every day.  My firm belief is yes, it can. People are people – they are similar where ever you may go. People run businesses and the application of a way of thinking to any given set of challenges or opportunities can create profitable outcomes. I have witnessed this disruptive innovation described by Christensen in our property industry over the past five years. The innovation came through one architect who had the genius to think well outside the adopted framework that had been ingrained in the decade prior to his arrival. A single development company had the foresight to nurture and channel the creative energy into a range of innovative home designs that simply blew the customers away. Innovative design and the use of new incredible materials were combined with a more sophisticated level of marketing new homes. This immediately elevated the company above its peers. Within a few years they had cornered the market in new builds and began to dominate while other architects and builders could barely make ends meet. Innovation is quickly copied by competitors (at least the smart ones), which is why continuous improvement then becomes a requirement. If a small development company and single architect on the north coast could do this, there is no reason your business can’t do the same.

(Author: Andreas Wassenaar, publsihed in The Bugle 4 Dec 2013)

Interest Rate Review (The Bugle)

The South African Reserve Bank’s (SARB) monetary policy committee met last week to discuss the state of play of the South African economy and make a decision on its policy repo rate interest rate. The decision was to keep this key rate at 5% which means that the prime interest rate charged by South African banks remains at 8,5%. This is good news for those who are servicing mortgage bonds as your monthly repayments will remain the same. Gill Marcus, Governor of the SARB, described the economy as fragile and vulnerable to changes in the exchange rate of the Rand, Business and Consumer confidence, local Industrial action and international variables such as the US Federal Reserve policy on quantitative easing. Did you know that the exchange rate of the Rand has depreciated by 57% against the US Dollar over the past three years? Surely we should be experiencing an upsurge in offshore interest in our residential properties? With prime homes along our Dolphin Coast priced in dollars now 57% cheaper, this represents incredible value. The Rand:Dollar exchange rate is around 10.12, the Rand: Pound rate around 16.41, and the Rand: Euro rate approximately 13.66. While a depreciating Rand could tempt purchasers of our local residential properties who are basing their decisions in dollars, pounds or euros to buy, the negative aspects of a depreciating Rand impact on our local inflation rate through more expensive imports, including the price of oil which touches almost every part of our economy. Our current consumer price inflation (CPI) rate is at 5.5%. The producer price inflation rate is 6.7%. For those with a keen interest in the property industry you should keep your eye on these rates as we know that a substantial move in the CPI above 6% would prompt the SARB to increase interest rates, and in turn the cost of servicing mortgage bonds. So what is the SARB forecast for CPI inflation for the next two years? They expect inflation to average 5.8% for 2013, 5.7% for 2014 and to edge down to 5.4% in 2015. If these forecasts turn out to be accurate, we can expect our interest rates to remain flat over this two-year period.

It is good to know that the price of money will remain the same, but what about is availability? Mortgage extension growth in South Africa as a whole is less than 3%. This is particularly low and indicates that the banks are not as yet easing their credit policies to substantially increase lending on mortgages. If you are a seller, this means that you are unlikely to see much price escalation in your home. It is only where we can see a shortage of certain stock levels of property, that substantial increases in the pricing become evident, due to basic economic supply and demand forces.

According to the RMB/BER business confidence index, which measures the outlook of businesses in the economy, we are currently at a ten-year low. The manufacturing sector took a hit in the third quarter with Industrial action claiming a 27,9% decline in the production of motor vehicles, parts and accessories. This has far reaching consequences and is the type of shock to the economy we would like to avoid.

So what is an astute property investor to make of this? Buy while there is plenty of bad news around, and equally be ready to sell when euphoria sets in.

(Author: Andreas Wassenaar, published in The Bugle, 27 Nov 2013)