Inflation and Property Ownership (The Bugle)

Why should property owners and investors care about the inflation rate? The rate at which the prices of a typical basket of goods and services consumed in an economy changes over time is referred to as the consumer price inflation (CPI) rate. Both inflation as well as deflation of prices is possible. Zimbabwe style hyper-inflation caused by excessive printing of money is a case study in how dangerous inflation can be and how it can cause both the financial and real economy to implode in a relatively short period of time. Asset markets, such as a stock market where shares in listed companies are traded or a property market, can be exposed to asset bubbles, which can be just as dangerous as the adjustment in prices can be sharp and sudden. Japan is a country that has experienced deflation over and extended period of time, and this can be equally bad for economic growth. Policy makers therefore have to balance some acceptable level of inflation with the prospect of economic growth and employment levels. 

The direct and immediate impact a change in our CPI inflation has on property owners, is that an anticipated response by the Reserve Bank would be to increase the interest rate it lends to the commercial banking sector (called the Repo Rate), who in turn immediately increase the rate they lend to property owners such as you and me. Higher inflation therefore means a higher cost of money. It also erodes your returns earned on a property investment over time. The nominal capital value of your property would therefore have to keep pace with inflation, failing which you would experience a decrease in the “real” (i.e. inflation adjusted) value of your home. We have experienced real deflation in property values recently where nominal price increases have been below the inflation rate.

As at December 2012 our CPI inflation rate was measured at 6,7%, slightly up from the 6,6% of November 2012, and just over the upper limit of the 3% to 6% target rate adopted by the Reserve Bank. Our 2012 annual inflation rate was measured at 5,6%. This is up from 4,3% of 2010 and 5% of 2011. It is this clear upward trend in inflation that will translate into increases in interest rates at some point. The policy makers may resist increasing rates for a time so as to try and sustain the fragile economic growth and employment figures, but unless inflation is kept below the 6% level, interest rates can be expected to increase and with that the cost of servicing your mortgage bond. The current drivers of our inflation rate have been the food and transport sub-indexes, and to a large extent administered prices such as electricity and municipal rates on property. Food inflation was 6,9% overall for 2012. Transport inflation was 5,5%, but the public transport sub-index was as high as 15,5%, caused mostly by the 12,4% increase in fuel prices. The Housing CPI showed a 6% overall increase but problematic sub-components such as Electricity increased by 10,3%, as Eskom continued to increase its tariffs, and “Water and other services” (including municipal rates) increased by 9,1%. Tenants should take note of this as we can expect a return to the standard 10% annual rental escalation clause in most lease agreements.

(Author: Andreas Wassenaar, published in The Bugle, 30th January 2013)

Debt and Risk (The Bugle)

I recently saw a graph that alarmed me. No doubt, economists and our country’s economic policy makers have seen the same graph. They would be concerned and would be asking some probing questions. The graph was entitled “Household Sector Credit Growth” and indicated the South African year-on-year % change of residential mortgage loans by banks, the year-on-year % change of non-mortgage household sector credit growth (lent by Banks) and the year-on-year percentage change in total household sector credit. As at November 2012 mortgage loan growth was bumping along the bottom at 1.13%. The alarming aspect was the exponential growth since early 2010 in non-mortgage credit, which had reached 25% by November 2012. This growth has drawn up the total household credit growth to 10.37%. Whereas previously both mortgage and non-mortgage debt had grown in tandem, the past two years have seen non-mortgage credit shoot off in its own (upward) direction. 

South African banks have been busy – just not on lending money for mortgage bonds. Non-mortgage credit extension represents unsecured lending by banks on typically short term goods that depreciate over time (such as TV’s, fridges, cars). This represents consumption expenditure and contrasts with mortgage credit extension, which is secured long-term lending representing investment expenditure. For any individual to consider taking on debt they need to ask themselves if what they are buying is comfortably affordable and what the risk is (i.e. their vulnerability) if circumstances were to change – such as the cost of finance increasing or their disposable income used to service the debt drying up. 

Economists have asked the same questions for a group of households. FNB’s latest report on household sector financial vulnerability asks these questions. A measure of affordability is the debt-to-disposable income ratio. Currently still very high at 76%, even though it is down from its 2008 peak of 82.7%, the steady increase in non-mortgage credit growth and the stagnation of disposable income growth leads them to believe that this measure may be back on the increase. Slower economic growth, which we have witnessed in the second half of 2012, affects disposable income growth negatively. An excellent measure of risk has been developed by FNB called the Household Sector Debt Service Risk index. On a scale of 1 to 10 this index has been climbing for the past 5 consecutive quarters to a current level of 6.68 and remains well above the long-term (32 year) average of 5.3. This risk index takes into account three main areas of risk: Overall Indebtedness risk, the Indebtedness growth risk and the Interest rate risk. We have enjoyed relatively low interest rates for a sustained period of time with our prime rate at 8.5% and structural consumer price inflation at around 6%. When interest rates are at their low point in their cycle the most likely movement is upwards and the risk then is how such an upward movement will impact on vulnerable households. 

The warning and advise to households is to limit debt to assets that appreciate over time and to ensure your risk is limited in the event of a higher cost of money or lower disposable income.

(Author: Andreas Wassenaar, published in The Bugle, 23rd January 2013)

Buy to Let: Yield on Residential Rentals (The Bugle)

JP Morgan recently published an analysis of US Monthly Rentals vs. Monthly Mortgage Payments, which made for interesting reading. It indicated the average monthly rental at US$718 and the average monthly mortgage payment of US$481, based on a 20% deposit and 30-year mortgage bond at the current fixed rates offered. With a situation like this it would pay every person to invest in residential property in high rental demand areas, to the absolute maximum of their ability to raise finance and have the cash deposit. This is not the situation in South Africa where monthly rentals are significantly lower than mortgage payments. 

I recently did the exercise for an investment property I have bought and at a 100% mortgage level, the rental paid on a property is only approximately half of what the net yield is. It therefore is still quite a bit cheaper to rent than buy, but this is slowly changing as excessive rental demand bids up rentals on a relatively small stock of available properties. For a property investor weaker house prices can be very good news. As rentals grow and house prices fall, the initial yield on a property increases therefore making it more attractive to invest in residential property as an asset class. Recently Tenant Profile Network (TPN), which has an excellent database of rental property performance, and FNB, which has excellent data on property sales prices, have collaborated to produce the FNB-TPN National Average Gross Yield on Residential Rental Properties data set. This shows that the low point in average rental yields at 6,65% was reach in December 2006, as property prices rocketed, and then started to increase steadily as property prices dropped. The average national rental yield is currently 8,58%. The operating costs associated with a property have to be deducted from this yield to get to a net yield. Rode and Associates have suggested that as a rough estimate one can take 1.5 percentage points off the gross yield to estimate a net yield. At an average net yield of 7.08%, this is still below the cost of finance, currently at 8,5%. 

One fundamental risk every landlord adopts is whether he gets paid or not. TPN estimate that the level of tenants in good standing is currently 83%. That means that 17% of rental tenants had not paid on time. A property investor would therefore require a risk premium in the yield to compensate for this. The question remains then if 8,58% is sufficient to encourage buy-to-rent activity. For me it was sufficient as I see potential upside on both rental growth and price growth. For many investors it is not as yet sufficient as the 4^th quarter of 2012 buy-to-let buying is estimated at a mere 7% of total home buying. Nevertheless, in a destination such as Ballito, which is experiencing a significant inward migration of families from the greater Gauteng and Pretoria region, the fundamentals are all correct for investment in buy-to-let opportunities. I have seen the opportunity and put my money where my mouth is. Allow us to assist you to do the same while the opportunity is available.

(Author: Andreas Wassenaar, published in The Bugle 16th January 2013)

Zimbali Holiday Rentals (The Bush Telegraph)

The past holiday period was busier than ever in Zimbali in terms of number of visitors and holiday nights booked through our short-term holiday rentals business. As Zimbali matures, the number of homes developed and made available for holiday bookings increases and the desirability of the estate as a premier holiday destination increases. Having had the privilege of witnessing Zimbali develop first hand from its inception 17 years ago in 1996 to the amazing estate it is today, I am more bullish than ever on its future and status of being Southern Africa’s premier resort and lifestyle estate destination. 

The new homes that have been developed on the estate over the past five years have taken the architectural solutions to our tried and tested guidelines to a new level. Certain architects such as Theo Coetzee have almost single handedly redefined contemporary Zimbali architecture, while others who have been involved for almost two decades, such as Chen Sagnelli and Dennis Boyd who each have close to 100 Zimbali homes to their credit, have embraced contemporary design and materials to create some very special residences. The 2012 new build of the year award, if there were such an accolade, would have to go to Nigel Tarboton’s (Metropole Architects) design of 23 Forestwood Drive. This home has been listed with Seeff Properties at R32m. Adjectives such as awesome, sensational, spectacular or ground-breaking fail to capture the essence of what has been achieved on this site. Faultless design, engineering and construction have resulted in what can only be described as a residential residence at the very highest level of quality possible. So many people attempt to get it right but seem to fail either on the design or implementation side. Nigel has not done as many homes in Zimbali as some others, but each project seems to have resulted in something highly impressive. For those vacant land owners in Zimbali contemplating a new build my advise would be to spend a considerable amount of quality time on design – both in and out, before moving onto site. Most design aspects can be efficiently resolved with detailed 3D rendered drawings prior to the construction period. The ideal is to limit changes to the minimum once your contractor moves on site. 

For those Zimbali homeowners who already have a home and are renting their property for holiday purposes, or considering doing this, our extensive experience in this regard may be of use. Analyzing only our own holiday rental data for the 2012 calendar year, we can report that we did 364 bookings (basically one for every day of the year), over 2,180 nights booked at an average rate per night of R3,287.30. The highest average rate per night was achieved in December 2012 at R4,774.29 and the lowest in February 2012 at R1,716.39. Unsurprisingly the peak month of the year was December with 72 bookings and 661 nights booked. The low season months in terms of bookings were February 2012 with 97 nights booked across 13 bookings, and October 2012 with 80 nights booked across 20 bookings. The Easter holiday period is fairly busy but nothing like December. For April 2012 we booked 290 nights across 51 bookings. At 44% of nights booked the April period relative to December is characterized by shorter bookings, mostly clustered around the public holidays. On the whole the tenants that book through us are very well behaved and look after the properties. They love the Zimbali lifestyle and resort environment and many plan to invest in the estate. We find that most of the problems arise from properties that have not been serviced, maintained or cleaned sufficiently. At the top of the list are Air-conditioning units, which pack up over the summer period. We strongly advise our homeowners to have their air-conditioning units serviced every year just prior to the summer season. We can write a book on the things we have had to deal with. Waking up at 02:45 to check for spare keys because a guest has returned from a wedding and lost their set or being phoned by a tenant to come around and light a braai, is simply par for the course. There is an Afrikaans saying, which I love, and which often seems appropriate: “Daar is nie pille vir domgeid nie!” (translated: there are no tablets for stupidity).

(Author: Andreas Wassenaar, Extension to article published in The Bush Telegraph, Feb 2013)

Building the Property Ladder (The Bugle)

Welcome to 2013 and the opportunity to make a difference. At Seeff Dolphin Coast we are inspired by other influential entrepreneurs from around the world who have built sustainable businesses while at the same time making an incredible difference in the lives of those people they touch. One of the most amazing companies I have come across is a California based shoemaker called Tom’s Shoes (www.toms.com). Based on a philosophy of “One for One”, they give away a new pair of shoes to a needy child for every pair they sell, they are now active in over 50 countries globally and combine their charity with education about hygiene and healthy behaviours. They have also expanded into eyewear and provide prescription glasses, medical treatment and sight-saving surgery to those communities that need it most. 

We at Seeff Dolphin Coast have been blessed with exponential growth over the past three years, and in a market that can be described as flat when measured by total number and value of registered property transactions. Our business is driven by the guiding purpose of “Helping people to profit through property” and our daily management decisions are supported by six unchangeable values, which are set in stone. These are: Excellence; Integrity, Experience, Creativity, Passion and Family. We know who we are and where we are going. 

A measure of success I have always applied and promoted is that it is not how much you have, but how much you are able to give away that really counts. I am therefore typically unimpressed with the published reports on the 100 wealthiest individuals, either globally or locally, but regard individuals such as Warren Buffett and Bill Gates, who have been able to allocate billions to make a difference in the lives of others as incredibly successful. At Seeff Dolphin Coast we took the decision last year to allocate a certain amount from every property transaction, we are involved with and benefit from, to assist those people in our immediate community who are most in need. There is no shortage of needy people, but the children orphaned through HIV Aids and supported by faith based work in our greater Dolphin Coast community we consider as excellent candidates for our gifts. As great as it is to receive gifts, it feels even better when we are able to give them. We hope to encourage other businesses within our community to adopt a similar mentality, no matter how small, so that together we can make a significant impact. The ability for us as a property company to thrive depends on a healthy and economically active community from the lowest levels to the very highest. We think of property ownership as a ladder to wealth generation, with entry-level housing forming the first rung, and this progressing upwards with each higher tier of pricing. Each level supports and leads to the next. We will facilitate the movement of individuals along this property ladder at whatever level they are. For those not on the ladder as yet, allow us the advise you on how to get onto this ladder as soon as possible – it will be the smartest decision you make this year.

(Author: Andreas Wassenaar, published in The Bugle, 9 Jan 2013)