Interest Rate Update (The Bugle)

Last week, on 23^rd May 2013, The SA Reserve Bank monetary policy committee (MPC) meeting decided to leave the benchmark repo rate (the rate at which the commercial banks lend money from the Reserve Bank) unchanged at 5%. This ensures that the prime overdraft rate will remain unchanged at 8,5%. It is almost a year ago (on 19^th July 2012) that this rate declined from 9% to its current level, which believe it or not is the lowest level since Nov. 1973 – 40 years! That is a working lifetime for most of us. 

An excellent resource is the Reserve Bank’s website, and if you read the press release provided by Gill Marcus, the SARB Governor, this provides a comprehensive insight into the factors that influence the MPC’s decisions. The key points made are that the domestic and international economic outlooks remain fragile, our local labour relations environment is impacting negatively on investor confidence, and economic GDP growth prospects have been reduced to 2,4% for this year and 3,5% for 2014. The CPI inflation forecasts are lower however (good news) at 5,8% for this year and 5,2% for 2014. If you have noticed more South African’s planning on moving back to South Africa from Europe, this is not surprising as the Eurozone remains in recession. The French economy recorded two consecutive quarters of negative growth (the widely used definition of a recession) and the German economy managed to avoid recession by recording annualized growth of 0,3% (only just) in the first quarter of 2013. Far more positive news has come out of the US with a booming equity market and recovering housing market. Global inflation has moderated given the slower global growth and weaker commodity prices, especially the price of energy in the advanced economies. The amazing discovery of the technology of extracting natural shale gas resources in North America, which is being mined through a process called “fracking”, is propelling the US to energy self-sufficiency. Commentators are calling it a “Gas Bonanza”. Not without its critics on environmental grounds, the availability of cheap natural gas to the US economy could be incredible. The discovery of the large natural gas resources off northern Mozambique could become a significant supply of cheaper natural gas to SA and an employment opportunity to engineers and project managers, some of whom I know personally and already own property in Zimbali.

For property owners we can expect our mortgage rates to remain flat for the foreseeable future. The greater Ballito area, with its extraordinary quality of life and superb gated estates is attracting the attention of wealthy individuals from inside South Africa as well a north of our borders.

(Author: Andreas Wassenaar, published in The Bugle, 29 May 2013)

Capital Gains Tax and Residential Property (The Bugle)

Capital Gains Tax (CGT) as it applies to residential property is an important consideration for buyers and sellers and could materially effect your decision regarding the registration of a property. Capital Gains Tax was introduced to South Africa and became effective as of 1 October 2001 and applies to all South African residents and foreign citizens who own fixed property in South Africa. Non-SA residents are liable for CGT when a property that is situated in South Africa is sold. If a SA resident buys a property from a foreign citizen, the onus is on the buyer to withhold CGT upon settlement (done by the transferring attorney), otherwise the buyer may be held liable for the capital gains tax. The amount of this withholding tax is calculated based on a fixed percentage of the selling price and the rate depends on the legal form of the entity that sells the property – 5% for individuals, 7,5% for companies and 10% for trusts. As a SA resident selling a property the timing of paying over the CGT is different. The relevant information would be included in the taxpayers’ income tax return in respect of the tax year in which the capital gain is realized. If a property is transferred in the March of a given year, the information will only be included when the income tax return in respect of the year ending February of the following year is completed. There can therefore be a long delay between when the sale is finalized and the date when the CGT has to be paid. The calculation of the CGT payable on a transaction depends firstly on the capital gain and then on the registration (individual, company or trust). The capital gain is the difference between the selling price of the property less transaction fees (agents commission, attorney’s fees and transfer duty) less other selling costs, less renovations or capital improvements to the property, and then finally less the cost of the property when purchased. Repairs and Maintenance expenses (such as painting) or running costs (such as municipal rates and electricity) or holding costs (such as interest paid on a mortgage bond) are not permitted by SARS to be off-set as a reduction in the profit or gain when the property is sold. Once the net gain has been calculated the CGT inclusion rate is applied to this to determine the amount that is then added as taxable income. For individuals this inclusion rate is 33,3% and for CC’s/Companies/Trusts it is 66,6%. The tax rate for CC’s and Companies is 28% and for trusts it is 40% on retained income. For these entities the effective tax rate applied to the gain is therefore 18,6% and 26,7%.  For individuals the marginal tax rate varies between 18% and 40% resulting in a max. effective tax rate on the capital gain of 13,3%. The good news is that individuals can offset the primary residence allowance of R2m from the gain before paying any CGT on the sale of their primary residence.

(Author: Andreas Wassenaar, published in The Bugle, 22 May 2013)

Residential Property Market Recovery (The Bugle)

I recently wrote about the alarming growth in unsecured lending amongst all banks, but most notably African Bank and Capitec, who have been leading the charge in the micro-loans market. The difference between the 25% growth in unsecured lending and the less than 2% growth in secured mortgage lending was highlighted. Since then the equity market has responded negatively to the leading unsecured lenders with the share prices of both African Bank and Capitec coming under huge pressure. The great thing about equity markets is that they are largely efficient in disseminating information and representing the collective knowledge and view of many independent players. The share price represents the result of this, and when a company’s share price is hammered there is usually good reason for it. As we see real disposable income growth slowing from a peak of above 6% at the end of 2010 to 3.5% by the 4^th quarter of 2012 and now expected to slow further to between 2.5% to 3% during 2013, to be largely in line with expected GDP growth, we can expect retail sales to slow and definitely expect to see a slow down in unsecured lending. 

The interesting part is that at the same time we are seeing renewed growth in residential property demand. The expectation of a recovery in the growth in mortgage lending, the essential and critical fuel that fires a property market, is what we as estate agents will be looking out for. The South African Reserve Bank measures the collective investment growth in property stock in the country, which is called Real Residential Fixed Investment growth. This measure only returned to mild positive growth in 2012 after almost five years of constant decline. StatsSA also shows that there has been a return to slight growth in the square metreage of buildings completed in 2012 (approx. 2.8%) after years of sharp decline. The result, as a matter of course, is less supply of new homes to the market in general, and this is why estate agents in certain price brackets are now starting to report stock shortages from around the country. 

Another key statistic that is pointing to a recovery in the market is the Full Title Property Replacement Cost Gap, which measures the difference between the average full title building replacement cost and the average existing full title property value expressed as a percentage of the full title property value. Currently this is 21%, down considerably from a peak of 26.1% in late 2011, and the trend is downward. It is therefore on average 21% cheaper to buy an existing home than a new home. This difference will always be positive but it just depends on how large the difference is. The lower it gets, the easier it is for developers to bring new competitively priced homes to the market. All these factors are now pointing to a recovery in the residential property market.

(Author: Andreas Wassenaar, printed in the Bugle 15th May 2013)

Arabella (WC) vs Zimbali & Simbithi (KZN) (The Bugle)

Arabella Golf Estate in the Western Cape is situated in the Overberg area just before Hermanus, flanked by the Kogelberg Mountain range and overlooks the spectacular Bot river lagoon. The golf course was designed in 1999 by Simbithi resident and legendary South African golf course architect, Peter Matkovich. It is consistently rated as a top 10 golf course within South Africa and the Golf Digest South Africa 2012 rankings placed Arabella at no. 4. This is impressive. I am currently here for the annual national Seeff convention where the licensees who own the 200 plus offices get together and actively discuss and analyze the best practices within the real estate industry and the opportunities and challenges that may lie ahead. It is an exceptional opportunity for team Seeff KZN to interact with the rest of the country’s leading Seeff license owners.  

Having had the opportunity to play the Arabella golf course in perfect Cape weather I cannot help myself but to make the comparisons to Zimbali and Simbithi and to dig a little deeper to get an understanding of the property values and the level of trade. To this end I looked at detailed deeds office reports on these estates and it is interesting to analyze these figures to provide some perspective. Arabella is not a huge estate. It measures approximately 115 ha and has around 266 properties. Compared to Zimbali at 430 ha and 1,300 properties and Simbithi at 410 ha and 1,800 properties, you soon begin to understand the difference in scale between the Cape based golf estates such as Arabella and our flagship estates. My research into recently registered transfers within Arabella revealed that the highest was recorded at R5m for a beautiful home overlooking the 18^th fairway offering spectacular views over the lagoon, on a site measuring 1,026 sqm. The next highest sales were at R3,850,000 for a home on a 582 sqm site and R2,500,000 for a home on a 750 sqm site. The 13 sales recorded as registered during 2012 within Arabella averaged R2,3m in price. 

So how does this compare to Zimbali and Simbithi? The first point is that average land sizes of approximately 1,400 sqm for Zimbali and Simbithi are significantly larger. For 2012 year, Zimbali had 71 transfers at a value of R365m split between 47 freehold sales with an average price of R5,6m and 24 sectional title sales with an average value of R4,2m. Simbithi had 180 transfers at a value of R264m, split between 121 freehold sales (includes the vacant land sales) with an average value of R1,2m and 59 sectional title sales with an average value of just over R2m. In terms of real estate sales activity and average realized prices, there simply is no comparison – Zimbali is way ahead on value and volume and Simbithi is way ahead on number of transactions.

(Author: Andreas Wassenaar, published in The Bugle, 8th May 2013)

CPI Inflation Analysis (The Bugle)

“Sell in May and go away.” This was an adage used for stock market investors when considering the timing of their investments.  With property the timing of when to buy and sell is equally important and I have often said that you make your money when you buy, not sell. It is essential to buy at the best possible price to ensure that you have the greatest chance of a profitable return. You could do a lot worse than spending the month of May on the Dolphin Coast, and if the last week’s perfect weather is an indication, we can expect a blissful month ahead. The first quarter has been particularly busy for our Seeff Ballito office and has provided every indication of the signs of a recovery in the residential property market. The overall consensus is that demand is up but pricing down. More transactions are being concluded but at lower prices. Good news for buyers but frustrating for sellers. The March consumer price inflation (CPI) data was released by StatsSA and shows inflation remaining at 5,9%, just below the SA Reserve Bank’s upper target limit of 6%.  The residential rentals component of this CPI is currently 4,7%, which is still low despite a strengthening residential rentals market. The acute shortage of available rental stock along the Dolphin Coast, which anybody who has been searching for a suitable rental property can testify to, is the first building block required for a sustained recovery in the buy-to-let market. Rental prices have been bid up to such an extent that Simbithi rentals are now regarded as well above average and in many instances higher than similar properties within Zimbali. Currently the overall buy-to-let purchases are only 8% of total purchases, which remains relatively low, considering that this figure was 25% in 2004. The Housing and Utilities CPI component includes the electricity component, which remains high at 10,2%. The national electricity price regulator of South Africa (NERSA) did not however grant Eskom the requested price increases, which suggests that this inflation rate can be expected to come down. The Water and Other Services CPI component was also high at 9,2%. It has been these “administered” prices, including municipal rates, which has driven up the cost of property ownership so dramatically over the past few years. Rental rates can be expected to increase and escalation clauses in new leases can be expected to default to 10% on average. I think the days of your typical residential rental only escalating by 5% per annum may be limited and resisted by many Landlords.

With overall CPI inflation expected to average 5,5% for 2013, the expectation is that interest rates will remain unchanged for the duration of this year. One interesting item noted when analyzing the breakdown of CPI inflation according to expenditure group, is that the very low expenditure group has an official CPI inflation rate of 6,5% while the very high expenditure group has a rate of 5,9%. Inflation can therefore be seen as a regressive tax in that it impacts more negatively on the poorer segment of the population. Transport CPI inflation is currently 7,5%. If you thought your school fees were stubbornly high and growing you would be correct – Education CPI inflation is currently 9%.

With the escalating cost of living being such a harsh reality for all of us, investing to hedge against this becomes a critically important decision. Buying an investment property in a high demand area is one of the proven best ways to protect yourself.

(Author: Andreas Wassenaar, published 1st May 2013 in The Bugle)