Profiling your Tenants (The Bugle)

The highest residential rental I have concluded was an R85,000 per month rental for a Zimbali beachfront property. The year’s rental was paid in full, in advance. This sounds like a really good deal for a Landlord, but when you consider the value of the home (R35m) the gross yield at the rental rate is only 2,91%. It was therefore a far better deal for the tenant at the time. That type of return would not usually encourage a property owner to make their home available to rent. In the rental market, the yield curve flattens out as the value of the property increases. In general, tenants will only pay a limited rental for a property regardless of how exceptional the home may be. For buy-to-let investors in residential property the obvious question to ask would be, at what level of property value can I expect to get the best yield and what risk profile can I expect at that level. In general we understand risk as impacting on return – the higher the risk the higher the expected return. We would expect low value properties to present a higher risk profile than expensive properties, and would therefore expect the lower price brackets to offer the highest yields. But is this the case? What does the data of rental properties in South Africa tell us? Can I expect to get better yields in different parts of the country?

Tenant Profile Network (TPN), South Africa’s leading tenant credit bureau, and FNB teamed up to match house price and buyer behaviour with rental yields and tenant behaviour.  Although increases in house prices will often excite homeowners, investors will be more interested in increasing rental rates and yields. Depressed house prices often present the buying opportunities that investors would be looking for. The gross residential property yield, according to the TPN-FNB data is currently 9.18%, which is up marginally from the 8.87% at the beginning of 2013 but still a bit down from the 9.32% peak in 2012. As stock shortages of rental properties become more pronounced, rental rates will be bid upwards and yields increase, as long as this growth is faster than the rate at which house prices rise. The regional yields across the major metropolitan areas in South Africa indicate Johannesburg as the highest at 10.13% and Cape Town as the lowest at 8.15%. The Durban Ethekwini region delivers an average 9.02%. We see however that Gauteng and KZN record slightly poorer payment performance than Cape Town. The percentage of residential rental tenants in good standing in Gauteng is 86%, and KZN very similar at 85%, but Cape Town is higher at 88%. If the market is segmented by house price, the lowest segment (below R600,000) offer the highest yield (9.97%) and the brackets above R1,500,000 quickly start to drop off from 7.62%. When we segment the market in terms of rental value and analyse the tenants in good standing within each of these categories something really interesting emerges. The lowest rental bracket (below R3,000 per month) indicates 81% of tenants in good standing which is below average. The next two brackets – R3,000 to R7,000 and R7,000 to R12,000 both indicate a 88% level of tenants in good standing. The rental bracket from R12,000 to R25,000 represents a drop to 83% which is a little surprising (as lower yield should be associated with lower risk), and then very surprising is the dramatic drop off to 77% of tenants in good standing for rentals above R25,000 p.m. There is therefore a definite sweet-spot in the risk/yield paradigm in the R3,000 to R12,000 p.m. range. This would be the market to target for prospective buy-to-let investors.

Published in The Bugle, 29 January 2014, Author: Andreas Wassenaar

High End Luxury Property (The Bugle)

Every year the London based property consultancy, Knight Frank, publish a fascinating Wealth Report, which provides detailed insights into the investment behaviour of the world’s High Net Worth Individuals (HNWI’s). To be classified as a HNWI you require net wealth of US$30m. The figures provided show that globally there are approximately 190,000 HNWI individuals. Of these 66,000 or 35% are North American based, 54,000 come from Europe and 44,000 from Asia. Latin America has 15,000 HNWI’s and I am sorry to say that the whole of Africa only has 2,488. Interestingly the bulk of the forecasted growth over the next ten years comes from Asia and Latin America. Knight Frank predicts that the number of HNWI’s will increase by 50% over the next ten years. This huge increase will have a direct impact on a range of luxury asset classes, including the demand for luxury high-end real estate. The top ten countries for US Dollar based billionaires includes, in order, the US, China, Germany, UK and India as the top 5. The next five, in order, are Russia, Hong Kong, Switzerland, Brazil and (surprisingly) Indonesia. As a frequent visitor to Indonesia in the past, I always considered it more third world than South Africa and yet it has rocketed up the wealth rankings. Brazil is expected to shoot up to position 6 over the next ten years, and Indonesia is expected to take over from Switzerland over the same period. The US is however predicted to firmly retain its top position (by far) as the country with the most billionaires.

To track the demand for high-end luxury residential property, Knight Frank created the Prime International Residential Index (PIRI) which tracks 80 prime residential markets around the world. The latest published figures reveal that the top two positions were taken by Jakarta and Bali in Indonesia with price growth rates of 38.1% and 20% respectively. The next three high growth markets were Dubai (20%), Miami (19.5%) and Sao Paolo in Brazil (14%). Did any South African city feature on this list? Yes, Cape Town ranked joint 28^th with Kuala Lumpur both showing 1% growth. Not that bad when you consider that only 32 of the 80 markets showed positive growth, with the balance showing zero or negative growth. The analysis of price ranges per sqm. is amazing. Monaco topped the list with a range from US$57,600 – US$63,700. Imagine paying close to R700,000/sqm. for a property? Hong Kong and London represent almost as crazy pricing taking positions two and three on the list of the top 20, with rates per sqm. of up to US$54,400 and US$46,300 respectively. Cape Town, as the only African city to feature, ranked 20^th (just below Dubai) with rates per sqm. of US$5,500 to US$6,100. An international investor considering a decision between Cape Town and Dubai would find the pricing very similar. Having visited Dubai several times, for me it would be a no-brainer to choose Cape Town. However for your average Russian buyer, Dubai seems to tick all the boxes in terms of a high-end residential investment destination. In Cape Town US$ 1m will buy you on average 172 sqm. of space while at the other end of the spectrum the same amount only buys 16 sqm. in Monaco. In Zimbali the same US$1m will buy you a new modern 500 sqm. 4 bedroom villa fit for royalty. A recovering International residential property market is good news for South Africa and the momentum in our market is already being felt by local estate agents.

Published in The Bugle, 22 Jan 2014, Author: Andreas Wassenaar

Dolphin Coasts Top traded Estates (The Bugle)

The relative size of the residential property markets between the leading estates along the Dolphin Coast is an interesting aspect and provides insight into where most of the trade is happening. For Estate Agents trade in properties is everything. A property market characterized by limited trade will attract little interest from estate agents and typically be under represented while a market that has brisk trade will be fully represented by many service providers. 

The two engines for growth for our market have been Zimbali Coastal Resort and Simbithi Eco-Estate. It is instructive to note that very similar Rand value transaction volumes are done annually across these two hotspots. The deeds office data currently indicates that for the 2013 year, 102 transactions were registered in Zimbali at a total gross value of R346,2m. In Simbithi a total of 191 transactions were registered at a total gross value of R363,8m. Simbithi is therefore the number one traded estate by a narrow margin. As the data service providers typically experience some time delay between the date of registration of a property and when the deeds office releases the data, the information is updated over time and the final figures only become available a few months after the end of any given period. The two largest estates along the Dolphin Coast account for R710m in trade, which would represent almost half of all transactions within the greater Ballito area. 

Considering fourteen of the most actively traded estates, the third position is taken by Seaward Estates with 62 transactions and a gross value of R101m. Palm Lakes Estate has shot up the rankings to claim fourth position with a brisk 92 transactions and gross value of R66,4m. If you are not yet aware that Palm Lakes dominates the market at the R2,5m level along the Dolphin Coast a visit to the estate will provide insight into why this is such a hot spot for development at the moment. Brettenwood Coastal Estate and Dunkirk occupy position 5 and 6 respectively with very similar volumes. Brettenwood had 54 transactions at R61,4m and Dunkirk had 52 transactions at R55,5m. Princes Grant, as a large established estate surprisingly only occupies position 7 with 15 registered transactions at a value of R27,6m. This is very low given the extent of the property. One explanation is the dominant holiday market of second homes that characterizes Princes Grant – a market segment that has been slower to recover in comparison to the primary home markets. Umhlali Golf Estate takes position 8 with 10 transactions at a value of R22,4m. The remaining six estates within our sample group all did less than R20m in trade for the year, together producing 72 sales with a gross value of R89,1m. This represents less than 8% of the total trade across the fourteen estates. The six top trading estates account for 88% of the gross turnover within the sample group indicating how the market is dominated by the few larger gated communities.

(Author: Andreas Wassenaar, published in The Bugle, 15 Jan 2014)

2014 Outlook: A Balanced Market (The Bugle)

The start of a new year provides the perfect time to reflect on where the property market has come from and take a view on what we can expect to happen over the next twelve months. With every coastal town in South Africa inundated with visitors over the year-end holidays enjoying the sunny beaches and splendour of the surrounds it becomes an obvious thought to ponder – investing in a holiday home. Coastal properties have born the brunt of the tougher economic climate over the past few years but things have changed over the past twelve months and indications are that 2014 could be similar. 

As estate agents active along the Dolphin Coast our 2013 figures are up 41% on the prior year. Our sense is that demand for residential homes has improved and supply is steady or decreasing within certain price categories. The best known measure currently available in the market for the relative strength of demand and supply is the FNB Valuers Residential Market Strength Index. Currently on a scale of 1-100 the Supply rating is given as 56.24 and the Demand rating as 51.67. The overall Market strength index is provided as 47.72, which tells us two things. It is firstly a relatively balanced market and, secondly, with demand ratings still below the supply ratings we are unlikely to experience significant price escalation, even though we have seen the gap between supply and demand narrow significantly. The forecast by FNB for 2014 in terms of price growth of residential properties is 6,5% and is similar to the anticipated 6,6% which the final figures for 2013 are expected to show. As a buyer this would indicate to me that it is no longer a market in which I can dictate the terms of a transaction as a relatively equal strength rating between buyers and sellers means that transactions are happening at fair market prices and as long as the property is priced correctly, a sale is likely. There are some exceptions to this general trend. Homes priced above R10m, especially in areas represented by a large number of non-primary holiday homes, remain in a buyers market where the supply of homes available for sale significantly outweighs the demand for these homes.

Property economists would temper our enthusiasm for a more buoyant property market in 2014 by drawing attention to the peak in the growth of the market demand strength, the downward trend in both the GDP growth figures and the growth in overall compensation of employees. The growth in transfer duty revenue is an interesting one to watch and although this shot up during 2012 and 2013, reflecting the good times the residential property-related industry has been feeling, the data indicates that this growth rate has peaked. Another excellent statistic to watch if you are looking to predict a trend is the SARB Leading Business Cycle Index. This growth rate has been flat which does not add anything to the case for resurgent property prices. We therefore find ourselves in a very good position. We are in a stable, balanced market, which is not expecting any dramatic change over the next twelve months and is currently rewarding buyers and sellers that embrace a realistic view of pricing.

(Author: Andreas Wassenaar, published in The Bugle, 8th Jan 2014)