Wednesday, 9 July 2014
What do Brazil and South Africa have in common, apart from being host nations of the FIFA World Cup? According to leading global ratings agency, Fitch, South Africa and Brazil are expected to lead the residential house price rises for 2014. In their published report, the Global Housing and Mortgage Outlook, they examined 17 countries and at that stage predicted average nominal house price growth of around 6% for Brazil and South Africa. Globally Fitch regards Germany, the UK, Ireland and Portugal as having an improved outlook, while Spain, Greece, Italy and the Netherlands are still having a tough time. Interestingly according to Fitch the expected peak to trough decline in Dutch house prices is 25%, not too far below the dramatic 30% decline in Spain since the onset of the financial crisis. The house price index for Greece (as expected) has had the worst decline at 42%. Australian capital cities experienced strong growth over the past two years as demand exceeds supply. Fitch expected Australian house prices to grow by 4% on average in 2014. The US housing market has recovered strongly and Fitch now report that their Sustainable Home Price model indicates that national US home prices are approximately 15% overvalued in real terms. For Canada, Fitch are indicating a 20% overvaluation and for the UK a 15% overvaluation.
We do have marginal variations in our local house price growth measurement depending on how it is measured. As an example FNB’s house price index is currently showing year-on-year growth of 7,8% while ABSA’s most recently published house price index report indicates growth rates of 8,2% for small homes (80 – 140 sqm), 6,4% for medium sized homes (141 – 220 sqm) and 7,9% for large homes (221 – 400 sqm). The Fitch report did however warn that expected interest rate increases at home could temper further price increases and subdue demand for mortgages. This we already know. Fortunately so far this year the actual interest rate increase has been limited to a single 0,5% increase from 8,5% to 9%. ABSA have indicated that they expect a further 0,5% increase in interest rates in September of this year. Our Rand to US Dollar exchange rate peaked in February 2014 at an average rate of R11.12 to the Dollar. Since then it has improved and currently averaging R10.68. The idea of a consistently depreciating Rand has not as yet materialized which has provided some relief from further cost-push factors on our local inflation rate. The first quarter of 2014 saw our real gross domestic product (GDP) contract by 0,6%. A recession is defined by two subsequent quarters of negative GDP growth. Our economy was therefore on the brink of recession. The growth figures for the second quarter are not out as yet, but in a statement of the obvious our new Finance Minister, Nhlanhla Nene, was quoted on Bloomberg as saying we would probably miss our 2,7% growth target for 2014. Barclays Research is predicting a final GDP growth rate for 2014 of 1,4%. With depressed national economic growth figures, what is an astute property investor to do? Buy high yielding rental properties at great prices.
Published in The Bugle 9th July 2014, Author: Andreas Wassenaar
Wednesday, 2 July 2014
A recent article on Property24 about the Buy-to-Let investment option as an alternate to traditional retirement saving vehicles caught my attention. The on-line responses from members of the public ranged from enthusiastic to negative. As a buy-to-let investor I regard it as an essential part of any long term saving strategy. As with all savings vehicles, the earlier you start in your career the better. Property investment should be seen as a long term strategy and as with most other asset classes can be cyclical by nature which means that timing the initial investment will remain an important aspect in determining your eventual yield and return. For those considering a buy-to-let strategy here are the 5 key considerations to get you started:
1. Planning: It is important to have good legal and accounting advise to ensure the correct vehicle is chosen to acquire the properties. Capital Gains Tax and Estate Duty are significant considerations to take into account. I decided on a trust to acquire long-term investment properties, which is excellent for estate planning but not as tax efficient for capital gains tax. Laws are also subject to change and this may tip the balance in favour of one vehicle rather than another.
2. Research your market: It is essential to have a clear understanding of pricing and the property market cycle of the market you are looking to buy into. I have kept my investments local and close as this is what I understand. Others have invested further afield such as London, Sydney or Florida. This can be good as a Rand hedge although the capital cost of entry may be prohibitive.
3. Decide on how to finance: The significant advantage of property investments is that mortgage finance is readily available meaning that you can leverage your investment and use the bond as an excellent savings tool. The amount of mortgage finance to use on any property should be carefully considered – associated costs should first be deducted from your gross rental before finance costs are factored in. Ideally you want to end with a paid off portfolio of buy-to-let properties providing you a passive monthly income.
4. Consider all additional costs: Property transaction fees can be high as transfer duty is payable on every purchase. The case for investing in lower value, high yielding properties is strengthened when you consider the sliding scale of transfer duty below the R1,5m level. It is only above R1,5m that transfer duty is a flat 8%. Up to R600,000 zero is payable, only 3% from R600,000 to R1m and only 5% from R1m to R1,5m. My perfect price range for a buy-to-let opportunity is therefore R1m. The other major monthly costs are Body Corporate and Estate levies, Municipal Rates and repairs and maintenance. When well managed and considered as part of the overall investment cost, these items need not be a deterrent to a successful buy-to-let strategy.
5. What property type is best? Tenant Profile Network have published detailed research on tenant behavior and shown that the R7,000 to R12,000 rental per month range is represented by the most reliable tenant group. Properties offering a high initial yield (a gross 8% or higher would be considered good) and within a high rental demand area are ideal. Location is always the critical factor as it equals demand.
Published in The Bugle, 25 June 2014: Author: Andreas Wassenaar
Wednesday, 25 June 2014
I often find it surprising how low the average approved mortgage bond is when our house prices are generally more substantial. Ooba, South Africa’s leading mortgage originator, recently reported that their average approved bond size is only R818,955. This is on an average purchase price of R947,086. First time buyers currently represent 25% of all buyers in the market, but according to Ooba make up 51,3% of all Ooba’s bond applications. This is incredible and gives us an understanding of how key this segment of the market is. If you are a mortgage originator or finance provider your product offering would therefore be tailored to a large extent to address this first time buyer market. The average age of an Ooba applicant is 37, and 47,5% will be declined by the first bank they make application to. However, 27% of those who are declined by one bank will be approved by another, meaning that Ooba’s effective approval ratio is 65,3%.
We know that currently total South African household mortgage balances are R816,7bn, growing at a subdued rate of only 2.3% year-on-year. This represents 72,6% of all mortgage balances in the country indicating how important residential mortgages are in the bigger picture. I regard mortgage debt as generally “good” debt, as it is typically long term in nature and used to finance a growing asset. However, households borrow money for more than just mortgages and 41% of all household credit balances (i.e. their debt) are in non-mortgage related finance such as instalment sales, leasing finance, overdrafts, credit card debt, personal and micro loans. Unsecured lending that grew exponentially during 2012 has fallen back dramatically, much to the dismay of micro-loan finance providers such as African Bank and Capitec. Economists are however relieved as the perceived bubble in unsecured lending was like a time-bomb waiting to explode. Unsecured lending (general loans and advances, credit card debt and overdrafts) is typically on consumption expenditure and this makes it dangerous and the type of debt I would refer to as “bad” debt. This type of debt is still growing at 7,3% year-on-year but significantly down from the 31,6% recorded in November 2012.
So when is debt “good” and when is it “bad”? The beauty about investing in property is that there exists a mortgage bond market to readily finance this asset class at reasonably competitive interest rates and terms. This allows you to easily buy an asset with part equity (cash) and part debt and thereby leverage your purchasing power. It is good when used in a way that matches your ability to service the debt. You should always consider a “what if” scenario – if you had to sell the property quickly by reducing the price, would you still be ahead? You would be if your loan to value ratio was relatively low, say 50%, and kept at these low levels as part of your long term investment strategy. Once you have a property with an access bond facility active on it, this becomes an excellent savings vehicle as the effective rate you earn by depositing extra cash into the mortgage facility is equal to the bond rate, currently at 9%.
Published in The Bugle, 2 July 2014. Author: Andreas Wassenaar
Wednesday, 18 June 2014
Are you an optimist? Stephen Covey introduced us to the 90/10 Principle. This idea says that 10% of life is made up of what happens to you – the things you cannot control, but that 90% of life is decided by how you react, and this you have complete control over. As a property professional there are things I have no control over. Interest rates, striking miners impacting on our gross domestic product, or a global financial crises. While it may be instructive to be aware of what is happening outside your sphere of influence so as to be ready for the opportunities that may present themselves, it is of little value to dwell on these things.
I was recently asked if it was a good time to sell and emigrate. I was surprised by the question as my mindset could not be further from this frame of thought. I cannot think of a better time in our recent history to be part of the poised growth of Africa and to have the privilege of living and working in South Africa. The hammering of our recent gross domestic product growth and the recessionary talk that has been pervasive in our media simply spells opportunity to me.
I will talk you through 12 current key property economy statistics and explain why I interpret this data as positive and an opportunity to profit through property:
1. Household sector real disposable income growth hits 2,5% representing a steady decrease over the past two years. I note this but realize the flip side is that property prices will remain subdued which helps me find the best possible buys.
2. Household Debt to Disposable Income Ratio down at 74.3% from the peak of 83% in 2009. This is a big improvement and means that household balance sheets are stronger. Interest rates at 9% remain the lowest in 40 years.
3. FNB Residential Demand Strength Index is steadily up from 2009.
4. FNB’s Residential Market Activity Indicator hits 6.76 – a level closer to the pre-2009 recession levels – good news!
5. FNB Residential Supply Strength Index – moving up and still stronger than demand indicating overall adequate stock levels and new stock coming on stream.
6. Agent Stock Constraints reported by 18.5% which is the highest over the past 7 years indicating the people are buying up the stock of existing properties and the back-log of homes is shrinking. This will mean that homes that have been on the market for a while in certain areas should now be trading.
7. Average time a property is on the market (nationally) sharply down to 13,6 weeks and heading downwards.
8. Proportion of properties sold at less than their asking price is now 81%, which is down and heading south supporting the view of increased demand being prevalent.
9. Average percentage drop in the asking price to secure a sale is down at 8% - a big improvement on the 13% recorded in 2011.
10. Affordability of housing has steadily improved over the past 7 years as measured by the average house price index over average labour remuneration.
11. First time buying activity is now at 25% and growing – a sign of a more active property market.
12. The proportion of buyers buying to let is slightly higher at 9% (from 8%) but remains low, which is a great buying opportunity to take advantage of the higher rental yields.
Published in The Bugle, 18 June 2014, Author: Andreas Wassenaar
Wednesday, 11 June 2014
We have an interesting anomaly that has developed recently. Our property market has remained buoyant in the face of a deteriorating general economic outlook. Our sales figures are up while GDP growth rates are down and the SARB Leading Economic Indicator is showing a further weakening in the near term. To some extent we can explain this by suggesting a level of pent-up demand is now after six years of flat price growth, being released. It was a relief that the May meeting of the Reserve Bank’s monetary policy committee decided to keep interest rates unchanged despite CPI inflation breaching the 6% upper target limit range. This counter-cyclical evidence is unusual and raises questions as to the sustainability of the current demand surge for property that we are experiencing. Transfer duty receipts by the government is an excellent way to measure the property cycle and by watching these figures closely we can get an indication of when the general trend reverses and we start heading in the opposite direction. The April figures published at the end of May still showed robust growth in transfer duty receipts, with year on year growth rates at 24,3%, but slightly lower than the 25,7% of March and significantly lower than the 49,4% recorded in January 2014. The current sideways movement in transfer duty receipts growth rates is expected to change to a slowing growth rate during the second half of 2014. If you were to analyze the last 100 transactions through our office you would find the average time between date of sale and date of transfer is 90 days. Any slowing in property sales activity would therefore typically be noted three months down the road.
Even though the FNB House Price Index showed growth of 8,1% in May 2014, up from 7,9% in April, economists are warning us that there are indicators that suggest a slowdown in growth rates is looming. When clouds begin the gather you need to understand the potential risks and opportunities that may present themselves. We saw that real economic growth for the first quarter declined by -0,6% - the worst quarterly performance in five years. The impact of the Platinum miners strike has made itself felt. When 70,000 relatively well paid miners strike for a lengthy period, the cumulative impact on the economy can be surprisingly severe. Retailers exposed to the purchasing power of this group would most certainly have experienced a dramatic drop in sales. Disposable income is another key statistic that has been on the decline. Compensation to employees measured a 7,85% year-on-year rise in the first quarter of 2014, representing a third consecutive quarter slowdown. When people have less money to spend, we can expect decisions to buy properties harder to make. Herein lies the opportunity. The buyers market will continue, rentals will continue to rise and pricing will remain relatively flat. All great news for property investors. I have already identified the best buy-to-let opportunities and yields are edging upwards.
Published in The Bugle, 11 June 2014, Author: Andreas Wassenaar