Rand Exchange Rate & Property Demand (The Bugle)

The Rand exchange rate weakness of late has become a hot topic of debate and a major concern for many businesses in South Africa that rely on imported components. While exporters do benefit on the one hand, in many instances imported equipment is extensively used by the same exporters making the net effect of a weaker Rand value somewhat watered down. Traditional wisdom regards the exchange rate value of a currency as a proxy for the share price of that country. If global investors feel confident about a country and its long-term future they tend to invest in the country, the net effect being a strengthening of the exchange rate as capital flows into the local currency. With South Africa relying on imported goods to such a large extent, a weaker Rand immediately filters through into inflationary pressure and higher prices for so many goods we make use of every day. Higher fuel costs is one such basic good, which in turn has ripple effects throughout the entire value added chain of an economy, especially in food prices and the transportation thereof. The idea that a weaker Rand can benefit us, has been peddled by some, but is essentially flawed. In an excellent article published in the Business Section of the Sunday Tribune newspaper on 17^th March 2013, John Loos obliterates any argument for a weaker Rand and demonstrates that even labour skills migrate to countries with strong currencies.  

This debate on the Rand exchange rate extends into the property market. As we frequently interact with both buyers and sellers who are based outside of South Africa, the value of the Rand does play a significant part on the decisions made by off-shore buyers and sellers. We are currently marketing a R6m property on behalf of a seller who is based in the UK, but who has homes in several other destinations and who tends to work in a US Dollar environment. Had he sold this property in May 2011 at a US$ exchange rate of R6.57 at the time, his hard currency proceeds would have been US$913,242. By holding on to the property, and should a sale have been concluded this week, at a US$ exchange rate of R9.19, his proceeds would now be US$652,884. This represents a 28,5% drop in the US$ value of the property over this period. So does the cheaper US$ price for our residential properties cause a flood of foreign buying? To some extent it will encourage this behavior, but there are further issues that every foreigner considers. These relate to the volatility of the Rand exchange rate and the future uncertainty – both political and economic that goes with it. Consider that in February 2009 the Rand Dollar exchange rate averaged R10.27. Big swings in the value of our currency create uncertainty about the future value. This discourages foreign buying. Furthermore, when the Rand is weakening, such as it is at present, prospective buyers may hold back on their decisions to buy anticipating even further weakness. A country and property market become attractive and competitive as an investment destination through fundamental things like higher labour productivity, laws that protect property rights, higher savings rates to fund fixed investment and higher levels of service delivery. Not, unfortunately, through a mere lower value of the Rand exchange rate.

(Author: Andreas Wassenaar, published in The Bugle, 20th March 2013)