Interest Rate Review (The Bugle)

The South African Reserve Bank’s (SARB) monetary policy committee met last week to discuss the state of play of the South African economy and make a decision on its policy repo rate interest rate. The decision was to keep this key rate at 5% which means that the prime interest rate charged by South African banks remains at 8,5%. This is good news for those who are servicing mortgage bonds as your monthly repayments will remain the same. Gill Marcus, Governor of the SARB, described the economy as fragile and vulnerable to changes in the exchange rate of the Rand, Business and Consumer confidence, local Industrial action and international variables such as the US Federal Reserve policy on quantitative easing. Did you know that the exchange rate of the Rand has depreciated by 57% against the US Dollar over the past three years? Surely we should be experiencing an upsurge in offshore interest in our residential properties? With prime homes along our Dolphin Coast priced in dollars now 57% cheaper, this represents incredible value. The Rand:Dollar exchange rate is around 10.12, the Rand: Pound rate around 16.41, and the Rand: Euro rate approximately 13.66. While a depreciating Rand could tempt purchasers of our local residential properties who are basing their decisions in dollars, pounds or euros to buy, the negative aspects of a depreciating Rand impact on our local inflation rate through more expensive imports, including the price of oil which touches almost every part of our economy. Our current consumer price inflation (CPI) rate is at 5.5%. The producer price inflation rate is 6.7%. For those with a keen interest in the property industry you should keep your eye on these rates as we know that a substantial move in the CPI above 6% would prompt the SARB to increase interest rates, and in turn the cost of servicing mortgage bonds. So what is the SARB forecast for CPI inflation for the next two years? They expect inflation to average 5.8% for 2013, 5.7% for 2014 and to edge down to 5.4% in 2015. If these forecasts turn out to be accurate, we can expect our interest rates to remain flat over this two-year period.

It is good to know that the price of money will remain the same, but what about is availability? Mortgage extension growth in South Africa as a whole is less than 3%. This is particularly low and indicates that the banks are not as yet easing their credit policies to substantially increase lending on mortgages. If you are a seller, this means that you are unlikely to see much price escalation in your home. It is only where we can see a shortage of certain stock levels of property, that substantial increases in the pricing become evident, due to basic economic supply and demand forces.

According to the RMB/BER business confidence index, which measures the outlook of businesses in the economy, we are currently at a ten-year low. The manufacturing sector took a hit in the third quarter with Industrial action claiming a 27,9% decline in the production of motor vehicles, parts and accessories. This has far reaching consequences and is the type of shock to the economy we would like to avoid.

So what is an astute property investor to make of this? Buy while there is plenty of bad news around, and equally be ready to sell when euphoria sets in.

(Author: Andreas Wassenaar, published in The Bugle, 27 Nov 2013)

Professionalisation of the Estate Agency industry (The Bugle)

Last week I wrote the first exam in over twenty years since leaving University. It was stressful. I remember my UCT student days fondly but for some reason cannot remember the exam part as much. It was the Professional Designation Exam for the National Certificate Real Estate (Level 5) qualification that all principal estate agents are required to complete. Every estate agent in South Africa is required to complete the level 4 equivalent. The changing face of the estate agency business is something you may have noticed or come across recently if you have been a buyer or seller. The required education standards are raising the bar for entry into the industry and going a long way to ensure the on-going professionalisation of the estate agency business. This is a good thing. The value I took from having to study two very thick lever arch files of information in preparation for the exam, was a substantially better knowledge of the legal framework and enormous bulk of existing legislation regulating the property market. The Estate Agent’s Code of Conduct featured prominently in this exam and the insights you get while studying every aspect of this ethical code makes for a better agent. Higher levels of knowledge and the requirement for continuous professional development for estate agents, is going to be very good news for buyers and sellers, tenants and landlords.

The property market boom times of 2003 to 2007 saw the industry swell to approximately 90,000 registered estate agents within South Africa. Although the real economic crunch did not hit us until 2008, it was during 2007 that the impact of the National Credit Act was felt for the first time. The National Credit Act 34 of 2005 was passed by Parliament on 10^th March 2006 and the main provisions of the Act came into effect on 1^st June 2007. This comprehensive piece of legislation regulates the granting of credit to consumers. Its purpose is to protect consumers and regulate credit providers. The Act regulates consumer credit, promotes responsible credit granting and prohibits reckless granting of credit. The impact of this legislation meant that the credit extension policies of financial service providers, including providers of mortgage bonds to the property market, changed overnight. The result was that there was a dramatic drop-off in mortgage bond extensions and the number of transfers registered in South Africa went from 44,000 per month to around 22,000 per month. The effects were felt throughout the industry. The number of registered estate agents declined by over two thirds to well below 30,000 today. With a two-thirds fewer estate agents in the market and half the transactions, the average estate agent today is actually better off and a whole lot more educated. The required education standards have created a barrier to entry for aspirant agents both in terms of time and cost. Part-timers will disappear from the industry and be replaced by committed and motivated individuals who are serious about making real estate their profession. My own two decade journey within the property market has lead me to understand that the more you learn, the more you realize how much more there is to know.

(Author: Andreas Wassenaar, Published in The Bugle, 20 Nov 2013)

Lower Income Market Segment Leads (The Bugle)

As estate agents at the coalface of the property market, we have an intrinsic sense of market conditions and can quickly understand which segments of the market are most active. Our recent experience along the Dolphin Coast is that the lower end of the market is very active and outperforming the high end. This view is supported by the recently published FNB estate agent survey report analyzing the residential property market performance by price segment, and categorized into Lower Income, Middle Income, Upper Income and High Net Worth. The  activity levels in the bottom two segments suggest that this is where a lot of the trade has been happening. The main reason for selling in the lower bracket is to upgrade, the estimate of this currently being 24% of all these sellers. For the other three segments the incidence of selling to upgrade ranges between 15% and 17%.  The lower bracket sellers are buying in the middle bracket thereby adding support to this segment with the result that both of the lower segments have performed well. The sellers in the middle income segment looking to upgrade are estimated at 15% thereby providing far less support to the income segment above it. Strong first time buying is a main driver of the lower income segment. 

Excellent examples within our immediate area are new developments such as Sheffield Manor and Manor Estates. As these are new developments, and therefore no resultant group of sellers from this pool are looking to upgrade as yet, the higher priced segment has not enjoyed support from this source. The impact of first time buyers on these developments is however significant and this pool of buyers is a key target market for these local developments. The financial stress-related selling in order to downscale has declined (improved) consistently across all the income segments but more rapidly in the lower income segment. Compared with the peak of 38% of the 2^nd quarter of 2009, the lower income segment have seen their percentage of sellers believed to be downscaling due to financial pressure decline to 15,7% for the four quarters leading to and including the 3^rd quarter of 2013. Whereas the lower income segment had a far higher percentage of sellers between 2008 and 2012 looking to sell due to financial pressure, this has been reversed over the past year and this financial stress related downscaling percentage has even moved below the percentages of middle income areas (17,7%), higher income areas (16,3%) and high net worth areas (16,3%). 

Selling price realism as measured by the period a property remains, on average, on the market prior to selling appears to be better in the lower income segment. For the 4-quarters up until the 3^rd quarter of 2013, a home in the lower income segment would take 11,6 weeks to sell. The middle income (13,4 weeks), the upper income (19,5 weeks) and the high net worth (18,5 weeks) market segments indicate a greater degree of over-pricing. We have noticed this along the Dolphin Coast where properties in the lower and middle income segment trade relatively quickly with stock shortages now becoming more prevalent. The percentage of seller’s having to decrease their asking price in order to secure a sale (84%) is also lowest in the lower income bracket, which compares to the 86,3% of the high net worth segment, 87,8% of the middle income segment and 91,3% of the upper income segment.

(Author: Andreas Wassenaar, published in the Bugle, 13 Nov 2013)

Two Golf Estates: Western Cape vs KZN (The Bugle)

I had the privilege this past week-end of attending a wedding on the picturesque Lourensford Estate in Somerset West, Cape Town. The weather can be hit and miss in November, but it delivered clear blue skies and no wind, which then makes the Cape look incredible. We stayed at the Erinvale hotel, which was of particular interest to me, as the Erinvale Golf Estate is one of South Africa’s most established residential golf estates. As I also had the opportunity to visit the suburb of Tokai, home to the flagship Steenberg Golf Estate, I could not help myself but do a deeds office analysis of these two golf estates and then compare them to Simbithi and Zimbali. Erinvale is situated in Somerset West, on the edge of the suburb and Helderberg Nature Reserve. The well known Vergelen Wine Estate is located next to it, and the Lourensford Wine Estate borders Erinvale and is particularly impressive. 

My research on the recent property transfer history for Erinvale revealed that the estate is relatively small measuring 155ha in extent and with 437 tradable properties – split between 45 sectional title units and 392 freehold properties. I immediately noticed that they had not imposed an architectural theme or language with the resulting mismatch of different designs and styles actually detracting from the overall beauty of the destination. Once you see an estate that does not have the strict architectural guidelines we are so used to along the Dolphin Coast, you realize the wisdom of having and applying architectural controls. I am thankful that Simbith and Zimbali have been developed along design codes implemented from the outset as this adds significant value overall. The Erinvale sales registered over the past 12 months indicate an overall average selling price of R5,154,545, with 18 sales registered this year to date. Many of the freehold transactions I picked up on were around the R4m level and typically on a site size of around 800 sqm. The sectional title units seem to trade in the R12,000 to R17,000 / sqm range, which is not dissimilar from Simbithi or Zimbali. 

Where I was a little more envious was the transfer data I picked up on for Steenberg Golf Estate. Not particularly impressive in terms of location, estate size (it is only 96ha with 245 freehold properties) or architectural language, and with homes built relatively close together on sites of around 800 sqm, which we would regard as smaller than our average site size, the pricing achieved on Steenberg homes is very impressive. The average price for those registered sales over the past 12 month period in Steenberg is R11,537,674. I noticed that the volume of trade was significantly less than I would expect, with only 12 registered sales to date this year and this is an increase on the only 7 sales registered in 2012, the 7 in 2011 and the 8 in 2010. It does therefore seem that Steenberg is characterized by low trade volumes. This indicates either that people love their properties and tend not to sell them or that pricing is actually too high, thereby restricting sales volumes. By comparison the average price in Zimbali is R6,803,357 and there have been 80 transactions registered this year to date. The average Simbithi price is currently R3,212,321 and 138 sales have been registered this year. I believe that our Dolphin Coast golfing and lifestyle estates offer incredible value and are aesthetically a superior product.

(Author: Andreas Wassenaar, published in The Bugle, 6 Nov 2013)