Palm Lakes Shines (The Bugle)

Something extra-ordinary is happening 13 km north of Ballito at Palm Lakes Family Estate. This 88 ha estate is located just west of the Tinley Manor turn-off from the N2 freeway and has rapidly gained the attention of developers along the Dolphin Coast. How has this estate rocketed up the rankings in terms of annual sales volumes to take the number four position just below Seaward Estates in third position and Dolphin Coast heavy weights of Simbithi Eco-Estate and Zimbali Coastal Resort that dominate the top two positions? Palm Lakes is now placed ahead of Brettenwood Coastal Estate and Dunkirk Estate in terms of annual sales activity. 

Wow! Somebody must be doing something right for the market to respond so positively and so quickly to a destination. If we look closer at the deeds office figures of actual registered transfers a picture of an estate on the move begins to emerge. The current registered stock of properties is provided as 259 sectional title homes and 431 freehold properties representing a pool of just below 700 existing properties. However this is only part of the picture as a pipeline of new properties is in place which will see the freehold properties growing to 652 by 2015 and the sectional title properties growing by an additional 228 units to 487 over the same period. This will then represent a formidable estate of around 1,139 properties. The 2013 year saw 24 sectional title sales registered with a value of R23,1m and 72 freehold properties registered with a value of R45,9m. A total of R69m in registered sales across 96 transactions is impressive. The average price of transactions taken from all transfers over the past twelve months in Palm Lakes is currently R1,439,163. This represents a very affordable price bracket and it is where the bulk of the market activity currently is. An age analysis of recent buyers at Palm Lakes in terms of the details recorded in the deeds office indicate that 34,94% are aged from 18-35, 40,96% are aged between 36-49, 22,89% are aged between 50-64 and only 1,2% are aged over 65. When over 75% of buyers are below the age of 49 this gives you insight into a youthful first time buyer market who want a high quality yet affordable and modern solution within a safe living environment. The new Palm Lakes retirement village sales are not yet included in these figures and ultimately once this large-scale 500-unit development within Palm Lakes is complete it will impact the buyer age-profile somewhat.

To get further insight into the property transactions taking place I analyzed all the transfers that have taken place within Palm Lakes over the past two years from 1^st January 2012. This pool of transfers is represented by 133 sales amounting to R114,7m. Of these sales, 89 were freehold sales (vacant land and built homes) amounting to R72,1m. The selling prices ranged from a low of R200,000 to a high of R2,300,000 with an average of R810,302.56 over this period. The average erf size traded was 672 sqm and the average price per sqm (land size) was R1,205. The sectional title transactions represented a pool of 44 transfers to the value of R42,6m. Selling prices ranged from R526,000 to R1,650,000 across a total of 5,224 sqm of space. The average rate per sqm actually traded over this period was R8,151.23. What does this tell us? Value with a capital V. And this is what is currently driving the Palm Lakes property market at the moment.

Published in The Bugle, 26 Feb 2014, Author: Andreas Wassenaar

Mortgage Bond Market Review (The Bugle)

To get an understanding of the scale of the American “quantitative easing” (QE) policy of buying financial assets so as the provide financial liquidity – i.e. money into the financial system, it is useful to compare our total national value of outstanding residential mortgages – reported by ABSA to be R809,9 billion to the value of QE. The level of US QE prior to the recent cutting back, had been US$85billion every month! That is more than our entire mortgage balances of the country being pumped into the financial system every single month. Imagine the value of total mortgages in South Africa doubling every month. This “liquidity” did find its way into stock markets – America’s S&P Index grew by 30% last year and the Japan’s Nikkei Index by 57%, buoyed by the monetary stimulus. Some of it definitely found its way into South African financial assets. 

When however the US Federal Reserve decided to cut back on this easing the money started to flood out of emerging markets. Our world is so inter-connected that a first time buyer along the Dolphin Coast looking for a 100% mortgage bond, and finds interest rates 0,5% higher in February 2014, largely because of the impact on our exchange rate of international funds movement, feels this impact directly.  

Ooba, our local leader in mortgage origination, and the facilitator of a good share of the new mortgage business provided annually in the country, recently published their key statistics on the performance of their market. Their average purchase price is R933,528 and their average purchase price of first time buyers is R708,989. I found it interesting that their average approved bond size is R793,931. For those of us who deal at the high end of the market, this seems like a lower than expected average. It does however provide some insight into where the bulk of the mortgage market is. The average size of the cash deposit was still relatively high at 15%, although lower than the 15,8% recorded a year earlier. For those optimists who expect 100% mortgage finance, these stats provide evidence that it is rare and that the terms of your loan will not be as good as when a healthy sized deposit is paid. The average age of their applicants is 37, which seems to remain surprisingly similar from year to year. The one very important benefit of shopping your mortgage application around through an originator, is that their average initial decline ratio is 46,9%. This means that 46,9% of the applications are declined by the first bank it is presented to. So of this pool of initial declined bonds, 25,7% of them will be approved by another bank. The effective approval ratio quoted by Ooba is 65,2%, which is an improvement on the 64,7% of a year ago. Another interesting aspect of mortgage finance is that it is not guaranteed that your bank is going to offer you the best deal on finance – you may have banked with them for many years, but your application will be subject to their current (and often changing) finance criteria. Many people are surprised at the typical 40% cash deposit required when purchasing vacant land. Some banks, such as Nedbank, have a general no loans on vacant land policy.

Published in The Bugle, 19 Feb 2014, Author: Andreas Wassenaar

Interest Rates and Rand Exchange Rate (The Bugle)

Interest rates have dominated the news since last Thursday 30/1/2014 when the South African Reserve Bank (SARB) announced through its Monetary Policy Committee (MPC) that it was raising is policy repo rate from 5% to 5,5%. This is the interest rate that the SARB lends money to the banking sector, which is always indebted to it. The banking sector by default therefore immediately increase their prime lending rate – within mere hours, by the same amount – prime was increased from 8,5% to 9% on 30 Jan 2014.  It’s only half a percent so why the mild panic? To understand market sentiment you need to have an understanding of where we have come from. On 16 September 2002 interest rates were at a peak of 17% and from there declined to a low of 10,5% by 15 April 2005. The upward cycle started and rates peaked again at 15,5% on 13 June 2008. On 12 Dec 2008 they were decreased to 15% and the downward trend started which bottomed out at our recent 8,5% from 19 Jul 2012. So for 18 months we have enjoyed the lowest rates in 40 years. The increase in rates by the SARB was somewhat of a surprise as most commentators were only predicting the increase to happen towards the end of the year. 

This increase brings to an end the downward cycle in rates and with it the expectation that rates will increase further, and it is this fear of increasing interest rates that has unsettled some. So what changed? The Rand fell out of bed. Our Rand exchange rates to the US$ (11.12), Sterling (R18.28) and Euro (R15) are all at five year highs. Consider the lows within this period: In May 2011 US$ traded at R6.57, in Jan 2011 Sterling traded at 10.32 and in Jan 2011 the Euro traded at R8.85. So a Brit has seen his currency appreciate against the Rand by over 77% in three years. That R16m Zimbali villa has decreased from 1,55m pounds to 875,000 pounds. We should be flooded with South Africans living and working in the UK looking to buy property back home. The impact of a depreciating currency on a small open economy such as South Africa is to significantly increase the risk of inflation. Petrol prices increase almost immediately, which impacts transportation costs, which impacts almost every sector of the economy. So what has driven the depreciation in the Rand and other emerging market currencies? It is the movement of investor funds in the capital markets. Non-resident investors in SA government bonds and equities were large net sellers during the last two months of 2013 – to the tune of R21bn in domestic government bonds and R19.4bn in equities. So why are these investors selling? The decision by the US Federal Reserve Bank to cut back on its quantitative easing programme has created the expectation of a slowdown in China and with that less demand for the raw materials imported by China, much of which comes from emerging markets, with South Africa being one. If investors expect less demand for our exports and therefore a poorer profit performance by those companies that export to China, they sell their investments and repatriate the funds. Strangely enough a recovery in the US and UK economies which allows for the Fed to cut back its quantitative easing is actually bad news for us as an affected emerging market in the short term. A stronger US economy will however be positive news for us in the medium term. The SARB outlook for our economic (GDP) growth for 2014 is 2,8% and for 2015 is 3,3%. The average growth for 2013 is expected to come in at an unimpressive 1,9%.  

So are things going to get better? Yes they are expected to. What about higher interest rates? Well your monthly installment on a typical 20-year bond of R1m increased by R319 as from last Thursday. Another 0,5% increase in rates could be expected and this will add another R324 per month to your installment. As long as you are comfortable with these increases you have nothing to be concerned about.

Published in The Bugle, 5 Feb 2014, Author: Andreas Wassenaar

Global and Local Property Insights (Ballito Mag)

How things have changed over the past six years. It was in January 2008 that the lights went out – literally as Eskom introduced extensive load shedding across our beloved Dolphin Coast area and the financial crisis gripped our economy sending our property market into a tail spin. The arrogance of an inflated asset market evaporated and 2009 represented the low point in the property market cycle. The mini rally of 2010 was short lived as the second half of that year represented a further squeeze. Developers put new projects on hold, banks were nervous and overly cautious and many prospective buyers adopted a watch and see attitude thereby withholding their buying decisions until some type of trend in the market could be determined. Towards the end of 2012 the surge in buying interest began and 2013 represented a very good year with transaction volumes returning to pre-crash levels, even though price escalation remained stubbornly constrained. As Seeff we experienced one record month after another, both locally and nationally. Similar reports were forthcoming from the other main real estate brands around the country. Estate agents had perked up and were starting to even experience stock shortages across certain price brackets for the first time in many years. Developers are back in force and have been buying up land en masse with a view to delivering product over the next five years. Several of our flagship estates along the Dolphin Coast are now experiencing vacant land shortages and buyers are realizing that price escalation is almost certain to follow. The Dolphin Coast property market is in a stable happy place with those professionals serving the industry starting the year with a renewed sense of confidence and positive expectation.

The international property market has similarly experienced a surge in demand. The Knight Frank house price index report provided evidence showing that global house prices had reached a new peak and exceeded its pre-financial crisis high. Average annual price growth across the 53 countries, which make up the index was 4.6%, with 69% of the countries tracked recording a positive price growth. The international property market stars that lead the growth were Dubai, China and Hong Kong with mainstream prices increasing year-on-year by 28.5%, 21,6% and 16.1% respectively. Impressive growth in house prices was also reported by other emerging markets such as Taiwan (15.4%), Indonesia (13.5%), Turkey (12.5%) and Brazil (11.9%). South Africa ranked 13^th on this list with attributed house price growth of 8.6%, marginally ahead of Australia which recorded growth of 7.6% and well ahead of New Zealand which was one of the 17 countries on the list that experienced negative growth. Interestingly only three of these 17 laggards, namely New Zealand, South Korea and Japan, are outside of Europe. There are however some pockets of hope in Europe with Germany, Austria, UK, Ireland and Switzerland representing positive house price growth. Ireland’s rebound in house price growth is noteworthy. Ireland ranked fifth in terms of quarterly price growth, with prices rising 4% on average over the three-month period. Less than two years ago prices were falling in Ireland at a rate of 5.4% each quarter. The recovery of the US housing market continues with house prices growing by 11.2% annually. The bottom four positions on the global list were taken up by Cyprus, Greece, Spain and Croatia with prices falling by -5.9%, -9.1%, -12% and -19.7% respectively. What a great time to buy in Spain or Croatia.

For South Africa the improvement in the international property market in general is positive news. The weaker exchange rate of the Rand has made our existing stock of residential properties more attractive to buyers making decisions in dollars, euros or sterling, and we can expect renewed interest from offshore buyers. Foreign buyers from Africa continue to grow and make their presence felt within the market. South Africa represents a more sophisticated market with access to first world amenities to these buyers. Our experience along the Dolphin Coast is that they are buyers of high-end opportunities while the typical European buyers seem to favour the middle range. They still have a perception of political risk attached to an investment in property in South Africa and therefore choose to limit their exposure.

The outlook for 2014 is positive. Two factors support my view. House price growth is starting to accelerate, demand has grown quickly and looks to match or even exceed supply soon. FNB’s published house price index for 2013 shows growth of 6.8% in nominal terms for 2013 on an annual basis, which compared to the 7.1% recorded for 2012. However, when we look at the monthly growth rates, December 2013 showed an 8.7% year-on-year growth rate. This shows acceleration towards the latter part of 2013, which we can expect to continue into 2014. The FNB Valuers Residential Market Strength Index is a wonderful measure of the demand-supply balance in the residential property market. During the past year we have seen a steady and increasing improvement in the demand rating, thereby closing the gap between the two. It is when demand exceeds supply that price escalation will start to become evident. When this happens the protracted buyers market we have become so accustomed to would have ended and the sellers will again start to exert their influence.

(Author: Andreas Wassenaar, published in The Bugle, Feb2014)