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South Africa Property Market

South Africa Property Market - What's Happening?

Diverse views… Varying opinions… Contrasting statistics…Confidence levels that are sometimes poles apart. Prompted by the upward trend of interest rates (400 basis points to date), a steady reduction in average residential property price growth (single digit growth predicted for 2008), the challenges presented by the National Credit Act, and a CPIX inflation that hovers above the 6% mark, the hitherto buoyant South African property industry is finding itself under a great deal of scrutiny.

Although these factors are certainly the harsh realities of the day, you will probably need to look at more than just those to better gauge what is happening in the property industry in South Africa at present. And, whilst 2008 doesn’t promise to be the rosiest year ever from a property perspective, the outlook is not quite as bleak as some of the prophets of doom might lead you to believe!

Here is why.

An Economic Take

The Global Economy: Seen against the backdrop of global property pricing trends, you will find that South Africa is pretty much in the same boat and on the same ocean. Countries such as the USA, the UK and Australia have all been reporting varying degrees of reduction in property pricing growth. Although the slowdown in South Africa started taking place well before the US subprime mortgage market crisis, the resultant turmoil contributed to a somewhat steeper drop in our property pricing growth during October, November and December last year.

You could however expect to see some of the ground recovered during the second and third quarters of this year when the effects of the aggressive interest rate cuts made by the US Fed to prevent their country from entering a recession, spill over into the South African financial sector.

The South African Economy: In spite of solid economical growth (app. 4%), our CPIX inflation rate has been lingering above (and sometimes well-above) the 6% threshold since April last year, with higher-than-CPIX wage increases and soaring oil prices, quoted as some of the culprits. In order to bring inflation back down to within the targeted range, the Reserve Bank tightened up on their monetary policies and increased the repo rate by a total of 100 basis points during the last two Monetary Policy Committee meetings of 2007, bringing the tally to 400 basis points since mid-2006.

The resultant higher cost of debt together with the inflation-related higher cost of living, equal less disposable income. This, in return, is placing a damper on the general demand for property.

Although the disciplined approach taken by the Reserve Bank may leave you out of pocket right now, it could see CPIX dropping to approximately 5.8% during the final quarter of this year. If this happens, the opportunity could be there for you to claw back some of your disposable income as repo rate cuts could well be on the cards again during 2009.

An Investor’s Take

A Buyer’s Market: 2008 heralds the return of the Year of Good Bargains. The South African property market is presently a buyer’s market and as oil magnate J. Paul Getty once put it: "I buy when other people are selling."

As a result of the prevailing economic factors, the supply of property is greater than the demand. This means that you are likely to find yourself in a position to drive really good bargains on rental -, holiday - and commercial/office properties. Of essence is that the property is in the right location; that leases are in place in the case of commercial and rental properties; and that there are no land claims pending.

It is worthwhile considering that the expected recovery of the property market early next year, together with the expected resurgence in property demand in lieu of the 2010 Soccer World Cup, may result in the Buyer’s Market not surviving beyond the third quarter of 2009.

The Battlefield: The ancient wisdom that victorious generals always choose where they do battle also holds true in the property industry. According to the experts, there are some property classes that could produce excellent yields in the coming years for those investors with the foresight to board the bandwagon early enough.

The two leading classes quoted are industrial space and office space, with both classes enjoying high per-square-meter rentals and low vacancy rates. The losing class is said to be retail space, which is expected to bottom out as vacancies start increasing in line with the already evident retail slump.

In the residential class, leisure / golf estate properties, coastal properties and land are speculated to be the most likely winners as the demand is already starting to outstrip the supply.

To Conclude

Indications are that the property industry is at the bottom of its current cycle and that the end of 2008 / beginning 2009 could see the birth of a brand new cycle. Until then, it will probably get a whole lot worse before it gets better. If you can ride out the storm and use the window of opportunity it presents to your advantage … well, rewards aplenty may be waiting when the skies eventually do clear.

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