Property market is likely to regain its balance this year

By Lew Geffen Time of article published Jan 21, 2014

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The promise of strong growth in gross domestic product (GDP), responsible lending and a greater availability of stock mean that 2014 is likely to be a very positive year for the South African property market, particularly for those looking to sell.

It looks set to be the year in which the South African property sector returns to a state of balance and consolidates the gains of the past two years.

The natural ebb and flow of the market, coupled with the influences of the post-recessionary economy, have put the property market firmly in the hands of the seller, which should lead to greater liquidity and confidence.

It is important to note upfront that property cannot be considered in isolation. It forms one of the most important parts of the nation’s economy. At the same time, property and the economy have substantial effects on one another.

In the third quarter of last year, GDP was up 1.8 percent year on year. In the same period, house prices increased 9.3 percent, according to the Absa quarterly housing review.

The economy still finds itself in a slow-growth phase following the recession. At the same time, house prices are increasing quickly, but not so fast as to be out of control. The consensus of predictions put together by Reuters is for economic growth of 3.2 percent this year.

The tentative nature of this recovery is highlighted by the banks, whose appetite for risk has been gradually increasing but remains well shy of pre-recessionary levels. The end-of-year report from bond originator ooba shows its effective approval rate grew just 0.5 percentage points last year.

While some might argue that this conservative approach could be hampering growth, it is necessary to prevent the emergence of another bubble. Banks are swiftly rejecting applications for properties they deem to be overvalued, preventing wanton opportunism in the face of the stock shortage that has pervaded the country for the past few quarters.

Buyers and, to a lesser degree, lenders need to stay abreast of developments in interest rates. The monetary policy committee will in all likelihood announce a repo rate rise of half a percentage point this year after having kept the rate at a record low of 5 percent for the past 14 months.

The committee’s first meeting of the year is next Wednesday and those looking to buy property this year would do well to pay attention to its results. Anyone who takes on a bond at the limit of what they can afford could find themselves in a very sticky situation once the rate increases.

The potential for growth can be seen in the number of transactions taking place every month. In 2006, when the market was at its strongest, we saw about 40 000 transactions a month. We are currently seeing just over 20 000, and this number is steadily rising.

The number of sales per showday can be used as an informal measure of the health of the property market. During the recession this rate hovered around 8 percent, before rising to 15 percent as the economy began its recovery. Today the strike rate is 28 percent, which indicates that property is selling with relative ease.

Development is likely to continue to boom. Building is still reasonably affordable and the weak rand, which Absa expects to continue falling, makes South Africa an increasingly attractive prospect to foreign investors. Last year the number of building plans approved rose by 11.3 percent as developers targeted the lucrative sectional title market. I don’t see this trend slowing down this year.

The commercial sector presents a slightly more varied proposition following a year that broke sales records despite many challenges facing landlords and brokers. Challenges such as highly competitive rentals, high vacancy rates (in certain sectors) and low annual escalations contributed to a tricky year and are likely to continue to do so this year.

That said, certain areas are proving unstoppable. Cape Town, in particular, is experiencing phenomenal demand with growth in areas such as Century City, the V&A Waterfront and Tyger Valley.

There is constant demand for the highest-grade office space, and the rental rate differential between these and lower-end office space (for which there is limited demand) is ever increasing.

On the investment purchasing side, demand is outstripping supply, with buyers accepting yields as low as 8 percent on high-quality buildings with long-term national tenants. We believe this trend will slow down, with astute investors demanding higher yields in light of possible interest rate increases in the near future.

My predictions for the year ahead are for strong growth, tempered slightly by a small drop in inflation. Prices will increase at a slightly slower rate because of increased availability of stock.

An annual price increase of just over 8 percent is likely. Most of the growth may be concentrated in the latter half of the year, once the uncertainty brought on by the national election passes.

All in all, 2014 should be a good year for the South African property market and I would urge those considering dabbling in it to make the most of the opportunities it offers.

Lew Geffen is the chairman of Lew Geffen Sotheby’s International Realty. He has over 40 years’ experience in the South African real estate industry.

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