PROPERTY NEWS

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Just for a change, I have posted an article that appeared in the latest Standpoint which is compiled by Stanlib (Volume 4:15 October, 2018) for their clients. The article is not solely about the residential property, but it gives us such a good overview of the property industry and serves well to make the point that economic growth is at the heart of everything we need in our country. Enjoy!

“Large-scale investment to develop and redevelop SA’s ageing property stock into modern premises for today’s high-tech businesses will only occur once economic growth is on a firm footing. Compared to many other countries in the continent, SA has a large and diversified pool of property, but a large portion of it is old and outdated, especially in the office and industrial sub-sectors.

Industrial property in general is not looking healthy, with the exception of warehousing. SA’s manufacturing sector is in the doldrums, because of slow economic growth and its dependence on Eskom’s costly and erratic power. Even specialised manufacturing nodes – such as a group of interdependent automotive businesses in close proximity – are seen as risky, since the collapse of one company can affect all its neighbours.

Taking a long-term view, SA manufacturing will recover, but investors incur opportunity costs by holding onto industrial property for five to six years until an upswing materialises. In the meantime, fundamental structural changes are taking place. Most of the activity in industrial property is due to shifting, not growth, as successful businesses move out of older properties that were not designed around information technology infrastructure. Older properties are becoming redundant.

Warehousing is sought-after, particularly for logistics businesses, but the demand is for more than simply a shed with a corrugated iron roof. Modern logistics requires laser-levelled floors and automated floor space. The most popular areas for logistics businesses are around Cape Town, Johannesburg and Durban airports. In Johannesburg, the prime area is along the R21 to OR Tambo, where both listed and unlisted family businesses have been active investors and developers, including companies like Fortress and Equites.

Retail property still offers specific opportunities. Of the four main retail categories – super-regional, regional, community and neighbourhood – the growth is in community retail centres. These include Nicolway, Morningside Mall and Benmore Gardens near Sandton, which provide quick shopping for people in surrounding residential areas. They can be convenience centres and sometimes even regional malls like Cresta, which is surrounded by high-density residential units and has little competition from smaller shopping centres, but super-regional and regional malls in general are battling, because they have a significant fashion component dependent on a strong economy and, because the global trend is towards shoppertainment.

Some of the newer malls like Cradlestone, Forest Hill and Mall of Africa have not yet seen sufficient residential development in their vicinity. Another trend evident in Mall of Africa’s design is the “work, live and play” trend, which means it can satisfy most of the lifestyle needs of residents in its catchment area, but some of the older malls have limited options for redesign and may have to be completely repurposed into hospitals or residential property in the next few decades.

Like industrial property, most of the action in the office sector is due to shifting rather than growth. Blue chip clients like Sasol, Discovery, Webber Wentzel and ENS have moved from older or scattered properties to centralised A- or P-grade offices in Sandton. These are usually “green” buildings with a focus on energy efficiency and recycling. In Gauteng, Sandton and Waterfall remain the most desirable office nodes while in Cape Town it is the Waterfront. In SA’s other urban centres there are no sufficiently sizeable office investment opportunities for institutional investors like STANLIB. We don’t see any revival in demand for the Johannesburg CBD, except for government and residential occupancy.

It will take sustained GDP growth to re-activate the whole office sector, from P- to C-grade. Businesses do not expand and hire new staff until they are certain of growth prospects. So we don’t see a recovery in this sector for several years. Much of the B- and C-grade space is becoming obsolescent and will have to be repurposed, although several of the SA-listed property stocks have a residential component. The only focused residential share is Indluplace Properties. In the residential sector, the main investment opportunity remains townhouse developments. There are some companies that specialise in sectors like student accommodation but they remain very small and student rentals are perceived to be risky.

Rapid urbanisation is not an investable opportunity because of the lack of jobs in SA’s cities. Although there is certainly a demand for low-cost housing, there is no income stream to incentivise large-scale private investment. SA GDP growth of at least 3-4% for a sustained period is needed to re-ignite property development. The earliest sectors to respond will be retail and warehousing and the latest will be office and industrial property. We continue to expect a total annual return (capital and income) from our property portfolios of about 13%, in line with the average of the last 10-15 years.”

Our kind acknowledgements to: Ahmed Motara (Listed Property Portfolio manager) and Lawrence Koikoi (Listed Property Portfolio manage)

I really enjoyed this article. It gives a drone-view of what’s going on and enables us to consider our actions going forward. It is factual rather than negative or sensational. We all know the truth that economic growth is at the heart of what we need. Bill Clinton was right in his campaign: “It’s the economy, stupid.” I remain circumspect, but grateful for the effort our President is putting in in this regard – strength to your arm, Mr President.

And secondly, I was seriously impressed with the following announcement by ABSA. Can you imagine what it would be like if a PPP could pull off anything close to this!?

 

“Dear Stakeholders,

Announcement: Absa’s position on Land Reform

We have noted the ANC’s announcement that it will propose an amendment to S25 of the Constitution in order to facilitate land reform and redistribution. We recognize the legacy of the past and the need to address the inequalities in our country. We are fully supportive of land policy and legislation that fulfils the intent of our Constitution and address the need for land among many South Africans.

We must also emphasize that this must be done in a manner that balances the needs of current and future private landowners, beneficiaries, government, the financial sector as well as its stakeholders.

We have noted the ANC’s undertaking that its proposal is for land expropriation to be done in a manner that doesn’t undermine the economy and that increasing agricultural production and food security will be a key priority.

Absa has made its own submission to Parliament after commissioning extensive research on the matter, including taking legal opinion on the efficacy of S25 of the Constitution. As a consequence, we do not believe that a constitutional amendment is necessary. Instead, Absa has identified five key areas through which the bank can make a meaningful contribution towards a sustainable land reform agenda.

These are:

1. The establishment of a special rural land reform fund, which would be funded by financial sector players and other organizations. The main objective of the fund would be to establish a new black commercial farming class.

2. The establishment of a special urban land reform fund. The fund would be geared towards building an affordable housing market that improves the affordability of urban housing and facilitate urban densification efforts as well as inner-city rehabilitation processes. It would also focus on creating a bigger class of black property developers.

3. The establishment of a land administration agency, a public-private partnership. Its priorities would include auditing the productivity and use of land which has been transferred through land reform and re-engineering the cumbersome processes through which land restitution claims are assessed and settled.

4. Support for the development of a new land administration system for the design and piloting of a new lands records system. This is especially important in former homeland areas where administration systems are not existent.

5. Driving a national dialogue for a new land policy white paper. There is a need for a new land policy White Paper that would culminate in an agreed national land policy.

We now await the outcome of the Constitutional Review Committee’s consultations and the rest of the parliamentary process before we can determine our next course of action.

Kind regards,
Geoff Lee
Managing Executive, Home Loans”

 

Never lose hope. Die hoop beskaam nooit. Translated – You’ll never be embarrassed by hoping for the best.

Yours in Property.

RESILIENCE PREVAILS

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Sitting down to write this blog, I need to pinch myself at the state of the market. It really has proven resilient and prevails despite the much bad news. In its August Origination overview, ooba states that: “Application volumes for August 18 were 4.3% higher mom and 10.5% lower YoY.” That’s very good against the news, and just a fraction higher than the previous number of about 8.5%. So is the market slowing? Yes, but it is proving good against the backdrop.

In turn, ABSA: Household credit and mortgage advances: 28 September 2018 states that private mortgage advances have grown at 4.4%. The implication of that is that house prices have remained around that level, as we know, and little has happened to the volume of transactions. I know I’m broad-stroking this information, but to bore with the details is not the point of this blog. All I’m trying to say is that things are holding up well under the circumstances. If you agree, the question then is what’s going on?

We have an Emerging market meltdown with one of the most traded currencies in the world. From its best just after the President’s election of mid-R11’s to close to R15 today, the Rand has certainly had a run, but seems to have settled in the R14-15 range. Yesterday’s headline in the Sunday Times, “No, No. Nene” and news that has just arrived of his impending resignation is off-the-page bad, but we’ll probably know by the end of the day. Man, I can’t help feeling the wrong guy is being taken to the gallows especially after reading his letter of forgiveness. He’s got mine, for sure – what a man to have stood up and said “I was there”, but then he got fired for saying, “No nuclear!”. The wrong guy is falling and the ex-President is lounging at his fire pool. Flippit and the Poor suffer the rap of the markets and the currency. Unbelievable!

Unless I’ve missed it, the SOE’s seem to be on somewhat of an even keel. I’m really not sure how Eskom has staved off bankruptcy on a R20bn loan from the banks. It needs R60bn to be paid by errant municipalities, probably the same lot that are letting sewerage pour into the Vaal, but that money won’t be coming either, but somehow, it and SAA still seem to be flying. Understanding a little of SAExpress, they seem to be spluttering to lift off as well. Good on you, Pravin; we appreciate your 18-hour days. Politically, we now have some sort of inquiry into attempts to remove CR. Politics is dirty at the best of times and despite the “No, not me?!”, it seems our President may be flexing some muscle. We’ll see as Election 2019 approaches with speed.

There is so much more to state and speculate [which most of this really is, in all honesty], but the one thing I enjoy is that everything is in the open in a free Press. I’m sure that much takes place in cigar-filled lounges out of the public eye, but the view from the tip of the iceberg is still perspective-enhancing. Much better than having nothing, with State-owned channels and Press pumping out lies. Instead of meandering, let me draw to a close. What has all this got to do with the property market?

The market is holding up against an avalanche of counter-market news. Resilient to the core, good men and women are buying and selling houses and I note that Africans, some 64% of transactions in the ooba data, are spending on property. There is a barrage of bad news, but in many parts of our country, it is business as usual. Is it the edge of a precipice or the foundation for gradual success? I like to think the latter. Someone who lives in our town was quoted as saying, “I’m not an eternal optimist, but I am addicted to hope.” Maybe, I’m just like the Archbishop Desmond Tutu, an old optimist despite the evidence. Where are you in the continuum from despair to hope? One thing is for sure, wherever you are placed, so are those around you; those dear souls “feel” your energy every day – positive or negative – you rub off on them.

Yours in Property.

PROPERTY OVERVIEW 9/2018

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“Sorry, seems to be the hardest word.” That’s how the song goes. But in my last blog, I said sorry for over-estimating the rise in Joburg prices this year and the GDP growth of the country :-(!

Let’s have a look at the property market in this blog.

I still think that we’re being let off the hook and things are going fairly well given the dire economic news we read every day. My opinion tries not to be scientific so a lot of gut-feel goes into that statement. In addition, I live in a small, upmarket town which has had some raw land-delivery protests in the recent past and this, together with talking to contacts who are steeped in national property businesses, I’m sure colours my view. As you read, you may have a different perspective so let me know if you differ significantly.

Some insights:

  1. FNB’s John Loos, in FIN24.com on 4 September 2018, informs us that “the majority of home sellers (96%) have to drop their asking price in order to sell the property” in the Q2: 2018, according to the latest FNB Estate Agent Survey. “This is up from an estimated 91% reflected in the first quarter survey and compared to an estimated 78% who ended up having to lower their asking prices in 2014. He says the survey evidence suggests that asking prices on average have become less realistic in recent years. The estimated magnitude of asking price drop needed to make a sale became slightly larger – from -8.2% in the first quarter of 2018 to 9.2% in the second quarter”. And finally to this point, “FNB has not seen any noticeable increase in the percentage of properties resold at prices lower than the previous purchase price. About 9.6% of total properties resold in July were estimated to be at lower prices than the previous purchase price. This is higher than the 8.7% of May and 8.9% of June.”

    The word “realistic” is loaded with sentiment, the seller’s state of mind. If my home must be sold at less than the purchase price, about 10% per the comment above, that’s stressful. Making a capital gain of less than inflation is going backward fast especially given all the costs of selling and re-buying or renting. Making no gain could best be described as a stress-sale. On the other hand, in some parts of the country, 10-15% gain almost per annum, has been the order of the day. No more and my friend in Cape Town says that “to drop a Million on your price” is the nature of house sales at the moment. So, would any seller drop the million before selling? I don’t think so. You’d do that when you are a serious seller and see that no one is coming through your door. Getting the price right depends on the seller’s desire to sell. We have a house nearby going for R12.3m which has been on the market for about 6 months. It’s not going to sell even on a lucky dip and the price indicates seller reluctance.

  2. On the other hand, in a place like Hermanus what would be the price of this seller’s house? My guess is about R10m. Why a guess? Well, the market has definitely received more stock given the recent unrest which, as we’ve discussed before, is very in-your-face in a smaller town, so the outworking of these sentiments remains to be seen. The jury of potential buyers is out. Linked to this and for interest sake, the EFF held it’s Provincial Conference in Hermanus last weekend over three days. In the Zwelishle Primary school hall, the conference was orderly and had very little impact on the town. On Sunday, Julius held a rally at the sports fields and that went off peacefully as well. We’re grateful and trust such behaviour continues to pervade the run-up to the elections.
  3. Another aspect of the higher asking prices is that sales are taking longer to conclude – about 50% longer depending on where you read. 40 days on the market has moved out to 60 days overall. Again, I bet you the unrealistic expectations of sellers have contributed to this situation. What would be really interesting to see is the number of houses listed and then withdrawn from the market. That trend would tell you how needy the sellers were to sell for whatever reason. On the face of it, “I can’t afford my house anymore” should be rising as the economy remains very sluggish and jobs become more insecure, thus reducing confidence.
  4. Sadly, allied to the “I need to sell” category is higher levels of emigration. One can read very valuable information from the FNB Barometers covering this aspect, but perhaps the most interesting for me is that Police Clearances have moved out from about 6 weeks to 12, and even 15, weeks.
  5. One aspect that drives much of this conversation is the rate of interest and the desire of the banks to lend. The former stayed level last week as SARB, I am sure, attempted to supplement President Ramaphosa’s stabilization package and his envisaged stimulus mega-fund. On the other hand, the banks seem to still be saying Yes to lending and are thus a welcome part of the answer to growth; long may that be! On the absolutely negative side is an apparent helluva increase of petrol coming soon. What a tragedy that the tax on fuel and the VAT increase [which by estimates then, take R29bn out of consumers’ pockets], is simply the penalty of corruption under the leadership of the ex-president and his cronies. Imagine the same increases being ploughed into the Investment Mega-fund for housing, schools, and tourism! What a country we could have!

In summary, we are better than we could have been, in my humble opinion. I often say that as I write and then qualify myself by saying that I genuinely believe that. I have lived through terrible recessions, and this for all of its insidious undercurrent of large-scale theft, is not “terrible” in its outworking. Granted, these are not the “ol’ days” pre – 2008, but they could have been much, much worse for the property industry. My encouragement, therefore, is that we vasbyt. Reiterating my previous blog, our President can pronounce R400bn and maybe we don’t know where it’s coming from but from what I hear from his United Nations conversations, he has acquitted himself well. Remember, it was not long ago that Pravin Gordhan was called back from speaking to investors with R5tn in investment funds on the pretext of a one-pager spy accusation which resulted in Gigagupta being appointed in his stead – WE’VE COME A LONG WAY IN 2018!!!]

I learned an Afrikaans idiom the other day, “Die hoop beskaam nooit.” For the uninitiated, “Hope does not disappoint” [Romans 5:5], or, “Hope does not embarrass you.” On the contrary, hope rubs off on those around you. Enthusiasm is hope internalized and expressed. Remember, if you’re happy, tell your face. We are all more beautiful when we smile and “smile lines” are never wrinkles 🙂

Yours in Property.