WINDING DOWN

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This will be my last blog in November. There’s a sense of Christmas in the air although, in Hermanus, Christmas is always in the air except when it’s Easter ☺

Christmas remains in the air as regards the property market! No winding down there!

Considering that Australia sells 90% of its property by auctions, the news from Pam Golding [PG] is interesting. With the purchase of eazi.com, the virtual property marketplace platform, PG now also uses auctioneers, BidX1, to sell homes as well. Virtual may be required for covid but being able to market property globally is a huge boon at any time. Their second Summer Auction catalogue features 21 properties, from below R2 million up to R14 million. “Superlative properties in Bedfordview, Silver Lakes (Pretoria), Kalk Bay, Sandown, Boknesstrand and Riebeek West in the glorious Cape Winelands, all of which offer exceptional value.”

The BidX1 digital platform provides alternative and easy access to a property portfolio which has been identified to “sell on the day”. In September 2019, 9 of 17 properties were sold to a value of R41 million.  PG adds, “BidX1 is recognised as one of the world’s leading and most innovative online property trading platforms, having already achieved sales success of over 10 000 properties across the globe, with a total sales value of in excess of R29 billion.” Not too shabby at all, I would say!

FNB’s Property Barometer for November 2020 entitled, Price Growth Resilient, is really upbeat… [I’m leaving out the rest titled, Outlook Uncertain], for now…

“The pandemic has not had as chilling an effect as initially expected: prices growth has held up and volumes reached multi-year highs in contrast to initial expectations.”

We say it again, on the simple face of it, covid has not had the impact we thought. But a few points: I said during covid that one of the things sub-Prime taught me was not to catastrophize. Amid sudden, deep adversity we all tend to overthink the problem. Evidence at the time is pervasively negative and so are we; it reflects in our voice and posture. If you have endured covid relatively okay, learn the lesson with me. Catastrophizing, like its close cousin, Worrying, never helps anyone. Another point is that the matters upon which I serve have weathered the storm through unbelievably trying times in some cases. They stand as testimony of CorporateSA and her leadership.

The aggressive reduction in interest rates (and mortgage rates), good pricing and lower transfer duties have momentarily improved mortgage affordability and incentivised renters to buy property.”

Rentals have suffered some and FNB confirms that. I can also imagine that many landlords are experiencing tenant problems. I left feeling sorry for both, quite frankly. It’s horrible to lose your income and suffer the ignominy of not being able to pay your rent. On the other hand, landlords have costs as well. Very tough indeed.

“The FNB House Price Index (HPI) shows annual house price growth flatlined in October, reaching 2.6% y/y (last month downwardly revised from 3.1%). Despite the mild reflation in recent months, the overall residential property price growth remains below inflation, as has been the case for most of the last decade.” 

To be able to speak of house price growth is amazing in of itself. Without considering inflation and calculating the Real Price growth, we’d take anything above negative price growth.

“Lower-priced properties are performing better, with the bottom 20% of price distribution (values below R500k, using FNB transaction data) averaging 11.4% y/y in 3Q20. On the opposite end of the spectrum, the top 20% (>R1.9m) averaged 0.7% y/y in the same period.”

This statement is really business as usual apart from the extreme areas like the Atlantic Seaboard. Lower cost homes and those anecdotally “under-R2.5m” often see greater positive or lesser negative growth in prices. Probably the driving factor is the number of people employed in these affordability bands. But there’s no doubt many 1st-time homebuyers have stepped into the market during these times.

“As a result, price reductions have not been as large as initially feared. The improved affordability (lower acquisition and repayment costs) and increased demand has, inadvertently, offered sellers a bit more room to negotiate: the FNB Estate Agents Survey shows that the average discount from the listing price has pulled back somewhat, from 13% in 1Q20 to 11% in 3Q20.” 

Wow! Wriggle room for sellers and not the doomsday 20-25% reductions I was hearing about in the covid mist. Point for me is that there was no doubt urgent sales happening “at any price” but if such a quick turnaround can occur to the fortunes of sales in general, then imagine what a vaccine and going back to sustainable work could do. I’m really chuffed to read this researched assessment from John Loos at FNB!

“Despite the pandemic, industry-wide data shows bourgeoning home buying activity, with the volume of mortgage applications reaching multi-year highs. Year-to-date, applications volumes are approximately 9% year-on-year. However, approvals lag as lenders apply caution amid an uncertain economic outlook, only outpacing 2019 levels by approximately 1.5% year-to date. Approval rates are slowly recovering from their lows in May/June (and subsequently, risk cuts from lenders) and have now cleared the long-term average. Loan-to-value ratios (estimated from Deeds data) also continue to tick up. There is also stiff market competition among lenders.”

My sense of the uptick in Applications was far higher than 9 % and the banks have recovered lending levels much quicker as well. One thing’s for sure, banks understand that rising interest rates could wreak havoc on affordability but checking this out with one of them yesterday, the sense is that the current low rates will need to remain in place for another “year or two”. My view is that if I was doing a “tight” bond, I would be cautious. In my humble opinion, prices will not rise rapidly, and interest costs will rise from Q32021 because of GDP and inflation increases and to protect the Rand. I really hope I’m wrong, but I would add between 2% and 4% to test my affordability in the next 3 to 4 years.

“In our view the 2Q20 data reflects the initial impact of lockdown restrictions on employment (the “first wave”). There is a risk of a “second wave” of job losses: faced with low demand levels, corporates will likely seek to reduce operational costs and achieve efficiencies. This could come in the form of labour shedding and may even extend to higher-skilled workers, who, during the “first wave”, were relatively insulated.”

I said that I was leaving out the “Outlook Uncertain” bit, but now we have to face it. Commonsense and CNN [just joking ☺], tell us that the disjoint between stock markets and the market where the rest of us live, work and have our being, is stark. No one knows the chance of a second wave and we will only know after Christmas if we have behaved or not relative to the invisible virus. Vaccine jabs only come months later to the less vulnerable population and right now the lines of communication are so conspiracy-rich that who knows who will rush to be vaccinated?

SA cannot afford a further lockdown, but we may feel compelled to try. Serious damage will be done. All we can hope for is that the infections will remain under control and that a large proportion of the population will behave responsibly at least in public places. I can already see shops are relaxing and I’m pretty sure I could walk into some without a mask while heat guns lie wasted on the entrance table. Sad testimony to a pandemic quickly forgotten; we may well be “covided out”. JUST REMAIN CAREFUL, PLEASE.

So, many of us find ourselves in somewhat of a purple patch making hay while the sun shines. Good for you! However, it would be trite not to reflect on the deaths in many families and the great harm done by joblessness. In our area, we certainly have regretful evidence of that as businesses close and others hold out for the tourists we hope will come. Not easy times at all.

But for now, on the brink of December, we count ourselves fortunate and enjoy the buoyancy. Remember to speak if you’re down and encourage if you’re up. Truth is we’re all in the same boat going in the same direction and a little bit of friendliness goes a long way and lasts a long time. On this thought and to close, I complimented a Pastor the other day having heard how he stood by a well-known family who lost their Mom. He answered me like this:

“Thank you for that encouraging feedback. Ministry is an extraordinary privilege. These are intense times & every act of caring & every word of encouragement reaches far beyond what is involved in the action or the word itself.”

Point made.

We’ll talk again in December.

Yours in Property.

 

JP LANDMAN ARTICLE

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Once again, I cannot improve on the information provided by JP Landman in his 3 November publication. Every credit to him in this blog. It is unusually titled WYSIATI which we’ll allow him to explain:

WYSIATI /’VE-SI-HA-TI/
3 NOVEMBER 2020

Psychologist Daniel Kahneman was awarded the Nobel for economics for his work on how we make decisions. A common mistake he identified is WYSIATI – what you see is all there is. We focus on one thing and do not see the bigger picture.

In October there were three important political announcements about the economy: the Expropriation Bill, the Post-Covid-19 Recovery Plan and the mid-term Budget. When combined, they paint quite a picture of where we are going.

Structural reform

Both the President’s and the Finance Minister’s statements have made it clear that the chosen path is structural reform – making changes in the economy to improve productivity and longer-term growth. Growth salvation will not come from the Budget, but from structural reforms in the real economy. Boring and not headline-catching, but real.

In fact, general criticism about the Recovery Plan was that it is nothing new. Precisely. No easy money, no new policies – just working to improve the basics. When parliamentarians denounced that the plan is a repeat of old ideas, the President conceded. What he offers, he said, is a new resolve and political will. So, is there evidence of a new political will?

Political will

Yes, there is evidence of a new political will… if we do not commit WYSIATI.

Take the highly contested Treasury document on economic reforms. When it was first published in August 2019, a prominent investment banker with ANC ties dismissed it as ‘Treasury (having) gone rogue’. The commentariat had a field day with divisions in government, the improbability of implementation, unhappiness of the unions and so on and so on. By February 2020, Cabinet adopted the document, and it became government policy. This October the President announced that he himself, with Treasury, will oversee the implementation of the paper. From ‘going rogue’ to official policy to presidential oversight – all in about 14 months. If that is not evidence of political will…

Then there is the government’s willingness to commit a breach of contract in April and not pay the third year of agreed salary increments. The mid-term budget reinforced this by pencilling in wage increases of only 0,8% per year for the next three years.

Consider the politics: Cosatu unions are the majority in the public service, are alliance partners of the ANC, and played a critical role in Ramaphosa’s rise to power, yet government is taking them head on. The wage fight is certainly not over, but one cannot say that government does not have the political will to tackle the issue.

A third piece of evidence is energy reform. I have written extensively about energy and will not repeat it here, suffice to say that we are seeing the biggest reform of energy in decades, and the biggest structural reform since agriculture, transport and broadcasting in the mid-nineties. When the President launched the reforms in February 2019, the reaction was ‘it will not/cannot happen’. Yet it is happening 20 months later. Here the WYSIATI mistake is to see only load-shedding or irritating bureaucratic delays and not the structural reform playing out.

Expropriation without compensation

A fourth piece of evidence is the Expropriation Bill. It deals decisively with the issue of land expropriation. Ace Magashule said it fulfils the ANC’s resolution on the matter. Business and investment circles heaved a sigh of relief. The commentariat was calm. The Bill clearly succeeded in satisfying all sides. It is testimony of political will… but also of remarkable political skill. A hat tip is in order.

There will no doubt still be shrill political debates and the Bill will probably be challenged in the Constitutional Court, but the matter has been defused.

South African Airways

One structural reform that government baulked at was SAA. The good news is that it was done in a fiscally neutral manner. The bad news is that it was done in a fiscally neutral manner – fiscally neutral means billions were taken from departments like the police (… crime and gender-based violence?), higher education, and health. Eish!

The argument that it was done to meet obligations is not convincing – the point of liquidation is that obligations get cancelled. Swiss Air rose phoenix-like from liquidation – why not SAA? The government undercut itself – good work on structural change is drowned out by SAA’s billions.

Recovery Plan

The other October announcement, the Recovery Plan, rests on five pillars: one covering social support and four covering structural reform. Citizens are tired of yet more plans, so what are the chances of successful implementation?

1. Employment stimulus

This is not structural reform, but a social employment and support programme. It will augment current employment programmes like ‘Working for Fire’, ‘Working for Water’ and various community-based programmes. These programmes employ about one million people a year. Now the President wants to see 800 000 more people employed and/or current jobs protected from disappearing.

Of this, 300 000 will be in schools (200 000 as teachers’ assistants, the balance as cleaners and caretakers), 25 000 in labour-intensive municipal maintenance, nearly 40 000 in rural roads maintenance, 111 000 in early childhood education centres, and 34 000 in creative industries and sport, among others.

Students of the 1930s depression will recognise the parallels with Roosevelt’s New Deal. It is really aimed at the poor and gives a hefty dose to rural areas.

R12,6 billion has been set aside in the current budget year and a further R30 billion a year for the next three years. Treasury calculates this initiative can add 0,3% to gross domestic product (GDP) growth (it stimulates demand). I rate the chances of successful implementation as high because there is political focus, money and the pressure of an election in less than a year. Minds will be focused.

2. Energy

The second pillar for growth is energy and, in my view, the one with the highest chance of successful implementation. Much of the preparatory work has been done, there is strong momentum, and many private sector players are keen to get involved. We have written extensively about this. Suffice to say that private-sector producers will create at least 16 000 MW of generating capacity in the next four years. It will unleash many billions in investment and create jobs in construction, energy, and manufacturing.

Treasury calculates that the energy investment can add 0,25% per year to GDP growth.

More importantly, load-shedding and the lack of energy security is an enormous constraint on the economy. Remove the constraint and more growth will follow. Confidence from energy security alone can boost growth. The turning point on electricity should be 2022.

3. Ease of doing business

Here the Recovery Plan lists several actions, among them a framework to establish a hemp and cannabis industry!

By far the most important on the list is spectrum release. The preparatory work has been done and the spectrum auction will take place by 31 March 2021. Apart from a nice windfall for Treasury, it will bring faster and cheaper internet to the country.

Treasury calculated that telecommunication reforms can add as much as 0,5% to GDP growth per year. Here too the impact should be visible by 2022.

Also, on this list is transport reform, particularly in rail. Legislation on a rail regulator has been prioritised in Parliament and the way is being paved for 8 000 km of unused railway lines to be leased out to private operators. Last week the (new) Transnet management threw their weight behind the initiative. When Ramaphosa, Mboweni, Gordhan and Transnet management are all behind it, chances of implementation are good.

In 2019 Treasury calculated that transport reform can add 0,3% to GDP growth per year. When combined, spectrum and transport can add 0,8% to GDP growth.

The World Bank has withdrawn its Ease of Doing Business Report due to flaws in its methodology, so this is no longer available as a tool for measuring progress. We will monitor the items on the South African list and report on progress or the lack thereof.

4. Infrastructure

The fourth pillar of the Recovery Plan is infrastructure. This is a personal high priority for the President, and he has been driving it hard since 2018. The ANC also came out in full support of the programme, even jettisoning its flirtation with prescribed assets to lure private-sector participation. Yet, it would be wise to temper expectations on implementation.

Firstly, the infrastructure programme hinges on cooperation between the public and private sectors. It will take time for the two sides to find each other. Some reports from the National Economic Development and Labour Council (Nedlac) are not encouraging. Secondly, the state has limited experience in running complex public-private arrangements. The President has made a commitment to grow capacity in the presidency, but realistically, it will take time. Thirdly, getting things done in the state just takes longer. The President announced the Infrastructure Fund (the Fund) in 2018 and it took two years to get it to fruition. It is the nature of the beast.

Having said that, the Fund is now established and operational and the Budget provides for R100 billion over 10 years. We will monitor progress of its implementation.

Treasury calculates that infrastructure spend can add 0,25% to GDP growth per year.

5. Industrial growth

Here the emphasis is on manufactured exports (particularly into Africa), localisation targets, and sectoral masterplans. A word of caution – some of these have been on the list for a decade, so tempering expectations is again in order. But there is progress.

Last year South Africa recorded a first-ever trade surplus with the European Union, driven by manufactured exports. The opening of the new bridge at Kazungula between Botswana and Zambia will help South African exports into Africa, as will the Africa Free Trade Agreement. In the Budget Mboweni announced changes to foreign exchange regulations to advance cross-border investment and financing. There are certainly possibilities and the environment is improving.

Localisation targets have been agreed with the retail and textile industries. More are planned for agro-processing, healthcare, basic consumer goods, industrial equipment, construction materials and transport rolling stock. Big companies will develop supplier development programmes. Here one recognises traces of the Black Umbrellas programme developed by Ramaphosa’s erstwhile company Shanduka, while he was still in charge there.

Masterplans have been compiled for the automotive, poultry, sugar, and clothing and textile industries. It is difficult to judge the success of masterplans from the outside, but last year South Africa exported more cars than ever and Remgro’s Jannie du Randt has made positive noises about engaging with government in the sugar and poultry industries.

Treasury calculates that industrial growth can add 0,33% to GDP growth a year.

What is possible?

In total, Treasury modelling indicates that the five parts of the Recovery Plan can add 1,9% to GDP growth a year. If we limit ourselves to the three with the best chance of implementation, leaving infrastructure and industrial growth aside, we are looking at an increase of 1,3% in growth per year.

Treasury’s base case for growth over the medium term is 1,6% rising to 2,0%. Add 1,3% and growth can reach 3,0% per year. Not enough, many would say, but we have not seen that for a long time. It is also comfortably above the population growth of 1,61%.

So what?

  • Except for the SAA decision, the Budget was the balancing act it had to be. It steadies the ship and buys time for structural reform.
  • Growth will not come from the Budget; it will come from structural changes that enhance productivity.
  • The biggest structural changes in the next two years will be energy and spectrum.
  • Together with social employment they can help lift growth towards 3%, which is comfortably more than population growth.
  • Much space is being created for the private sector with the opening of electricity, spectrum, transport and infrastructure, enabling more exports into Africa.
  • Certainty on land expropriation removes a threat that hung over the economy.
  • The economy is in dire straits and people are suffering. It must have been tempting to go for populist measures. We have seen none of that. Rather, the opposite.
  • Most of us tend to see only the Budget (and then only SAA) and we ignore the bigger picture: the restructuring underway in the economy. It is as if spectrum and energy are not happening. A classic WYSIATI mistake.

For us in property, that he reports “business and investment circles heaved a sigh of relief” as regards EWC, through its enabler, the Expropriation Bill, is particularly noteworthy.

I really try hard not to be cynical and having read Kahneman’s book, Thinking Fast and Slow, I have a sense in case after case, that we have very little information on anything and where we believe “we hold the truth” we need to be humble enough to perhaps realise that it remains Our Truth. What JP often does is give us enough evidence of what is happening or, at least, a trend which is specific or identifiable. As always, we are left to decide from our own perspective whether he has a valid point or whether we discount what he says. An Analyst, particularly a Political Analyst, will always leave us to make up our own minds. However, we have the ANC Secretary General in court facing serious allegations. Something shifted drastically for that to be the case.

So much of the article makes me want to contradict in response. But I have to acknowledge, so much of the article gives cause for hope. We’ll each need to decide what side of the fence we’re on. As I’ve said before, South Africa has a way, sometimes raw and in-your-face, of making you get off the fence onto one side or another. Or, in good, plain language, Jy mag nie draadsit nie!

Yours in Property.

S&P VIX

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I receive daily screen dumps from one of my associates which show me many aspects of the markets, the exchange rates of our major currencies, the price of Bonds and the movement of each of these.

I’m not a fundi when it comes to these measures but I know red means down and green means up. So, if I look at the movements of the last two days, I’ve seen green – that unexpected Monday morning sense of excitement as the markets and the currencies take action on the back of good news. Our JSE jumped 1.56% yesterday to 57307 and has grown 11% this month so far. I’m tempted to do the sum extrapolating this increase to month-end…let’s do it…68 768…NOW, THERE’S A RECORD!! And in the USA, the Nasdaq is over 12 000 and the S&P just shy of 30 000. I’m open to correction but I reckon these are near highs if not records.

So, what drives this all? Probably three things:

  • President Trump leaving office. 
  • President Elect Biden bringing some hope. 
  • A covid vaccine by Pfizer.

I’m sure if I dug deep into the Google fount of all things, I would find some more good reasons but for now, these will suffice.

Practically speaking, 50% of America voted for President Trump so America remains not a United States. But possibly there were enough investors and enough enthusiasm amongst them to drive the markets up again. On the other hand, President Elect Biden had 50 % so he has brought some hope to some citizens and perhaps enough to settle things down a little as the lawfare ramps up. But then there’s the vaccine and for those of us who are covided-out, it is good news.

I guess you could say it’s like explaining the great property market at the moment by saying it is historically low-interest rates that have brought it about; a Catch-All reason for buoyancy. Whichever, or whichever the combination of myriad factors, Up is better than Down for All of Us.

I was reading Mark’s EVO Newsletter this morning and I understand his reservation. For three reasons he feels the property market is up and sustainably so:

  • Low-interest rates have ignited affordability. 
  • Developers are up to the challenge of providing stock with a wide range of choice. 
  • The Banks are lending.

I think he’s right. These factors, especially the first and the last, are very important to sentiment and it only takes a few months in lockdown to spur getting into your own home. How sustainable is anyone’s guess, and I’m sure the arguments for and against will flourish, especially in hindsight, a year from now.

What can make this turn of events calm down? A hawkish approach by the SARB for one and then definitely rising Repo rates. But remember, that will only happen if the underlying economy is recovering, or better still, flying. Oh, for some of that! And the SARB is not going to want to switch that off unless the Inflation rate starts to raise an ugly head. My view on that is that prices are not going to jump too quickly in a world which is globally trying to recover and repay mounted debt – because we’ve all been in the same boat this year.

On the other hand, we have a measure called the S&P VIX. We’ve talked about it before and it’s just become one of the first things I watch in my dashboards. Quoting a senior person talking about 2020 in a meeting I’ve just ended, there is “a lot of volatility and a lot of moving parts.” Indeed, and I’m sure some of us have the experience of feeling like a “moving part”; kinda like watching a spin dryer or even feeling in it at times. These days, Certainty – that little bit of normality daily – sometimes goes out the window for a while.

So, what about the VIX?

It measures the volatility in the S&P stock market index. We know that it is really good [in a market traders view, possibly a little too good] when below 10. But it has risen close to 50 during the “collapse of everything” in April. At these levels, it is simply too much to bear and impossible to forecast while unemotionally, it measures a market in absolute volatility and even, as it felt then to us, in free-fall. But yesterday it was 23.39 and had weakened [red!] by 5.91% ie, by about 1.38 points.

On the one hand, it was measuring the upturn in the markets, but on the other as in any market, the prices continued to “jump around” as the post-election news waxed and waned. Whilst I believe Mr Trump was playing golf, it seems he did have time to launch more litigation and fire his Defence Secretary. The VIX is just picking all of that up through the market’s volatility. Still high, it is way down on covid highs and once the election settles down, it too may return to 12-15 again. We wait and see; only a very brave person calls such measures as the VIX. If you asked me what would stabilise it, I would say Mr Trump congratulating Biden on his win and another 90% efficacy vaccine being produced and distributed in 100’s of millions of doses.

But for now, it seems certain that we will continue to enjoy a buoyant market. As I’ll continue to remind us, make hay while the sun shines and for goodness sake, don’t miss the opportunity. Use every relationship you have to harvest everything the market has to offer and don’t languish. Think of it this way….everything you’ve ever done has got you to this point and now it’s your time for success and pay-back.

You have what it takes. Use it!

Yours in Property.