With compliments of Moneyweb, Today we refer in this bog post to this article ,dated 30 March 2016.
“Brace for Staid Growth” is not the most exciting headline I have read lately. But let’s face it, compared to some of them we have been reading this year, it borders on good news.
When I look at gross yields on property around 7%, they’re not exciting. Levies and rates, never mind maintenance and the odd bad tenant, deserve a better return – especially if your property is bonded and interest rates have risen.
As usual, John Loos of FNB has an interesting take on this issue. Average Price-Rental Ratio, used in the calculation of January’s CPI [inflation], is only 5.2%. this points to the low increase in rentals paid and is positioned relative to house prices which grew last year by 6.5%. So, roughly speaking, rentals are rising slower than the cost of housing and yields are therefore deteriorating. Even rent escalations of 8-10% need to be carefully considered as cash-strapped consumers/tenants battle to afford increases. As a rule of thumb, you can always get a tenant, but you can’t always get a rental – keep the good tenants; the cycle turns.
However, Ian Fyfe of Financial Mail fame, always used to say it’s really nice to be able to touch your assets when it comes to property. Compared with what Robert Kyosaki calls “derivatives” [what we would normally just call “shares”], where you have paper money, property can be seen, felt and admired. Allied to this thought is that your property may not have risen much in value over the past few years, but you never breathed anxiously after Nenegate to until about a month ago when the stock market collapsed from 53000 to around 47000 in huge, unexpected jumps down the Chinese mountain. You were steady, not staid, as she goes.
One of the other problems, in fairness, is that many properties have not grown in resale value over the past 5 to 8 years. A friend was telling me that properties sold in 2010 have grown from R600000 to R630000. That does not sound good and coupled with a 7% gross return on rentals, definitely isn’t exciting. One of the aspects that impacts on rentals is the level of building activity.
According to Jacques du Toit of ABSA, the share of total building as at January 2016 is:
Houses <80m2 is: 37.7%
Flats is: 35.5%
Houses > 80m2 is: 26.8%.
This means that 70+% of all properties built were in the “rentable stock”. It could be implied that stock levels may be supressing rentals. I must add though that the Building Confidence Index has only just managed to scrape through the 50% barrier and is nowhere near the heights of 2008. Caution still rules in the minds of developers. This may sway them from further developments.
Lightstone have an interesting take on these matters. House price rises peaked in 2015 at 5.8% and ended Q4 on 5.5%. however, they project house price increases in 2016 between 4.5% and 2.5%. They quote the following reasons for this state of affairs:
· Looming recession in an economy certainly under strain
· Less speculation and home improvements
· Inflation & interest rate present a double whammy on household pockets
· The luxury property market is leading us through the down turn.
Very interesting and quite gloomy considering some of the early-2016 thoughts from both FNB and ABSA. So, do you invest in residential property? My personal view is, yes. Have some in different areas and different demographics so that your share portfolio is diversified into some physical assets, together with cash and shares.
I see FNB in their Property Barometer of mid-March 2016, sense that the Repo rate will “settle” at about 11% in 2017. Interesting, that is a rise of 1.25% this year. Clearly, this is off my expected 2% and very positive if we can hold steady through the rating agencies’ re-rating in June and August 2016. In fact, it would be a great outcome before hopefully, the rates stabilise or begin to reduce slowly. Also very positive for us all was the speech by Governor Yelland of the Fed yesterday who pointed to the fragile US economy as a reason not to increase rates. This has pushed the Rand back through the R15.00 collar and as I write, it is trading at R14.95. Awesome news!!
So, 2016Q1 is completed. Tomorrow is April Fools’ Day. And all the fools are still here. Remain positive in the strained environment – there is no better way to wake up in the morning than with a positive attitude.
Yours in Property