Posts

DOWN TO GRADES

/in /by

So what do we say, South Africa?

Against the backdrop of S&P’s “steady as she goes” decision, we have won a reprieve. That is until December 2016. Remember, we still have Fitch to come and if I was a rumour-monger, I would say they exited SA early this year in order to deliver bad news from afar.  But, that would be churlish as Rating agencies are particularly circumspect before they deliver judgements upon economies, especially those that result in sub-investment grade. As I recall we will have their decision within a month.

Who’ve we got to thank? Not Boland Bank but two institutions. The one is Pravin Gordhan and his Treasury team who must have done an amazing job in the past 6 months to avert a certain downgrade. Recovering from Nenegate, straight into Budget 2016/7, navigating Guptagate and all the speculation around it and then walking through the fire with the Hawks and their implication. What a feat for Treasury to whom we owe a debt of gratitude.

The other is Business. Thank goodness that in December 2015, they rallied around the change of mind about David van Rooyen and began what may prove to be the best Public Private Partnership [PPP] in our modern economic history. The teams that volunteered to work with government must have laid the ground for solid feedback on growth, labour and jobs to be positioned with S&P. Who knows but that in these early stages, we are not laying the foundation for progressive growth targets with the necessary compromise between Labour and Business so as to achieve meaningful employment in the balance of the year and beyond?

Of course, there were those of us [even me if I’m honest] that wondered if we could avoid the downgrade. On the back of Friday the 3rd’s news, many have said, “Well, we still have to get through December”. Let me tell you, if you had given me “stay as you are but prove yourself” as an outcome on Thursday, I would have taken it with both hands. We can face Fitch with new confidence and assuredness that we have the presentation, the evidence and the support to remain as is and work forward.

The great thing now is that we have a fighting chance. And we can come out on top. Many have referred to the Social Compact and this era could be the very galvanization that we need to find Government, Labour and Business around the table.

One thing we know is that we trade in Hope and its cousin, Confidence. With a market happily over 54000 and a Rand smilingly below R15, we have early stage Confidence. For you and I in the property industry, Confidence = Sales.

It’s a short, sweet note, this blog. Let’s hope Fitch is convinced we have the teams and mettle to improve and the wisdom to focus while we vote. Then they leave us “as is” to get on with being better by yearend. And with that decision made, that our market enjoys a fillip going into the 3rd quarter as we shrug off the negativity with a sense that all will be well.

Wishful thinking or Reality? Like Ford said: “If you think you can or you think you can’t, you’re right.” Let’s trust we’re going to surprise ourselves. And in any case, surprize yourself in the second half of 2016.

 

Yours in Property,

Jack Trevena

NEARLY TIME TO REVIEW THE HALF-YEAR

/in /by

Can you believe it, the year is far advanced. And what a year it has been with probably the only gorilla in the national room being the arrest of our Minister of Finance. So far, everybody has confirmed it is not going to happen so let’s rest with that knowledge.

One of the reasons he would be hectic on government business is the soon-to-be rating by Standard & Poor which is due to make its decision on 3 June whether to downgrade SAInc to non-investment grade. The jury is out on what this could mean for us. For instance, PSG is buying Bonds because it believes the bond yield has discounted the likelihood of a down grade whilst RMB has surveyed it’s leading clients and decided the re-rating would not have a deleterious effect on the market. Moneyweb Today is reporting that the re-rating will have a dramatic effect on shares, quoting Standard Bank, and up to a 60% decline in value with a dragged bounce back over 12 months. Chris Hart, ex-Standard bank economist, is stating that under a particular set of circumstances, the Rand could collapse to R60:1US$. What a see-saw of opinions!

On the positive side, the SARB decision to hold rates was interesting. The view is that Inflation won’t stay out of the target band ie above 6%, for as long as expected. So they held the rate. Surprising to me as my sense is that that Rand will drop after the S&P re-rating and would have needed an interest rate hike to protect it. I still expect 2% this year and we are some 0.5% away from that point. You may recall that I called 2% against the general consensus of 1-1.5% for the year. Certainly I see the next 0.5% being inevitable. However, let me make it clear that I don’t believe the rate hikes are good for anything other than the protection and stability of the Rand. We simply cannot afford high interest and low growth but, if I was to choose between a devalued Rand and high inflation or raising interest rates, I would raise rates. Another point to remember is that S&P look for sound monetary policy and the independence of the SARB especially at these times – all of this is being demonstrated.

Assuming all the information above, where is property at?

 

  1. Prices continue to rise slowly but, surprisingly, real price rises around 0% are occurring. Why “surprisingly”? Well, we expected negative real growth in house prices and the figure is better than expected. Good News! What is interesting according to ABSA at end-April was that the affordable segment is performing well and pushing up the average. Their think is that down-buying [the tendency to buy a smaller house that you know you can afford] could be creating price resilience in the lower market. My sense is that government employees can afford these houses and are wanting to enter the property market.

  2. The rand is under strain whichever way you cut it. If that is so, building prices will rise and new houses will become more expensive that existing properties. That will push the price of houses in all sectors. By how much, I do not know but it is good news for ad valorem money earners like estate agents.
  3. The issue is affordability and this is driven by two things: Employment and Interest rates. Employment, whether it exists/remains and the stability around “my job” lends confidence. If rates are rising [and this must be a dead cert], I question my ability to afford a bond. The move earlier in May by the FED to hold back again on a rate increase in the USA coupled with our decision last week to hold fire is cause for positivity but we must accept rates will tend to rise – we’re in such a cycle. Rates rising has a mathematical impact on affordability but if I’m unsure about my job, I lack confidence to buy in any case. As a knock-on, that affects even my willingness to sell. The nutshell of this is that sales will be slow.

  4. The downgrade is possible and imminent. We really don’t have long to wait. I want to be with those who believe it will not occur; my heart is there. My head says it is inevitable. Unless PSG is spot-on, it will raise the cost of borrowing for government, decrease the value of shares and dent the Rand. None of this we need at a time of slow growth and drought. It will make us feel poorer before the markets rally back over a year. Let’s raise our genes of faith and trust for the best outcome for all our Peoples.

My best advice – Know what you can control and work hard at it. Rest with what you can’t control and allow things to take their course. If you really do have money to buy offshore hard currency then do so.

 

Yours in Property

Jack Trevena