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South Africa can be very proud of its property industry

I was having a look at the ‘net and came across this headline: SA property sector worth R4.9-trillion

I know, I felt like that as well: So much property and so little in my name. It happens to all of us!

But, that got me thinking about our country and the industry…………

The South African property industry is significant in many respects:

  • Property rights are secured in our Constitution and we trust that it will stay that way.
  • The Deeds Office nationally is functional and does relatively well in securing our property rights as well as the rights of our financiers.
  • Our property law is well established and we produce outstanding conveyancers and property experts in many fields of the property market.
  • It is very well managed with a number of globally competitive property funds that own significant amounts of property on behalf of shareholders.
  • Our estate agents are highly skilled and requiring of continuous training and development in order to stay at the top of their game. Estate Agencies, are widespread and whilst the large franchises dominate, there is still room for the smaller business owners to ply their trade off the back of excellent exposure and/or relationships in their community.
  • We are building property across the spectrum of requirements, from the poor to the aged and up to the rich. Whilst the process could be much better, developers are getting access to land, and we hope ever-improving, to electricity which was a real issue a few years ago.
  • In our cities we have leafy suburbs and our own “Hollywoods” and, by and large, we live safely though behind some very high, secured walls.

 

Not a bad situation to be in as a country. Yes it could be better, our cities could be better managed in key areas of delivery, our poor ramshackle areas could be revitalised and our informal settlements are a blight on us, but it is probably fair to say that we have a good property industry overall. In fact, I would be prepared to call it a significant and contributing national asset.

The CEO of the Property Sector Charter Council, Portia Tau-Sekati, presented excellent research to the industry in September. The sector contributes significantly to the country’s economy and in 2009 comprised 8.3% of gross domestic product (GDP), according to a South African Property Owners Association research report entitled “The economic impact of the property sector in South Africa”.

According to the Charter Council’s study, only 1% of the country’s land is urban and residential, about 73% is natural pasture, approximately 12% is agricultural and the remaining land is comprised of conservations and reserves. Two-thirds of the property owned in South Africa is residential and worth R3-trillion, while commercial property is worth R780-billion. Undeveloped land that is zoned for development is valued at R520-billion and publicly owned property, including national, provincial and local government and state-owned enterprises, is worth R570-billion.

“Retail property has the highest value of the commercial property sectors in South Africa at R340-billion, followed by office properties at R228-billion and industrial properties at R187-billion,” the Charter Council reported. “Representing a small comparative value of R25-billion is hospitality, leisure and ‘other’ property.”

According to SAinfo reporter, the study will be an annual one and the Charter Council aims for it to become the benchmark against which progress in the industry is measured. “The study is a useful tool for understanding the South African property market and its dynamics,” Tau- Sekati said.

To read more go here.

I make my point again against the backdrop of this recent and defining research that South Africa can be very proud of its property industry.

Against this backdrop, the SARB’s decision to hold off on an interest rate hike late last month augers well for the industry. Inflation figures will be announced today [19 October 2015] but are expected to remain within the 3-6% range so no serious danger there. Of course, the whole world seems to be waiting for the USA rates decision and we have the unfortunate matter of the weak Rand, ostensibly because of the US$ strength. There is no doubt that the SARB decision, as much as it would like to raise interest to protect the Rand and still inflationary fears, is set against the context of South Africa’s dismal economic growth. That will probably be revised to a 1.5% forecast but it is, at best, hovering unacceptably low.

John Loos, FNB’s Property Economist, speaks to the interest rate and makes valid points as usual. Firstly, a gradual rise in interest rates prevents any need to over-react later and keeps lenders and borrowers cautious. Secondly, he makes the point that lending does not grow the economy but only productive lending does that with any sustainable effect. Finally, he states the obvious that we all need to hear: Indebtedness is not good for our economy [and back pockets] and we should use the low interest rates as an opportunity to reduce our household debts as quickly as possible.

According to Private Property, Cape Town has the most exclusive properties and precincts of incredible value. Private Property, quoting Lightstone research, reports, “Cape Town may not be the financial epicentre of South Africa but it continues to dominate the list of most exclusive addresses and data has revealed that the Mother City lays claim to three of the five most elite addresses in the country. According to the Lightstone research, the most expensive street in South Africa currently is Nettleton Road in Clifton, where the median price for houses is R27.1 million, followed by Glen Beach Road in Camps Bay with an average house price of just under R24m. Head Road in Fresnaye takes fourth place with an average selling price of R21.44m. Sandhurst in Johannesburg scoops third and fifth places with a median sale price of just under R25m in Coronation Road and R20.76m in Rivonia Road. In the list of most expensive addresses in the Western Cape, not surprisingly, four of the five most pricey are situated on the sought-after Atlantic Seaboard, with fourth place taken by Eastcliff in Hermanus.

Lew Geffen says: “The upswing on the Atlantic Seaboard started in 2002 when a property in Chilworth Road in Camps Bay sold for R23m, but the demand for luxury homes really began to peak 2008 when 13 properties in the R20m plus price band changed hands to the combined value of R414.193m.”  “In spite of the credit crunch which hit in 2008, property values on the Atlantic Seaboard have continued to grow exponentially and now it is not only home to the most trophy properties in South Africa; it also fetches the highest price per square metre.”

Closing on this article, Cape Town may be home to the most luxury properties in South Africa, although data from New World Wealth shows that Johannesburg still has the most Dollar millionaires in the country.

So there you have it, Cape Town has the properties and Johannesburg has the money. Like Homeloan Junction’s excellent service, some things never change.

Yours in Property

Interest rate hike comes as no surprise

This week’s interest rate hike comes as no surprise.

This statement, not in the sense that I think we should have it, but simply that the matter is so “on the fence” that the decision could go either way in any of the MPC meetings. The SARB is faced with horrible decisions because GDP growth is pathetic and nothing exists on the horizon to change the situation. You get the feeling that the world economy is moribund as the USA growth story is so fragile and based on the billions of printed Dollars, whilst the China story has been coming for some time and now that it has hit, seems obvious and irreversible in the medium-term [make that 3-5 years]. The impact of both on South Africa is direct and inescapable – the USA is needed for global growth particularly amongst our leading trade partners and we critically need China to buy our primary commodities [frankly, so do Australia and many other so-called development economies, in Africa, Asia and South America]. The Rand is weak and we sit with the Rating agencies’ threat of junk bond status hovering like Damocles’ sword over our national head.

Talking about our “sword of Damocles”, according to Wikipedia:

“Damocles (literally: “fame of the people”) is a figure featured in a single moral anecdote commonly referred to as “the Sword of Damocles”, an allusion to the imminent and ever-present peril faced by those in positions of power. The Damocles of the anecdote was an obsequious courtier in the court of Dionysius II of Syracuse, a 4th-century BC tyrant of Syracuse, Sicily. According to the story, Damocles was pandering to Dionysus, his king, and exclaimed to him that he was truly fortunate as a great man of power and authority, surrounded by magnificence. Dionysius then offered to switch places with Damocles so that Damocles could taste that very fortune first-hand. Damocles quickly and eagerly accepted the king’s proposal. Damocles sat down in the king’s throne surrounded by every luxury, but Dionysius arranged that a huge sword should hang above the throne, held at the pommel only by a single hair of a horse’s tail. Damocles finally begged the king that he be allowed to depart because he no longer wanted to be so fortunate, realizing that with great fortune and power comes also great responsibility (and danger). “

The decision to raise the Repo rate is as tense. We are told that the USA has to raise rates at some stage so as to protect inflation in that country from raising its head as growth rates rise. In addition, there is justifiable concern that not signalling a rise of interest rates will over-stimulate the propensity of the American public to spend on credit. Many consider that the rise of the rate will occur later this month partly to curtail overspending for Christmas. For SA Inc, this means that money will be invested in the Dollar and our currency will weaken further. Roll on R15 to the US$ which will have its own impact on our inflation and require rate rises to temper it. Not pretty by any means. But remember to see the interest rate rise in relative and not absolute terms. When it started, our Repo rate was 5% and the 0.25% absolute increase was a 5% rise in interest cost. This rise, off a base of 6% was absolute 0.25% but only a 4.2% rise in interest cost. The Prime rate is still below 10%, psychologically in  single digit territory. To put it in monetary terms with which we may better identify, a R1m bond just became R164 per month more expensive with a total of R807 per month in total since the upward rate cycle began, which is 2% and 9% relative increase in interest costs, respectively. Necessary? If the USA rate rises, yes; if not, then no, too much too soon in a struggling economy.

However, don’t lose heart. The increases are really well controlled and pre-emptive. In the figure below you will note how interest increases have been cone-shaped in the past – steep and effective but with the risk of collateral damage. In the recent rate increases, much circumspection has gone into grasping the nettle early but not squeezing the life out of the economy.

South African Repurchase Rate

With this background, I was struck by a Moneyweb article by Patrick Cairns on 20 November 2015, titled, South Africa needs a “Modi moment”.

We have a great country, tortured yet beautiful. We have people with a will to stay here and continue to make it greater. We need leadership in every sector but are blessed with good examples in the property industry. Our estate agencies, originators, developers and property funds are world-class in many respects. So we in property are truly blessed. Homeloan Junction is proud of its place in the tapestry of the industry, small but well deserved.

Yours in Property

To Buy or not to Buy? How to make the choice right for you…

I have been trawling the property information keeping myself up to speed with developments. There is a gloom in the economy, but fortunately the property sales and mortgage business is not in the doldrums. Affordable housing has looked good for years and developments continue in many areas of the country. It has probably been the manner in which the SARB has guardedly raised rates that has keep the property market on an even keel. Let’s hope it stays that way; boom and bust is disruptive and we cannot afford disruption in a national asset being Residential Housing.

The question often comes up, especially from First-time Homebuyers, is this the right time to buy? In other words, To Buy or not to Buy? – that is the question.

The answer is always the same for me: Do you think the cost of building is going to go down? If the answer is Yes, then wait. If the answer is No, then buy. Let’s explore this issue in a bit more depth.

Inflation, on a global scale, has been kept in check very nicely. Some of the major countries, Japan noteably, have reduced interest rates to historic levels on the back of close-to-zero inflation. Costs of production have been driven down by the Asian countries and currencies have been relatively stable for many years. In the past year or two that has no longer been the case and currency fluctuations and even devaluations, have become the norm. As we’ve mentioned before, thank goodness for the low oil price.  So the inflation story sounds quite benign until it comes to building costs. News24, on 20 February 2015 reported, Building costs have continued to increase by more than the average consumer price inflation rate over the past 15 years, according to Jacques du Toit, property analyst of Absa Home Loans. The latest Absa residential building review compiled by Du Toit shows the average building cost of new housing constructed came to R5 828/m² in 2014, which was 12% higher than the cost of R5 205/m² in 2013. The building costs are affected by a number of factors such as building material costs, labour costs, transport costs, equipment costs, land prices, rezoning costs, developer and contractor holding costs and profit margins.

That insight answers the first question and clearly, building costs are not reducing and frankly, seldom have. I guess the question then is, what should I be buying?

Think about the following:

Affordability
Don’t buy what you cannot afford. The bank will help you with this and strictly test your income and expenditure in terms of well-known affordability guidelines laid down by the National Credit Regulator. Do an affordability calculation to see what you can afford to buy.

Improve or Buy
Buying and selling homes is an expensive affair. As a rule of thumb, knock off 20% – 30% of the price of your new home for costs. Transfer and estate agent commission could already be about 12% and then bond settlement and registration costs and furnishings add to the tally. Improving instead of buying could prove much cheaper and convenient.

What to buy
If you’re going to buy, buy wisely. For normal family living, close to shops and schools, proximity to work, sport and social events makes eminent sense. Remember, what you like or don’t like as a normal consumer probably counts for many others’ opinions as well. It may be cheaper next to the highway but probably all the b
uyers agree that you can’t hear yourself talk in the garden. Then, if you can afford it, take some advice from my late Uncle – there are two strips of land that are scarce, along the coastline and along the top of a mountain range. Houses in these two places carry and hold a premium in the long run. I am also a proponent of secure estates and, in particular, golf estates. Secure estates for the obvious reason of enhanced security but golf estates, in addition, give you lifestyle for the family. And remember, few additional golf estates are being developed – they are just too expensive and water is becoming a serious problem – thus adding to the scarcity value.

Future plans 
Don’t put yourself through the trauma of moving twice! If you have your eye on emigration, a job in another town or a particular suburb or estate, don’t buy now. Wait until you can settle and then sell and settle in the new environment. By the way, building can be a real pain and you would be a rare person to not have a “builders story” after completing your house. The same can be said for renovation but it is normally on a smaller scale.

Investment or not 
Robert Kyosaki [of Rich Dad Poor Dad fame] is quite right when he says that an asset that does not produce income and requires maintenance and services, is actually a liability. In fact he goes so far as to say, buy and rent a factory and let the factory buy the house from nett rent. But most of us don’t live there and we get great pleasure from owning a property and knowing it is the domain of our family. For this reason, the comments about What to Buy become really important. You would at least look to capital appreciation to offset the costs when you sell the property so choose the Location well. This section particularly applies to “that little house at the sea”. Truth is that we could do well, in most cases, to rent or use a guest house for our holidays, rather than battle financially to pay off a second home.

If you think you can afford it, buy now. Be wise and look around. Consider all your options and do your best to think ahead a few years. But, I would posit, do not delay too long if you can afford to buy now.

And always remember Homeloan Junction is there for you. Dealing with us is free. Yes, you read right – free. And we’ll back that mortgage service up with sound advice and expert knowledge.

 Yours in Property.

IT’S TIME TO BE A FOX ( Part 2)

Our previous blog ” It’s time to be a fox” looked at the concept of hedgehogs and foxes. In this blog, we suggest some assertive behavior for the next period of our economic cycle.

But firstly, let’s reiterate. Hedgehogs

  • know one big thing
  • see the world through a filter of one big idea
  • stretch the idea and build data around it
  • are confident to predict and make many of them
  • drum on about the “tried and tested” formula
  • love complexity
  • are better in stable environments.

Foxes:

  • know many things
  • gather information from a wide spectrum of inspiration and sources
  • are self-critical and update their beliefs when faced with contrary information
  • are cautious about predictions
  • look for a new idea if something is not working
  • drive out with simplicity
  • are better in rapidly changing environments.

With that reminder, we are approaching rapids in our economy. That may sound like “one big idea” but it certainly is the consensus view of many writers at the moment. Just reading JP Landman’s article, Coming to a Standstill, dated 9 September 2015, he states that electricity and strikes initiated the SA growth problem, but these factors have been exacerbated by lack of confidence, a growing chasm between the public and private sectors, and a incoordination in key growth sectors. The SARB has also revised growth predictions and raised interest rates right into the headwind of a deteriorating economy in order to deal inflation. Not pretty at the moment, I’m afraid.

So what should you be, a fox or a hedgehog? We’ve been there before and survived, is a real hedgehog statement. You should’ve been around in 2008 to 2010, is another. Alles sal regkom, is a grand old hedgehog statement, loaded with stoicism and sense of duty. May I put to you that there is another way and explore the alternative.

The Foxy thing to do is to

  1. Review your business Good times layer in costs and make income assumptions. As for costs, scan every cost in your business and eradicate what even smells of complacency. As a radical move, you may wish to signal this effort to your people – stop the cake on Friday, change the coffee brand; just do something that makes everyone aware that times have changed.
  2. Review your activities – Golf on Wednesdays is really cool but stopping it will give you 6 good hours of extra work. And the message for your people will go without saying – news will get around. Start every day with a 2-Do List. Know what is optional and what must be achieved today, without exception. Follow-up on outstanding payments – years in business have taught me that “your best client [read, friend] will always pay you” probably means he is battling to pay. The other poor souls have already passed that point and you need to be the one creditor who collects. In property, chase up registrations and outstanding mandates. Remember management control is: Setting standards, Measurement, Evaluation, Correction or Reward and a Feedback Loop. Nothing short of that journey, is Control. Don’t delegate control if you’re accountable – by the time “your bank account tells you” it could be too late.
  3. Accept a Lower Standard of Living but not a Lowering of Standards: You can be poor but you don’t have to be dirty. Values drive behaviour and the values in your firm can leave space for facing the negative reality in the bad times, but not for excuses. You cannot create motivation but you certainly can channel it. Don’t allow your people to become de-motivated. There is a process of excellence in the business that needs to be maintained; maintain it. Customers certainly don’t need to know if you’re responsibly dealing with lowered economic growth. Stand up when answering the phone, convey positivity in your voice and your eyes, remain solutions-orientated and think possibility – there is nothing like sticking your chest out and tilting your chin upwards to make bad vibes go away. Remember your brain doesn’t know if you’re imagining or telling the truth when you decide to be positive in the face of circumstances. Imagination rules your world.
  4. Hunt for business: I have sat in airports recently reading the newspaper. I have even read the latest RW Johnson book and I am convinced that the day you believe it’s over, it is. Hunt for business. If you don’t someone else will. Jack Welsh had a famous saying: “Take control of your life, or somebody else will.” How true! No excuses, just down-to-earth action. No half-jobs, just hard work. If you want to read the paper and believe that China is your road to success, then go and work somewhere else. Remember this, people don’t leave you when they leave; they leave you in their heads a long time before that. You wish they would leave when they “opt-out” because that would save you money. The problem is they leave after months of “trying”, hours of toxic conversation with others, and a couple of unhappy customers. Watch for it in the daily activities and attitudes. Root it out asap. On the other hand, where genuine efforts are made by those great people who are with you for the long-run, encourage them and build them up. Remind them that “this too will pass” and that Action Conquers Fear.
  5. Find Inspiration: Running a business is tiring and battling cashflow, exhausting. Find a friend, a confidante, to whom you can turn. Pray, read, take “me time”, breathe deeply – 10 out, 10 in – to relax and replenish your soul. You can only give what you have, and be who you are. It is fair to say that your people “don’t need their leader with sweat on their brow.”
  6. Change BEFORE it hurts: It is always written about for one simple reason, people change WHEN it hurts. It is so difficult to simulate adversity in a successful company. It feels treasonous to even speak about the need to alter course when the island of delight is right on course. But, change you must. Bill Gates puts it this way:

When your business is healthy, it is difficult to behave as if you are in a crisis. That is why one of the toughest parts of managing, especially in a high-tech business, is to recognise the need for change and make it while you still have a chance.

Lots more could be said on this subject. Truth is that this is not the only recession we have faced and we have come through. Whether or not there is fundamental difficulty in this one, remains to be seen. Chance is there is little you can do to change that. But for foxes, they take inspiration from many sources, they re-consider the tried-and-tested, they try-abandon-try until their possibility thinking becomes their reality and their “new normal” meets their definition of excellence despite changed circumstances. They encourage others. They trade in hope and they are merchants of good news, truthfully spoken. Their word is their bond and their people trust them.

Hedgehogs have a place as well. They may be the very calm in the storm your company needs right now. Their idea may be good despite not ever pretending to be the silver bullet. Like all people, make allowances for them to enrich your team.

Yours in Property.

It’s time to be a Fox

Howzit China! will certainly be on our lips after the global markets slumped this week in response to the yuan decline and other economic news. Our real good news is that some experts are questioning our SARB decision to raise interest rates in the face of a deteriorating market for consumers.

So it is time to pick ourselves up, improve our game and focus our efforts. It’s time to be a Fox.

I first heard the concept from Clem Suntner when I read his book Hedgehogs and Foxes. The article below is copied from Business Day and was written by Michel Pireu on 18 August 2015. All credit to him therefor for the first part of this blog.

In 1953 the philosopher Isaiah Berlin divided thinkers into two categories – the hedgehog and the fox – borrowing from Greek philosopher Archilochus who said, “The fox knows many things, but the hedgehog knows one big thing.” Hedgehogs, argued Berlin, see the world through the prism of a single overriding idea, whereas foxes dart hither and thither, gathering inspiration from the widest variety of experiences and sources.

Recently, University of Pennsylvania psychology professor, Philip Tetlock conducted a multi-year study of the outcomes of expert political forecasts about international affairs. He studied the aggregate accuracy of 284 experts making 28000 forecasts looking for patterns in their success rates. Most findings were negative – conservatives did no better or worse than liberals; optimists no better or worse than pessimists. All were only slightly more accurate than chance, and worse than basic computer algorithms. Only one pattern emerged: how you think matters more than what you think.

“ The most important factor was not how much education or experience the experts had but how they thought, “ says Tetlock. “The better forecasters were like Berlin’s foxes: self-critical, eclectic thinkers who were willing to update their beliefs when faced with contrary evidence, were doubtful of grand schemes, and were rather modest about their predictive ability. The less successful forecasters were like hedgehogs: they tended to have one big, beautiful idea that they loved to stretch, sometimes to breaking point.”

Beginning with the idea that foxes are better at predictions than hedgehogs. Tetlock looked at the underlying differences in cognitive approach and found clear differences. Foxes are cautious about making predictions. Hedgehogs are not, but are more likely to suffer from overconfidence and hindsight bias. Foxes are avid gatherers of ideas from many sources. Hedgehogs specialise and resent ideas that contradict their thinking.

If something isn’t working foxes will look for a new idea or model. Hedgehogs seldom vary their approach and are more likely to use new data to tweak existing theories. Foxes readily accept they’re wrong. Foxes accept complexity. Hedgehogs believe in an underlying simplicity in everything. Foxes are more concerned with the evidence than the theory; hedgehogs see data as “noise” that obscures underlying truth. Consequently, foxes are better equipped to survive in rapidly changing environments in which those who abandon bad ideas quickly hold the advantage. Hedgehogs are better off in static environments that reward persisting with tried formulas.

Little did I realise on the 18th that the global economy would take such a fast turn. In our next blog, we will look at the whether a fox or a hedgehog is needed for the next period of what has been a fairly good run in the property market. Look forward to “meeting you again, at the Junction”, that’s the Homeloan Junction, of course.

Yours in Property.