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


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