Property Market overview by Dr Andrew Golding

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Dr Andrew Golding, CE of the Pam Golding Property group. Dr Andrew Golding, CE of the Pam Golding Property group.
Rode-REIM Real Estate Conference 2014

Against the backdrop of a year (2011) beset by both global and local challenges, the property market has continued its up and down performance in line with the past few years.

While the South African housing market experienced unprecedented growth over the past decade or more, despite this fact local residential property values did not experience nearly as sharp a decline as some other countries. 

Over the past 10 years the South African housing market has delivered an average annual return of almost 23 percent, surpassing equity returns of just over 17 percent over 10 years.  In comparison, bonds returned a little over 10 percent while the return on cash was nine percent.  A comparison (by Coronation Fund Managers) shows global equity at just 2.3 percent and global bonds at 5.7 percent over the same period. And while the return outlook for local property over the next decade is likely to be less than that of the past 10 years, returns on local equity and bonds are also forecast to drop. 

International market

Looking at property markets abroad, the housing market in the UK returned an average growth rate of around eight percent over the past 12 months.  However, demonstrating that, just like in our South African market, there are pockets of excellence which outshine the rest of the market, the prime London market has streaked ahead of the rest of the country, showing returns of nearly 30 percent over the past three years – one of the best global performers, if not the best.

The US housing market is still under duress, showing an annual average drop of 5.9 percent, while Ireland is in an even more critical state, with house prices falling 12.9 percent over the past year.  Australia is also facing challenges, although the prime Sydney market remains strong. Apart from some notable exceptions, global residential housing performance is still struggling along generally, amid renewed global economic recessionary concerns and particularly off the back of recent Euro concerns. 

South African housing market

All in all the South African housing market has not fared badly – prices have probably dropped a total of 15 percent since the peak of the market and volumes are slowly but surely returning since 50 percent of the existing market disappeared when the market crashed (from a volume perspective) in 2007. 

Today sentiment has improved; there is a growing acceptance among sellers for the need to price properties realistically in line with current market conditions, and buyers are continuing to place their confidence in solid, tangible real estate as a sound investment.  There is also a pent-up demand among potential and aspiring home buyers, exacerbated by the continued restricted access to finance or credit.  There is even an uptick in demand and consequently sales at the top end of the market in the R20 million and R30 million upwards price range.

From a Pam Golding Property (PGP) group perspective we have has seen a steady increase in show day attendance and enquiries, and over the past 12 months (October 2010 to September 2011 inclusive) have achieved an increase in sales volumes or units of almost eight percent, representing an increase in sales turnover of 13.7 percent.  In other words, for the 12 month period ended September 2011 we saw sales increase from R9.64 billion last year to R10.96 billion this year.

PGP has seen a significant increase at the top end of the market, reflected by an increase of 40 percent in units sold priced above R6 million, while units from R3 million to R6 million have increased by 21 percent, and units priced from R1.5 million to R3 million are up by 16 percent.   However, sales to international buyers remained low at 2.7 percent of total PGP units sold, with the bulk of these buyers from: the UK, Germany, Namibia, Zimbabwe, Ghana, USA, China, Belgium and Switzerland. We continue to see increasing demand from buyers in other African countries such as Ghana, Nigeria, Zambia, and Uganda, as well as other BRICS (Brazil, Russia, India, China, South Africa) countries such as China and India. 

Africa

In line with our ongoing strategy to extend our brand footprint in Africa, in January 2012 PGP opens an office in Nairobi, Kenya, which brings to 10 the number of African countries where PGP is represented.  We are currently in negotiation with other East African countries such as Uganda, Tanzania and Rwanda and preliminary enquiries are underway in Nigeria, Ghana and Angola.

South Africa

Closer to home, developers continue to show a growing appetite to re-enter the property market.  Currently there is also a strong demand for modern accommodation particularly in the R900 000 to R1.6 million price range, which presents an opportunity for developers with vision. Cash buyers remain evident in the market and coupled with those with access to credit are able to select from a wide range of stock, with good buying opportunities available and presenting the potential for meaningful capital returns in the future.  Some buyers are capitalising on the current scenario in order to plan for the future by downscaling from a large, high-maintenance property to a more manageable yet equally high quality, high-end primary residence, while simultaneously acquiring a second, highly ‘lettable’ property in a high-demand area as a sound investment for retirement years. 

Other trends which we believe will play an ever-increasing role in the marketplace are: locations with access to good schools and educational facilities; areas with good infrastructure, roads and requiring less travel time or distance to the workplace; and a migration to locations which offer a better quality lifestyle and secure environment. There’s also growing evidence of buyers seeking to reside in communities among like-minded people who share common lifestyle interests – eg within a family-oriented community, lifestyle or equestrian estate. While the Gautrain and improved Bus Rapid Transit transport systems are impacting positively on the demand for homes in accessible areas, the proposed toll roads are expected to add to the consumer burden in terms of costs and will further result in a desire to reduce travel and live close to the workplace.

Notable Market Trends

Gauteng: Johannesburg

In the Johannesburg area new developments in well established areas are attracting like-minded people on the basis of lifestyle and convenience regarding access to major routes, amenities, shopping and leisure facilities and good schools and creating good market activity. 

Property in gated estates continues to perform well, as evidenced in the Fourways and Dainfern areas, with supply demand factors making this property class largely recession-proof to date.  Security and lifestyle are at the forefront of buyers’ minds and gated estates rate highly on both counts.  In addition, these properties provide sound returns in the rental market as they are extremely popular with foreigners working on contract for multinational companies. Investing off-plan in one of the newer, gated estates in the Fourways area provides a current buying opportunity for sound potential over the medium term (5-10 years). 

Further investment opportunities are found in development nodes such as Rosebank, where good future growth is predicted due to the Gautrain and revitalisation of the area.  Transitory suburbs such as The Parks are also in demand, having always reflected positive growth, while the older, more established suburbs of Bryanston, Westcliff and Hyde Park have always been sought after as providing a highly desirable address. In Midrand PGP reports that commercial growth in the area bodes well for the residential property sector, while the Gautrain is already resulting in increased enquiries regarding homes in the area. The East Rand continues to reflect a high demand for homes, with value for money a key factor driving demand and well priced housing available in areas such as Benoni, Boksburg and Kempton Park - despite having to compete with older suburbs with good infrastructure.

Promisingly in Gauteng, buyer activity below R500 000 has been consistent.  For some time the mid-range market experienced some sluggishness in respect of securing and servicing bonds, despite the fact that interest rates are at a 30-year low.  Being a market which is most dependent on mortgages, the middle sector has felt the pressure of stringent bank lending criteria. Conversely, the upper end of the market has proven more resilient in terms of having far higher liquidity and easier access to finance and PGP has concluded a number of transactions in the R20 million to R30 million plus price range. 

Gauteng: Pretoria

In Gauteng the Group’s Pretoria office in the Tshawane Metropolitan area has seen an improvement in stock levels of ‘sellable’ properties.  Due to the high demand for rental properties we are seeing a return in interest from buy-to-let investors.  We manage substantial portfolios of individual investors and it is interesting to see that this year hardly any properties were sold out of their portfolios - in contrast to 2010 when we saw investors reducing their portfolios.  Properties in the sought after areas of Waterkloof, Waterkloof Ridge and Brooklyn continue to be a sound investment, with the demand for rental properties from embassies and foreign missions driving this market, achieving rentals of up to  R60 000 per month.  (In Canopus Street alone, in Waterkloof Ridge, there are 17 embassies.) Continued commercial development in and around this region bodes well for continued growth and the prospect of a sustainable and vibrant residential market.  Sales at security and golf estates have increased compared with 2010, with normal market conditions returning and improved prices being achieved. 

Last year, due to the considerable pressure on house prices a number of sellers on these estates opted to rent out their properties and we saw a number of distressed sales occurring, setting a low market average and with low offers from buyers.  With better prices now being achieved, 2010 lessors are putting their homes back on the market and interestingly we are seeing that quite a few of the tenants in these homes are making offers on the properties.  The lessees were forced to rent in 2010 due to difficulty in obtaining finance to buy as a result of high credit exposure – having had a year to pay off some of the debt they are seen by the banks as less of a risk and buying is becoming a reality again.

Western Cape: Cape Town Metro

In the Western Cape, firstly looking at the Cape Town metropolitan area, there has been a definite uptick in sectional title sales, with stable, relatively recession proof areas most favoured.  Currently there’s a selection of ‘good buys’ as a result of highly geared speculators disinvesting, especially in speculator-driven new developments;  those scaling down in the light of escalating costs such as rates, electricity, fuel, food etc or downsizing for a lifestyle change; and low-key cash buyers investing for long term gains. Erratic trends are typical at present but generally the movement in the residential market has moved from the top end of the market to the middle market, ie from R2 million-R8 million, in areas where buyers either have a high level of personal equity or qualify easily for access to credit.  Among high end sales achieved by PGP is a home in Bishopscourt sold to a South African buyer for R35 million.

In mortgage dependent markets, loan failures remain evident.  PGP concludes a high percentage of cash sales in this region, with offers - especially from buyers with cash - coming in very low in some cases and taking a longer time to close.  On a positive note there is less job insecurity in the middle markets and we are seeing some international buyers in the market.  An area performing exceptionally well is Cape Town’s Northern suburbs, where homes are selling within six to eight weeks of listing, and with a particular shortage of stock in the price bracket from R1.8 million to R2.4 million.

The rental market is performing well, boosted by a strong demand among those reluctant to make a long term commitment to purchase, job uncertainty, cash requirements and scarcity of finance.  Rentals currently being achieved by PGP include: 

* houses let in Cape Town’s Southern Suburbs for R35 000 per month in Constantia and up to R60 000 in Bishopscourt;   

* houses in City Bowl let for R20 000 and R35 000;  rentals of R32 500 and R60 000 achieved for homes in Green Point and Fresnaye; 

* and apartments renting for R30 000 per month in Mouille Point and R23 500 in the V&A Waterfront. 

Western Cape: Boland & Overberg regions

This year (2011), in the Western Cape Boland and Overberg regions the most significant growth sector is buyers in the 20-29 year age group, where we have seen an increase in demand of over 60 percent – indicative of the re-entry of first-time buyers in the marketplace, capitalising on the prevailing low interest rates and sound value for money available.  For example at The Village at Diemersfontein Wine Estate outside Wellington one can acquire a two-bedroom house from just R699 000 or a three-bedroom home for up to R1.5 million. 

Furthermore, if ever there was a good time to buy a holiday home along the coast of the Overberg it is right now.  For example, a three-bedroom family home in sought after Voëlklip, Hermanus, recently sold for R1.7 million and a three-bedroom townhouse in walking distance of the main Onrus beach sold for R1.175 million. At the end of this month (November 2011) we are launching another sound buying opportunity, with 120 apartments priced from R1.5 million becoming available in ‘Andringa Walk’ in the heart of Stellenbosch, on top of the newly revamped Eikestad Mall, off well-known Victoria Street.

The Boland and Overberg areas remain popular among buyers across a broad spectrum, from first-time entrants to the market to families seeking a wholesome lifestyle with access to good schools, as well as lifestyle buyers acquiring small farming units.  Areas performing exceptionally well - even through the traditionally quieter winter period - include Hermanus, Somerset West and Franschhoek.

Sentiment regarding residential and farm sales is improving in the verdant Franschhoek valley.  Since the start of 2011 PGP has sold agricultural properties in the region in excess of R220 million, ranging from dairy, olive and wine to fruit, mixed farming and lifestyle smallholdings.  With regard to farms generally, we have seen more interest this year from international buyers from countries such as China, UK, USA and Sweden, however enquiries for farms are still mainly from South African buyers seeking smaller lifestyle farms.

While it is no secret that the wine industry is going through challenging times, impacted by increased production costs, a weak Rand and worldwide economic conditions, the perception that all wine farms are on the market because they are under pressure to sell is not true.  A number of Stellenbosch farms, for example, are on the market by owners only if they achieve a certain price.  Currently, PGP is marketing a 140ha wine farm in Stellenbosch with state-of-the-art winery and magnificent manor house, priced at R105 million, and a 48ha farm with a very good brand and excellent winery for R25 million.

Garden Route

As far as the Garden Route is concerned, the leisure market is slowly showing signs of revitalising after a period of low demand, and coupled with this there are currently good buys available which will provide capital growth in the longer term, particularly at St Francis Links and Plettenberg Bay.  High end homes in Knysna continue to enjoy high appeal while other towns and hamlets such as George, Sedgefield, Mossel Bay, Witsand and Riversdale with its scenic farms, are attracting buyers aspiring to a better quality lifestyle, or looking to retire to the coast.

Other regions: Central or Inland regions, KwaZulu-Natal and Eastern Cape

In the other regions of the country, namely the central or inland regions, and in KwaZulu-Natal and the Eastern Cape, we have seen an improvement at the top end of the market, with a farm sale recently concluded in the Karoo for R43 million, homes in Umhlanga and Mount Edgecombe sold for up to R24.5 million as well as an increase in high end sales in Mpumalanga and a continued demand for homes in Grahamstown.  We have noted that sales in all these regions, including the Garden Route, have moved up in price bands from a very low level, including the R2 million to R5 million price range.

An area which surely currently offers outstanding value for money is the KwaZulu-Natal South coast, while the key growth corridor north of Durban continues to benefit from increased business activity and lifestyle demand from home buyers. Other hotspots as possible investment considerations include the East Rand (as mentioned earlier), greater Durban area, Nelspruit and East London, which are showing a high level of demand, particularly where there is a strong industrial focus which results in a migration of skills and opportunity to boost demand for housing. Finally, we are also seeing a re-emergence of interest in lifestyle properties, many of which are farms, in areas such as Clarens, Dullstroom, Bethlehem and Riversdale.

International Sales

Turning now to some of our international activities, the sale of prime, luxury real estate in the Indian Ocean Islands continues to highlight the global appeal of an idyllic, tropical lifestyle – particularly for South Africans. Since inception, at the now established Eden Island marina development in Seychelles, Pam Golding Properties International Division has concluded over USD300m in sales, and for the year to date alone (2011), has sold 48 luxury villas at a total value of USD50.8m.

Approximately 40 percent of these were purchased by South African buyers, with around 30 percent acquired by those from Eastern European countries such as Czechoslovakia, Ukraine and Russia.  Most are purchasing for the exceptional lifestyle, and of interest is that very few units are made available for resale.  However, those which have been resold have achieved capital appreciation in the region of 30 percent on the original purchase price.  Indicative of the high usage of homes among owners, only 25 percent of buyers to date have opted to place their units in the rental pool, where rental yields average at eight percent per annum.

Key contributors towards the success of this development is the perceived value on offer – most of the infrastructure has been completed and paid for, so the developer is able to hold prices at very competitive levels.  Coupled with this, the development is far advanced with clubhouse, communal swimming pools, private beaches, deli and tennis court all completed and operational, which provides potential buyers with a sense of security.

In Mauritius, PGP has sold 55 units this year at a total sales value of USSD35m predominantly in several RES (Real Estate Scheme) developments.  Of these, 85 percent of PGP sales were to South Africans mainly based in Gauteng. However, from an overall market perspective general sales in Mauritius are split approximately 50:50 between South Africa and Europe.  Residency on the island also provides high appeal for South African buyers.  Due to the superior infrastructure and mild weather patterns of the North (Grand Baie area) and West Coast (Tamarina and Black River area), PGP continues to favour these locations. 

As far as the UK is concerned, PGP continues to market prime located London property to South African buyers, mainly from Johannesburg and Cape Town.  The areas favoured most by local purchasers are in South West London - in suburbs such as Putney, Wimbledon, Chiswick, Wandsworth and Richmond. With rental yields of between five and six percent, almost all our sales are to those buying for an investment and Rand hedge. 

Hotel Market

As far as the hotel market in South Africa is concerned, Pam Golding Hospitality reports that this continues to compare favourably with international hotel markets.  The fact is South Africa has very few distressed hotel situations when compared with other parts of the world.  Traditional overseas markets have reflected no growth in international tourist arrivals and in most case these have declined as a direct result of prevailing global economic conditions.  In contrast it is anticipated that the improvement in growth of global travel to South Africa will be substantially driven by the exploration of new markets, with the BRICS relationship proving to be critical over the long term.

In addition, international and regional hotel operators who have a presence in gateway cities in South Africa will find it much easier to expand into Southern and Western African countries.  There are many hotels in our neighbouring states that offer an opportunity which, with a good refurbishment, strong global brand and a sound hotel operator, have the potential to operate well.

Pam Golding Hospitality (PGH) has been mandated to market three separate parcels comprising a total of 23 mid-market hotels situated in South Africa and Zimbabwe.  The total value of these hotels is in the region of R1 billion.  These hotels are offered on an attractive discount of approximately 50 percent compared with current replacement value, and, PGH is in discussion with four major international hotel groups who seek to compete with City Lodge and Protea Hotels in the growing mid-market hotel arena in Southern Africa.  In regard to the hotel sector in general, we are optimistic of seeing early signs of recovery and over the past month have received six firm engagements for feasibility studies for new hotel projects in South Africa.

As far as Pam Golding Lodges & Guesthouses division is concerned, over the past year we have concluded steady sales of such establishments in the order of one transaction per month at an average selling price of R10 million, with approximately 75 percent acquired by buyers mainly from Holland, Germany and France who are relocating here. 

2011 African Property Awards

We are pleased to mention that PGP is about to receive an award at the 2011 African Property Awards in the category of Best Real Estate Agency in South Africa at this event, which is taking place at present in Dubai.  In addition, PGP has been awarded international Superbrands status, which is only awarded to the world’s leading, exceptional brands.  In fact every time Superbrands status has been awarded in South Africa PGP has been a recipient.

Looking ahead and industry issues

All things being equal and on the current trajectory we hope to have concluded R12 billion for the group’s financial year ended February 2012. Looking ahead at 2012, by this time next year at the very latest, it is hoped that estate agents across the country will have reorganised themselves into two separate organisations, one representing a labour component or employee component (the former Institute of Estate Agents), and the second representing business owners and principals (the so-called business component) REBOSA.  More important however is that these two organisations will be able to represent in a fully inclusive way, the constituencies that they are designed to represent.  In this way the industry will be able to be in control of its own destiny and to speak with one unified voice and will be able to interact meaningfully and credibly with all the stakeholders, both government and non-governmental.  

Transformation

In regard to inclusivity, the challenge of transformation within the residential real estate industry is certainly one of our greatest challenges.  The clock is now firmly ticking with the imminent advent of the Property Charter and companies will simply have to find ways of meeting the challenges of transformation and the Property Charter.  These ways, in my view, will have to be new and extremely innovative if the industry is to be successful in attracting black talent, which up to now certainly has had no real incentive to join the real estate industry.

Regulatory

From a regulatory perspective, we hope that next year doesn’t have as many regulatory implications and that the full effect of the Consumer Protection Act will have been bedded down and properly understood.  However, looming on the horizon is the new Property Transactions bill which is in draft form and which is essentially a long-awaited revision of the old Estate Agencies Affairs Act.  Undoubtedly this new bill will have significant ramifications for the residential real estate industry and the industry will need to scrutinise it carefully when it is made public.

The market

Turning to the market itself, our view is that it’s likely to be much more of the same, with metropolitan South African residential markets chugging along at a gentle and slow pace, but improving nevertheless, as the debt burden on households continues to ease and as positive sentiment slowly but surely flows back into the residential market and as we start to move towards the end of this property down-cycle.  Probably taking a little longer is the return and recovery of the leisure market sector within the residential property market and it is unlikely that there will be significant improvement in this market, although we do believe that the start of the recovery in this market will happen towards the end of next year.  

We also hope to see an improvement in foreign investment, depending on the political messages that go out next year.  But certainly the foreign market appetite has been dimmed by a combination of factors and it is our hope and expectation that foreigners who have traditionally found South African an attractive place to invest in property will continue to do so in increasing numbers.

From a general South African property market perspective, we hope to see numbers of transactions continuing to increase, hopefully with approximately a 10 percent increase over this year, and that prices will remain flat in real terms.

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SA Commercial Property Market  |  Gautrain  |  Pam Golding Property Group  |  Dr Andrew Golding
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