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MAY 2013 |www.opp-connect.com


Uncertainties At the end of last year, industrial action in South Africa became violent (especially in the mining sector) and too commonplace for the cautious investor. Combined with frequent service strikes, this in part led to a series of downgrades from various global ratings agencies. Partly because of this, the rand has


also seen weakness in recent months. These factors could have a negative


impact on the property market. If South Africa sees higher costs of borrowing as a result of rating downgrades and heightened risk, it could limit economic growth and lead to less household purchasing power within the country. As of yet, the rand weakness has probably (according to FNB) not been signifi cant enough to warrant rate hikes, but it has the potential to do so. If household income among the


middle class of South Africa weakens then more are likely to emigrate. Combine this with an uncertainty amongst foreign investors and you can see why some experts are worried. However, it is important to stress that these potential negative effects remain just that – potential – and I have yet to see an expert say with confi dence that the South African market is about to experience another crisis. While certain factors are increasing investor uncertainty, it is by no means as dire as it was in the aftermath of the 2008 fi nancial calamity. Political doubt also plagues the


country. ANC leader Jacob Zuma became president of South Africa in 2009. Zuma supports wealth distribution but has assured foreign investors that their money will be protected. However, Zuma had faced corruption charges before his rise to power and told a rally in January that foreigners might face restrictions on buying landed property – therefore being limited to leasing land.


A positive future? The latest Absa house price index certainly showed positive indicators in areas of the market. Based on applications for mortgage fi nance (for middle-of-the-range homes), the Absa index highlighted year-on-year growth in average home values. It also showed that low interest rates are making real estate a little more affordable – meaning that the South African market is becoming a more tempting prospect to a wider range of potential investors.


Disclaimer


Scrutinising the plethora of reports and articles about South Africa’s property market is, to put it lightly, a little confusing. Experts seem to be falling over themselves to contradict one another – and a factor that strengthens one part of the market can have negative effects for another. This article is an attempt to make sense of a multitude of sources – but please, do get in touch if you think there’s something important we’ve misrepresented or missed out on. Email Francine.carrel@opp-connect.com and we’ll get your views seen by international property professionals.


Amazing | Is the property market as impressive as the countryside? It is important to note that while


property may be becoming more reasonably priced, there is still a marked shortage in affordable housing. Rapid urbanisation is driving up house prices in the cities, which is causing problems for the GAP market - those earning between ZAR 3,500 (USD 389) and ZAR 7,500 (USD 835).


“There is still a marked shortage in affordable housing. Rapid urbanisation is driving up prices”


The FNB (First National Bank)


Property Barometer Estate Agent Survey, released in March, showed rising demand for residential property in the fi rst quarter of this year, contrasting with the declining trend in Q4 2012. It also highlighted that the percentage of properties sold at less than asking price was 89% in Q1 2013 – compared to 85% in the last quarter. South Africa’s property market


delivered a 15.2% total return in 2012, according to the SAPOA/IPD South Africa Annual Property Index. Retail showed the highest total return of 17.1%, followed by industrial at 15.9%. Offi ces lagged far behind at 11.9%. The increase was more than 10%


higher than the previous year and was the highest return since the 2008-09 global fi nancial crisis, according to


MARKET REVIEW SOUTH AFRICA | 57


the SAPOA/IPD South Africa Annual Property Index. Income return was relatively steady


at 8.9%, while the uplift was provided by a 5.8% capital growth. Stan Garrun, IPD’s Managing


Director, stated in the report, “A real divergence in the market has occurred. “We have seen a good turnaround for retail and industrial properties, [but] concern remains over the health of the offi ce sector, as evidenced by high vacancies particularly in the inner cities.


“Given the context of a moderate- to-soft economic outlook and relatively low levels of consumer and business confi dence, South African property has managed to once again prove its resilience.” Property did, however, under-


perform against both equities (at 20.6%) and bonds (at 18.2%). The SAPOA/IPD index looks at


a sample of 1669 properties worth R206.2-billion, therefore representing about 60% of professionally managed investment property in the country. “South Africa joins just a handful


of countries globally experiencing even a mildly positive trend in returns. Once again, non-European markets are tending to outperform European countries,” the report says. Jess Cleland, Research Director


of IPD South Africa, told OPP, “The key point is that – unlike in previous years – there is a current divergence in the market in terms of performance.


The retail sector is quite strong, with demand particularly skewed towards the larger shopping centres, which is being driven by both local and international retailers. This means that vacancies are very low and rental growth is good – all resulting in strong returns to investors.


“Industrial property is also


providing decent returns, despite a slight weakening in the underlying fundamentals. The offi ce sector, conversely, is currently struggling with stubbornly high vacancies and little rental growth. Having said that, there are still pockets of strength in offi ce nodes around the country, but these are generally confi ned to areas with good quality properties in locations that are desirable to blue-chip tenants.”


Conclusion A constant barrage of information relating to South Africa’s political and economical situations leave many wondering if it is a good choice for investment. It would seem that, despite understandable misgivings, many foreign real estate investors are seeing good returns. A volatile country with a fairly secure economy – it’s diffi cult to weigh up the risks. Before doing business in the country, be sure to do your research. If you make local contacts, follow the news carefully and proceed with the right amount of caution, you could fi nd yourself making some serious money.


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