Prop­erty mar­ket turns at­trac­tive post-down­grade

The Star Early Edition - - OPINION & ANALYSIS - Harry Hat­tingh

THE EF­FECTS of the rat­ings down­grades are begin­ning to hit home, throw­ing the coun­try into an eco­nomic re­ces­sion. A sig­nif­i­cant con­trib­u­tor to the de­cline was the 2.3 per­cent fall in house­hold ex­pen­di­ture in the first quar­ter of this year, an in­di­ca­tor of just how much con­sumers are feel­ing the pinch. House­holds are spend­ing less on food and cloth­ing just to keep their heads above wa­ter in th­ese dif­fi­cult times.

The down­turn threat­ens to have a damp­en­ing ef­fect on home sell­ing and home buy­ing for the rest of the year. But there are three im­por­tant fac­tors that are likely to mit­i­gate the ef­fects of the de­cline, mak­ing the res­i­den­tial prop­erty mar­ket – worth R3.9 tril­lion and grow­ing, ac­cord­ing to re­search by the Prop­erty Sec­tor Char­ter Coun­cil – an at­trac­tive in­vest­ment prospect. The coun­cil es­ti­mated that the res­i­den­tial prop­erty sec­tor ac­counted for 75 per­cent of the en­tire prop­erty sec­tor’s value, mean­ing that what hap­pens in res­i­den­tial prop­erty de­ter­mines the fate of the sec­tor as a whole and its con­tri­bu­tion to eco­nomic growth.

The first of th­ese fac­tors is the out­look for inflation and there­fore in­ter­est rates. They de­ter­mine how much bond hold­ers re­pay to fi­nan­cial in­sti­tu­tions each month. Con­sumer price in­dex (CPI) inflation has been on a down­ward tra­jec­tory over sev­eral quar­ters. Be­cause CPI is what the Re­serve Bank uses in its inflation-tar­get­ing regime when set­ting in­ter­est rates, some econ­o­mists say that it is pos­si­ble the bank will re­duce in­ter­est rates later in the year.

Com­bined with a stronger rand, which makes im­ports cheaper, this could bring much-needed re­lief to un­der-pres­sure house­holds. More af­ford­able debt re­pay­ments and cheaper im­ports mean more dis­pos­able in­come at the end of the month. And it could also make home loans more af­ford­able to those that were on the bor­der­line, giv­ing a boost to ac­tiv­ity at all lev­els in the mar­ket, whether look­ing to buy or sell your home.

Then there is the chronic short­age of hous­ing, par­tic­u­larly in ur­ban cen­tres. There sim­ply is not enough hous­ing stock over­all to meet de­mand – and there hasn’t been for a while. When you drill down into the de­tail, it be­comes clear that the short­age is most pro­nounced in low to mid­dle-in­come sub­urbs in metropoli­tan cities such as Johannesburg and Pre­to­ria. This sug­gests that it is more of a mis­match in cer­tain seg­ments than an over­all short­age.

Look­ing for homes

More peo­ple than ever be­fore are liv­ing in cities and look­ing for homes. But the mar­ket is strug­gling to sup­ply at the prices clients are will­ing to pay in th­ese seg­ments, keep­ing home prices and ren­tals up. There is a “sweet spot”, which has ranged from monthly pay­ments of about R7 000 to R12 000 or so, where there is the great­est mis­match and there­fore de­mand.

Houses in this range do not stay on the mar­ket for long and typ­i­cally at­tract strong in­ter­est from buy­ers and sell­ers. At the top end of the mar­ket, ar­eas such as Sand­ton in Johannesburg and Pre­to­ria’s eastern sub­urbs con­tinue to be in de­mand, no mat­ter the price. And fi­nally, there is tech­nol­ogy. The world is ex­pe­ri­enc­ing what some have dubbed a fourth in­dus­trial rev­o­lu­tion. New tech­nolo­gies are emerg­ing and com­bin­ing in new and ex­cit­ing ways, leav­ing no sec­tor un­af­fected by the dis­rup­tion. The prop­erty sec­tor is no ex­cep­tion.

Com­pa­nies such as Airbnb are at the cut­ting edge of the dis­rup­tion. Re­ports are that in cities like Dur­ban, Airbnb is al­low­ing bond­hold­ers to pay off their home loans in record time – 18 months by some es­ti­mates. This is the short­est time pe­riod world wide. At 33 months, Johannesburg was not that far be­hind.

The hap­pen­ings that her­ald the fourth in­dus­trial rev­o­lu­tion mean that it’s only a mat­ter of time un­til other com­pa­nies find ways to be as dis­rup­tive as Airbnb. Many smart peo­ple are at work try­ing to fig­ure out how to ap­ply the ex­plo­sion of new tech­nolo­gies in the prop­erty sec­tor to de­liver bet­ter value and ser­vices to home­own­ers and ten­ants.

Tech­nolo­gies such as so­lar power and ef­fi­cient build­ing ma­te­ri­als have also been mak­ing their way into new hous­ing de­vel­op­ments, driven largely by reg­u­la­tion and de­mand. The Green Build­ing Coun­cil, for ex­am­ple, has been driv­ing aware­ness of th­ese tech­nolo­gies and is­su­ing cer­ti­fi­ca­tions. And buy­ers and ten­ants are be­com­ing in­creas­ingly aware that more en­ergy-ef­fi­cient homes mean lower longterm costs for util­i­ties and other con­sum­ables. As a re­sult, South Africa is re­puted to be among the fastest-grow­ing when it comes to de­vel­op­ing new build­ings with th­ese tech­nolo­gies.

It may be that what is hap­pen­ing is that we are catch­ing up to de­vel­op­ments in other parts of the world, but th­ese tech­nolo­gies are nonethe­less one of the sig­nif­i­cant fac­tors driv­ing ac­tiv­ity in res­i­den­tial prop­erty.

So, on the whole, the res­i­den­tial prop­erty mar­ket con­tin­ues to look promis­ing. Op­por­tu­ni­ties abound for de­vel­op­ers, agents and fi­nan­cial in­sti­tu­tions to meet chang­ing de­mands and win new clients, even in this tough eco­nomic en­vi­ron­ment. Harry Hat­tingh is co-founder and prin­ci­pal at Lead home.

PHOTO: BLOOMBERG

Ar­eas such as Sand­ton in Johannesburg and Pre­to­ria’s eastern sub­urbs con­tinue to be in de­mand, no mat­ter the price.

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