Article from: Private Property, 28 January 2010

Experts Cautiously Optimistic About Property in 2010

Article by Antoinette McDonald & Angelique Arde

For many investors, including those with a penchant for property, the past 18 months have been nightmarish. Millions of jobs were shed and value was lost in a global meltdown that has been described as the worst financial crisis since the Great Depression, adversely impacting property, the sure-fire asset class of asset classes.

But with a new year has come new hope, especially down here at the southern tip. For ever since South Africa won the bid to host the Fifa World Cup, pundits have been saying that 2010 would be a golden year for us.

With the big event only 132 days away, what are the experts saying now? On the back of a global recession, what can we realistically expect from the residential property market this year?

Experts polled this week all expressed cautious optimism. In terms of nominal growth, almost everyone’s betting on between 6 and 8 percent, but “slow” and “gradual” are the adjectives most commonly used to describe the recovery.

Doret Els, an economist at Quantum, says the residential property market is set for a better year than last. “Positive factors include the 4.5 percent point cut in interest rates during 2009 and slightly lower lending standards by banks. In addition, the fall in the number of building plans passed and residential buildings reported as completed during the latter half of 2009 are expected to have dampened supply and could add support to property prices.”

However, consumers are still paying off debt accumulated in previous years and, judging by the latest retail sales, are still shying away from spending. “We expect consumer spending to start recovering towards the middle of the year, because interest rates are unlikely to be hiked before a significant strengthening in the economic recovery.”

Dieter Deppisch, the head of property data research at the South African Property Transfer Guide (SAPTG), says he remains confident that “upward trends in the property market will become apparent” — thanks to dissipating recessionary factors along with a slight increase in risk appetite on the part of lenders.

“Our data shows that demand for property, while having weakened significantly, still exists. Residential property sales are driven by semigration, life-cycle changes, down-scaling, emigration, logistics and a host of more intangible emotive factors. Those seeds don’t disappear in a recession. They remain dormant and spring to life when watered with positive sentiment.

“Great opportunities always exist. Some investors will cash in on the opportunity of providing accommodation to sports fans. Others will wait in the wings and pounce on the bargains that arise from sellers choking on a debt-to-income ratio which, while declining slowly, remains near the 79% mark.”

Rhys Dyer, ooba’s chief operating officer, says his company believes the worst is behind us. “The all-important drivers – such as positive house price growth, increased application volumes, increased approvals, further expected relaxation of bank lending criteria, and increased competitiveness amongst lenders – support sustained recovery in the property market in 2010.”
Dyer explains the effect of increased property prices. An “increasing property price environment results in banks becoming more comfortable to relax loan-to-value criteria and other credit criteria, as the value of their security increases relative to the outstanding loan.

“An increase in property prices improves the attractiveness of property as an asset, thereby increasing demand and buying activity. This increase will also drive more buyers into the market, looking for a bargain before prices start increasing again. It is definitely still a buyer’s market and this should help lead to an increase in buying activity.”

Gary Peterson, proprietor of The Bond Man, reckons he could well be the most upbeat bloke in the business, but he’s still not predicting fireworks in 2010. “We’ll never get back to what we had three or four years ago. Instead, we rejoice in the gradual recovery.”

So what of Fifa World Cup fever: is it the get-rich-quick-opportunity of the century or a lot of hot air?

“I don’t believe the World Cup will create a feeding frenzy among foreign buyers,” says Deppisch. “Visitors to our shores will be enamoured by our braaivleis and sunny skies, but we must remember that these visitors are just emerging, blackened and scarred, from dramatic recessions in their home countries. This has produced caution, even fear. And fear has a crippling effect on sales.”

Echoing these sentiments is John Roberts, the CEO of Just Letting.

“There seems to be an expectation that foreigners will invest heavily in our country over the period [of the tournament], because of a favourable exchange rate. Property owners seem to think foreign investors will be happy to buy at high prices or place ‘never-seen-before’ offers. People must understand that the whole world has gone through a recession — most countries worse off than South Africa. Before the recession, foreign investors might have had the money to buy, but they have also lost money on stock markets and property overseas.”

Roberts says his company has seen many investors signing short-term leases, in an attempt to take advantage of the large numbers of foreign tourists looking for accommodation during the World Cup.

“However, many of them are beginning to worry that their properties will stand empty during the event, especially in light of Match [Fifa’s accommodation agent] handing back rooms to property owners.”

His advice to investors is to sign quality tenants for as long as possible – 12 to 24 months. “It seems as if there is an oversupply of property [in anticipation of the 2010 event], and some property owners might find themselves without any form of rental income.”

Of course, the World Cup will provide a platform to promote South Africa as a destination to the world, says Dyer. “This can only help in marketing South African property to international buyers, and it must increase interest in South African property from international investors over the short to medium term.

“Historic growth rates in South African property do still make property an attractive investment to foreign buyers, relative to international inflation rates and returns on comparable assets overseas. There are however exchange rate risks that international buyers will be watchful of,” he says.

The Bond Man agrees that even if fans won’t be queuing up to snap up our properties, they will gossip the good news about South Africa, which will ultimately produce a positive spin-off: “We’ve got an exceptional offering at a darn good price,” says Peterson.

This may be cold comfort to you if you’re a hard-pressed home owner hanging on by the skin of your teeth. If that’s you, the SAPTG’s Deppisch offers this advice: “It’s still a buyer’s market and will remain so for the medium term. Financially able buyers are blessed with a glut of well-priced properties. They are spoiled for choice and often submit offers that make sellers gag – or laugh hysterically! Therefore if you can hang on to your property a little longer this may benefit you in the long term.”