Emerging Markets Taking Viable Steps to Fight Global Inflation

Emerging Markets Rising Inflation

An article published on the Sify website has highlighted increasing inflation in a number of emerging markets over the last year. While this problem is also being experienced in developed markets, rising inflation is especially acute in emerging markets because food tends to account for a much larger percentage of consumer price indexes.

To add insult to injury, many countries are working close to full capacity because investment has not kept up with economic growth, which consequently pushes up wage inflation. Official statistics may actually mask the true extent of inflationary pressures in some cases, but there is evidence that the skyrocketing food and energy prices are seeping through to core inflation (in other words, having an effect on other inflationary factors).

Concern has also been raised in terms of the effect of price increases and the various official responses to the situation. Vietnam reported a year-on-year inflation rate of 25% in May, which has seen a proliferation of labour strikes in reaction to this and growth forecasts have since been cut. China is also experiencing a core problem with rising food prices. Even Egypt has hiked public sector wages by 30% in a bid to prevent social unrest. Indonesia is said to be willing to spend a fifth of its annual budget to shield citizens from energy price increases.

Without a doubt, the inflation pressures being experienced by emerging markets seem much worse than in developed countries. Such a development is certainly worrying, as measures including subsidies, price controls and export bans can only provide short term relief at best, while probably just storing up long term problems for the future.

However, there has been a responsible approach taken by various authorities in many countries affected that is somewhat encouraging. For example, Egypt’s decision to pay for the state sector’s wage hikes by curtailing tax exemptions for firms operating outside of ‘free zones’, imposing taxes on interest earned from Treasury bills and cutting state fuel subsidies.

Indonesia announced recently that it would reduce fuel subsidies by 30%, while Taiwan has decided to abandon them entirely. Continuing the trend, Malaysia and India have also decided to reduce fuel subsidies. The current policies will go a long way towards stabilizing the finances of these countries and help direct necessary resources to other parts of their economies.

While moves by central banks in South Africa to raise interest rates in a bid to quell inflation are generally considered bad news for stocks, when it comes to the long term, it is encouraging to see the increasing credibility that these banks have acquired in battling rising prices. The same policies have been applied by banks in Korea and Chile, which ensures that the responsibility for dealing with inflation is taken out of the hands of politicians.

It is important to keep the threat of inflation in context, as policy makers in some emerging markets insist that the spike in inflation is due in part to a short term supply stock in food and energy that will soon ease as higher prices lead to increased supply. There is merit to such arguments and while recent developments are concerning, inflation should not yet be seen as a ‘crisis’ that poses a threat to the overall attraction of the world’s fastest growing economies.

Some countries have also pegged their currencies to the US dollar and successive cuts in interest rates in the US have made the inflationary problems in these countries worse, while already struggling with their economies in overdrive. How long this policy remains in place depends largely on the economy in question, as well as the priority each central bank puts on inflation control.

In general, local currency appreciation and higher interest rates should really help combat inflation. It is believed that the prospect of currency appreciation will not exacerbate the problems being experienced by emerging markets by pulling in more capital, simply because there a number of emerging market currencies are still relatively undervalued.

Equity investors are concerned about emerging markets partly because of the possible severity of measures implemented by governments in an effort to cool the economy and partly because of the cost pressure that local manufacturers might face as a result of price increases. Of course, another concern is the depreciation in value of future money. However, in places like Latin America and Russia, the recent spike in global inflation has been concentrated in commodities and this has actually helped stock indexes.

While the price of commodities may drop from their peaks, these prices are not foreseen to reach extremely low levels in the near future. This is due in part to the continued demand from emerging markets and the relatively inelastic supply. Thus commodity companies should remain in a profitable position and constitute an attractive investment opportunity.

The information in this article is courtesy of Mark Mobius (“Rising inflation in emerging markets”, Sify Finance, 29 June 2008).

If you would like to buy or sell property in South Africa, please visit www.sahometraders.co.za.

Estate Living Increasing in Popularity in South Africa

Estate Living On Rise in SA

A transcript published on the Business Day website outlines a discussion by the Property Experts on South Africa’s Home Channel on DSTV. The debate centred around estate living, why it has become so popular in South Africa over recent years and what this is doing to housing in general. Bruce Whitfield hosted guests including Jeanine Fincher from Chas Everitt International Property Group and Leza Kotze from Edward Nathan Sonnenbergs.

Jaenine Fincher believes that the situation is a response to the escalating crime in South Africa and that there probably aren’t enough estates at the moment. Estates tend to be found quite some distance outside of the cities (Bruce Whitfield). Fincher suggests that what may happen in future is more people in the suburbs will start blocking property and selling it off to create more estate living in the suburbs.

When asked about the trend of people moving out of the suburbs, from places where they feel vulnerable, to places where a higher level of security is perceived, Leza Kotze agreed that crime has had an immense impact on property development in terms of this trend. Various suburbs have compensated for this by putting up boom gates and forming a community watch organization, but there remains a big difference between what this can provide in contrast to true estate living. Estates not only provide a high level of security, but some kind of entertainment as well, whether it be a golf course, stables or even private school. There is a whole lifestyle that comes into estate living, which is essentially what gives it such an appeal.

When it comes to the unbelievable expense that goes along with buying into an estate, Fincher believes that while the demand is there and people are paying, there is just not enough in the right price range. She insists that more estates need to be built, but a lot cheaper and not necessarily so big. It’s unnecessary to purchase immense stretches of land; one can go smaller and still manage to have the community surrounded by walls for security purposes. Levies in estates are also high, considering that there is so much more to maintain, from the grounds, to the roads, the infrastructure and so on.

Whitfield also highlights the trend towards densification that seems to be following suit, with townhouse complexes and units getting smaller and being built closer together. Kotze says that this places a huge strain on municipal resources to provide basic services, which is one of the biggest challenges that needs to be addressed when it comes to densification in Johannesburg and Cape Town in particular. All this is doing though is bringing South African cities in line with all the major cities around the world, where property is expensive and a scarce and limited resource.

The information in this article is courtesy of Business Day (“Ask the Property Experts”, 24 June 2008).

If you would like to buy or sell property in South Africa, please visit www.sahometraders.co.za.

SA to Renovate Rail Network

Property Development Rejuvenation

A news article published on the Property Magazine website draws attention to South Africa’s planned rail network rejuvenation. With predictions of an increase in rail usage in South Africa, fuelled by recent petrol price hikes and the ever-present congestion on major roads, properties that are located within good proximity of the rail network are set to become more popular.

Cape Town in particular is set to follow international trends in cities like London, where properties that are situated close to rail stations command premium rentals and prices. The recently launched Salt River Junction, which is due for completion near the end of 2009 is in close proximity to Salt River station. This is poised to take advantage of the massive Cape Town development strategy initiative that is currently being facilitated in the area.

According to property developer, Edward Black of Urbode, the Salt River development was created with a complimentary vision in line with the trend towards increased infrastructural developments in Cape Town, especially the Department of Transport’s recent announcement that substantial investment would be poured into the recapitalisation of South Africa’s rail network. The local Metrorail carriages will be replaced ahead of the upcoming Soccer World Cup in 2010 and improved security and ticketing systems will be implemented.

The Salt River and Woodstock suburbs are undergoing massive regeneration with the emergence of various high value developments, including the Black River office park, the Lion Match Factory and the Old Biscuit Mill. Also taking place is the restoration of a number of old Victorian buildings and the rehabilitation of the local park, which is transforming the suburb into an urban conservation area.

According to Louise Maranz of Vered Estates, “In keeping within the realm of these fast growing trends in the area, the Salt River Junction development will form a valuable investment for buyers with an anticipated return of 8%. With the unit prices being 20-30% less than other developments, recently sold out in the area, our competitive pricing strategy positions Salt River Junction perfectly in making the units affordable for first time buyers who now cannot afford to purchase property in the City Centre, whilst still desiring a central location. The redevelopment initiatives are ultimately extending the inner city environment to other peripheral areas of Cape Town, making it exceptionally attractive and viable to this market”.

Salt River Junction is situated on the border of Salt River and Observatory, almost equidistant from the City Centre, Claremont and Century City, with ideal infrastructure and access to all main roads and public transport nodes. Maranz says that the spatial design, alongside other elements of the development, will be ergonomically engineered so as to be energy efficient, heating the surrounding interior space and providing natural light in common areas. The instant hot water heaters installed have proven to be 15-30% more efficient than geysers.

The development provides breathtaking views of Devil’s Peak, Tygerberg Hills and part of Table Bay, with two entertainment decks located on the 3rd floor perfectly positioned to take advantage of these incredible views. Always of paramount importance is security and Salt River Junction will include a sophisticated biometric access control system and 24-hour guards, as well as secure basement parking.

With such exciting property development taking place throughout South Africa ahead of the 2010 World Cup, it certainly makes sense to invest wisely and ultimately reap the rewards.

The information in this article is courtesy of The Property Magazine (“Property development gearing up for SA rail network rejuvenation”, July 2008).

If you are looking to buy or sell property in South Africa, please visit www.sahometraders.co.za.

Emigration Seeming Viable Option in SA

Emigration Regains Appeal

An article published in The Times has reported on the idea of emigration as holding a renewed appeal for local South Africans. A wealth survey carried out in August last year showed that 96% of people who responded thought emigration wasn’t an option. However, in the follow up interviews this year, just 75% said emigration wasn’t on the cards.

Nic Andrew, head of Nedgroup Investments said that people are also starting to pay more attention to offshore investments. People with significant assets have always been inclined to diversify their investments geographically. Exchange control has relaxed over time, which has given people more opportunity for offshore investment.

According to Andrew, “In the period when there has been opportunity for meaningful offshore investment, we have seen two major cycles. Between 1998 and 2000, as the rand depreciated people became very nervous and a large amount of money went offshore”. However, at the time, this was more of a ‘panic currency hedging’ than a clearly strategic investment.

Those who did move money offshore generally did so ‘after the horse had bolted’ and this resulted in people paying a premium as the rand hit all time lows. For the past 3 or 4 years, the industry has seen relatively little offshore investment, mainly due to the fact that investors have been burnt overseas. South Africa was also enjoying a period of above-average returns, particularly in the equity and property markets.

The second half of last year saw this change, with investors looking to diversify and then being hit by a number of emotional factors, including political uncertainty, the Scorpions debacle and the Eskom crisis. “In January, Eskom had a particularly negative effect on people living in Gauteng. Together with some rand nervousness, these factors have resulted in a significant increase in offshore investment,” said Andrew.

He added that during this time, there had been investors who had made astute investment decisions, which included appropriate levels of diversification. However, the rise and fall of offshore investment depends largely on emotional factors and is driven by popular perception of South Africa’s future.

“There are a large number of people looking at diversifying to protect their wealth as a form of insurance. In addition, there are a number of wealthy people who are either emigrating or they are deciding not to invest in South Africa,” Andrew said.

Andrew said that another consideration had to do with many investors under investing offshore over the past 4 years, who had seen significant growth in the local assets in their portfolios. Thus, some capital outflows were being seen as investors looked to rebalance their portfolios.

The information in this article is courtesy of Andrew Gillingham (“Idea of emigration retains its appeal”, The Times, 22 June 2008).

If you would like to buy or sell property in South Africa, please visit www.sahometraders.co.za.

Serious Damage to Property on KZN South Coast

Flood Damages Property in KZN

An article published in BuaNews has drawn attention to the devastation caused by recent floods in the KwaZulu Natal South Coast area. The report indicates that provincial MECs are set to visit the area on Thursday to gain firsthand information about the damage caused to businesses and homes.

On Tuesday, the Ugu District on the KwaZulu Natal South Coast experienced torrential rains, which caused the Umtamvuna River to burst its banks and flood houses and businesses in the surrounding area, leaving serious damage to property. 6 people died in the floods and there were cars washed away with people still inside.

There were at least 10 people who had to be rescued from rooftops and taken to higher ground, with more than 200 people given shelter in local community halls. The National Sea Rescue Institute (NSRI) sent out more than 500 volunteers to help evacuate people whose houses had been flooded.

According to the departmental spokesperson for the Provincial Local Government Lennox Mabaso, “We are still trying to accommodate all those that have been affected and lost their homes”. The assessment of damage will be conducted once rescue operations have been completed.

The Durban Weather Bureau predicts no heavy rains in the South Coast area for the rest of the week, although there may be some light drizzle. The Durban Metropolitan Police have urged motorists traveling towards the South Coast area to exercise extreme caution, as the majority of roads and low water bridges have been flooded.

Most businesses in the South Coast area are to remain closed until mop up operations have been carried out. Following an aircraft skidding off the runway, the Durban International Airport was closed but has since been reopened. According to a spokesperson from the Airport Company South Africa (ACSA), Colin Naidoo, “We worked until late yesterday trying to accommodate all delayed passengers and currently all flights are on schedule”. He added that no passengers were injured during the incident.

The information in this article is courtesy of Edwin Tshividzo (“South Africa: MECs to Visit Flood-Hit Kwazulu Natal South Coast”, BuaNews, 19 June 2008).

If you would like to buy or sell property in South Africa, please visit www.sahometraders.co.za.

Plettenberg Bay South Africa's New Playground

Plettenberg Bay Top Marks in UK

A recent article by Douglas Rogers published in the UK’s Telegraph newspaper reported on Plettenberg Bay as South Africa’s new playground for the well to do. According to the article, it is Plettenberg Bay and not Cape Town that attracts the jet set these days and the region has gone into a literal status overdrive as a result.

When international celebrities like Bono or Oprah fly in to Cape Town for their annual holiday, South Africa’s own elite are nowhere to be found. A closer inspection reveals that they are 400 miles to the east, soaking up the sun and the surf in Plettenberg Bay. The hillside beach town overlooks a protected bay at the far east end of the Cape Peninsula’s world famous Garden Route.

When it comes to what the area has to offer, Plett’s surrounding wilderness is simply stunning, with a bay that forms a breeding ground for Southern Right Whales during calving season, the Tsitsikamma forest boasting miles of unspoiled hiking trails, as well as the gorgeous Knysna lagoon located just 30 miles to the west. However, recent years have seen Plett become far more commercialized, as the style and status overdrive has gathered momentum.

According to Di Valentine, who manages a new Afro-Arabic styled boutique lodge in Plettenberg Bay, “Knysna is for arts and crafts; but Plett is for glamour and style. We’re like the Hamptons – just without the Hiltons”. One of the primary reasons for this ‘glamorous reincarnation’ is evident before you even reach the seaside town along the Garden Route: polo. There are no less than six beautifully maintained polo estates that lie in the Tsitsikamma foothills.

There’s more to Plett than polo though, as the sleepy seaside town literally comes to life during the holiday season, with the majority of local visitors flocking here from Johannesburg. They come for some sun and sea, but also for the Tsitsikamma National Park, which is part of the largest natural forest in South Africa, an elephant park, the largest free-flight exotic bird aviary in the world, as well as the world’s highest bungee jump at the 700 foot Bloukrans River Bridge.

While glitz and glamour may not be your thing, it is still refreshing to hear of stories published overseas lauding South Africa’s little gems. There is no doubt that Plettenberg Bay and the rest of the Cape province have much to offer the tourist market, but it is even better to think that locals have just as much opportunity to invest in property and take full advantage of the natural landscape and developing infrastructure.

The information in this article is courtesy of Douglas Rogers (“Plettenberg Bay: South Africa’s playground”, Telegraph, 16 June 2008).

If you would like to buy or sell property in South Africa, please visit www.sahometraders.co.za.

Civil Society Distressed by Expropriation Bill

Concern Over Expropriation Bill

An article in the Sunday Tribune has reported that civil society organizations believe the draft Expropriation Bill currently before Parliament is ‘the greatest single threat yet to the national accord on which the new South Africa was founded’.

The ad-hoc Committee for the Defence of Property Rights has said that, “It is deeply rooted in the ANC’s national democratic revolution which has as one of its central goals the radical redistribution of property”.

The committee is comprised of the FW de Klerk Foundation, the Centre for Constitutional Rights (CFCR) and Afriforum. Speaking about the Bill, the committee insisted that it would have ‘disastrous consequences, was unconstitutional, would seriously damage the economy, threaten SA’s food security, damage race relations and was unnecessary’.

A petition has been launched by the committee against the Bill, calling on the President and government, as well as the ANC leadership to withdraw the Bill. The petition states that there are serious flaws because:

- It is unconstitutional and will lead to arbitrary deprivation of property because compensation will be determined by “executive diktat”. Market value will be downgraded as a factor in deciding compensation, and the role of the courts will be limited to an absolute minimum;

- It will seriously damage the economy by undermining domestic and foreign investor confidence. It will empower the state to expropriate any property (not just land) for any purpose it deems in the “public interest”. Security of ownership of private property is a fundamental requirement for all successful economies;

- South Africa’s food security will be threatened. Most of the farmland that has been expropriated thus far has experienced substantial declines in production. Successful food production requires large-scale farming, large capital reserves, high levels of technology and extensive experience and training;

- Serious strain will be placed on interracial relations. Apart from its proclaimed objectives, the Bill’s primary intention is to deprive South African citizens – against their will and on the basis of their race – of property in which they might have invested their life’s labour and resources, as well as deep and long-standing emotional and family connections. It will inevitably be viewed by the target community as an assault on their fundamental constitutional right, an attempt to limit the protection afforded to them by the courts, and as yet another blow to the national accord negotiated between 1990 and 1996, upon which any hope of national unity depends;

- It is simply unnecessary. More than 5% of agricultural land comes onto the market every year. Government already owns vast tracts of land that can be utilized for redistribution. Organised agriculture has repeatedly expressed its willingness to work with government to promote fair, effective and sustainable land reform.

The draft bill has been criticized for similar reasons by a number of organizations appearing before the National Assembly’s public works committee hearings around the country over the past few weeks.

The last two days of public hearings on the matter are being held at parliament on Tuesday and Wednesday this week. Yesterday, committee chairperson Thandi Tobias-Pokolo assured all presenters that each input would be thoroughly considered and taken into account.

The information in this article is courtesy of Sapa (“Expropriation Bill threatens SA”, Sunday Tribune, 17 June 2008).

If you would like to buy or sell property in South Africa, please visit www.sahometraders.co.za.

Collective Sigh of Relief for Property Owners in SA

Sigh of Relief for Property Owners

An article in Business Day published last week discusses the monetary policy committee’s decision to raise interest rates by just 50 basis points. The move was seen as an ‘ironic twist’ and relatively “good news” for the residential property market in particular, which has had a torrid time since January.

Homeowners already under pressure in the face of soaring food and fuel prices, feared at least a hike of 100 basis points after Reserve Bank governor Tito Mboweni recently hinted at an expected rise of 200 basis points. The residential property market is yet to feel the effects of the April interest rate hike, as these still have to filter through.

Chief executive of Pam Golding Properties, Andrew Golding said that Mboweni’s warning of a potential 200 basis points increase had “conditioned the market” to anticipate at least 100 basis points and that the 50 basis point hike had come as “relatively good news” as a result.

However, Golding emphasized the fact that this is the tenth interest rate hike since the cycle began in June 2006 and that it takes “some time for the actual effects of any interest rate increases to be felt”. He added that, “the market is still feeling the effects of the previous interest rate rises, so this is by no means good news”.

Rael Levitt, CEO of auction house The Alliance Group, believes that ironically the lower than expected interest rate hike has come as good news for the residential property market, which has been “savaged by poor sentiment”. He predicted that the market would continue seeing a “deceleration in prices” and “distressed” mortgage bondholders.

Eskel Jawitz, chairman of Jawitz Properties said that the fact that the hike was only 50 basis points was a “welcome relief” to the residential property market. But he warned that Mboweni’s message was, “if we don’t get our house in order, there is a possibility of further increases”.

“While we are happy it has only gone up 50 points, we have to recognize there has been 10 rises over the past two years and the average homeowner is certainly finding it difficult not only to cope with an increase in interest rates, but also the increase in fuel, the looming electricity price hikes and new municipal rates,” Jawitz said.

He added that the market had to “accept” that the net disposable income of most people these days was far less than two years ago. “The positive thing, notwithstanding what is going on, is that buyers are still buying, sellers are selling and the properties are changing hands,” insists Jawitz.

The information in this article is courtesy of Nick Wilson (“South Africa: Property Sector Relief at Rate Hike”, Business Day, 13 June 2008).

If you would like to buy or sell property in South Africa, please visit www.sahometraders.co.za.

Advised to Seek Best Deal on Home Loan

Shop Around for Home Loans

An article published by I-Net Bridge has drawn attention to the “perfect storm” created in the housing market by a combination of interest rate hikes and tightening financial liquidity. Simon Stockley, CEO of home loan provider Integer, says that consumers already under pressure are becoming the major casualty.

Stockley explained that in the current economic climate it is becoming far more expensive to raise capital in response to the ‘global credit crunch’ and consequently, local banks are now having to pay more to attract more liquidity.

According to Stockley, “Now they want to pass the increased cost of sourcing cash to hard pressed South African customers”. These factors make the Governor of the Reserve Bank, Tito Mboweni’s recent announcement regarding increases to the repo rate “difficult to understand”.

This is at a time when central banks in other countries, like the UK and the US, are taking proactive steps towards supporting and stimulating the property sector. South Africa’s regulator seems far too “preoccupied with inflation targeting at the expense of growth in the economy,” says Stockley.

Where banks were offering discounts to prime in the past, they are not going to be as aggressive about offering prime –2% in the current environment. “Increasingly, we are seeing smaller and smaller discounts with the new maximum discount to clients, outside of the privately banked sector, at around prime –1.5%,” Stockley says.

While some might expect these developments to be the last of the consumers’ woes, ABSA and FNB have recently implemented changes to their credit policy, requiring borrowers to now have a deposit of at least 5% of the value of the property in order to secure a loan. This makes it even more difficult for new entrants to the market, who do not have such a deposit to gain a ‘foothold on the property ladder’.

Stockley’s advice seems to be that now, more than ever, consumers need to ‘shop around’ to get the best deal and should not accept the first offer that banks put on the table. It is vital that consumers negotiate terms with lenders before committing to a home loan or re-finance option.

“Shopping around does work and consumers should always seek professional advice when applying for a home loan. Because there is no real competition in the banking sector, banks have been able to exploit their dominance of the home loan market and offer customers the worst interest rate when they first apply for a home loan,” urges Stockley.

He adds that, “It’s only when you question and come back with a rival offer that the banks generally match or reduce their rate. So, shop around for the best rate and never accept the first rate a bank puts on the table”. It is no longer a matter of the best interest rate on your home loan, but the better deal that provides control over monthly repayments and ensures that you are bond-free years sooner.

The information in this article is courtesy of I-Net Bridge (“Near perfect storm in housing”, 11 June 2008).

If you would like to buy or sell property in South Africa, please visit www.sahometraders.co.za.

Opinions Differ on State of South African Property Market

War of the Expert Opinions on Property

An article published on the IOL website has highlighted the clashing opinions of various experts and major players in the South African property industry. A “war of words” seems to have broken out between estate agents and bond originators, as pessimism increases subsequent to news that house price drops of between 10% and 40% are expected.

While there are some estate agents who insist that homeowners should not be “swept up in the panic”, there are others who are quite frank about the property market being in “serious trouble”.

The Cape Argus received an urgent email from Ooba (formerly Mortgage SA) on Monday, which stated that “recent alarmist forecasts by property market commentators” had resulted in “undue concern” for homeowners. They urged that homeowners resist being taken in by the “scaremongering” because the current downturn was only a “short-term situation”.

The initial unease started when Lew Geffen, head of Sotheby’s International Realty South Africa, sent a letter to his franchise owners predicting the pending crash would see a 40% decrease, adding that there were 60% fewer buyers in the market today compared to the same time last year.

While many industry players have lashed back and rejected these predictions, Maurice Levin, PR Manager for Sotheby’s has defended Geffen’s claims. “Lew is not afraid to pronounce that the industry is in a pickle. Many agency bosses talk it up because their livelihood depends on it,” Levin said.

Lee Gautschi, owner of Lee Gautschi Properties has said that she is “honestly” not experiencing panic selling in her market, although she did agree that a range of negative factors were having a dampening effect on the market. These factors included the National Credit Act, interest rate hikes and a “worldwide political trends of recession” that have impacted the local market.

Reports in the media have highlighted other negative factors affecting the market, including emigration spurred on by high crime rates, xenophobic attacks, the Eskom crisis, political dissent and corruption in South Africa’s ruling party.

The FNB Property Barometer indicates that emigration accounts for 12% of the total number of homeowners putting their properties on the market, while 21% comprises sellers downsizing due to financial pressure.

Andrew Golding, chief executive of the Pam Golding Property Group also tried to quell rumours of a property crash. “The reality is not as gloomy as portrayed in some of the commentary,” he insisted, adding that the middle class sector of the residential property market was characterized by an “under-supply and over-demand”.

However, sales director at Betterbond, Marsha Haupt had an opposite view, suggesting that right now, “there is more supply than demand”. According to a franchise agent who wished to remain anonymous, “If [Reserve Bank Governor] Tito Mboweni does increase the interest rate by another 2%, there will most certainly be panic selling in seven to nine months, whether that trend has begun or not”.

The estate agent said that many agents were also evaluating properties far beyond their scope so that they could secure a sole mandate for themselves. However, once the seller had signed on, the price began to fall and there were fewer and fewer people attending show days.

This reinforces what Geffen mentioned in his letter, as he said that attendances at show houses were generally poor and that “only when the agent has convinced the seller to use the most aggressive parameters, namely 40% below asking price, does the showhouse receive 10 couples or more leading to a subsequent sale”.

In fact, Geffen went even further and said that, “All the guns are loaded against us in this market and it will take your own courage and perspicuity in order to survive”.

The information in this article is courtesy of Tanya Farber (“SA property market in ‘serious trouble’”, IOL, 10 June 2008).

If you would like to buy or sell property in South Africa, please visit www.sahometraders.co.za.

Oil Prices to Affect Property

Concern Over Rising Oil Prices

An article published in Business Day indicates that South African markets are braced for a tough few days ahead, as oil prices head towards $150 a barrel and the Reserve Bank is set to deliver more bad news in the form of another interest rate hike.

The price of oil reached an all time high of $139.12 a barrel on Friday in New York trade, which only served to reinforce concern amongst world leaders and market analysts that the steadily rising price will work to slow global economic growth even further.

Raymond Goss, joint head of Investec Securities in Johannesburg said yesterday that it was “going to be a hard day for the market all around” and that the JSE would “take its lead” from the closing market in the US, which was down by over 3% on Friday.

Goss explained that the oil price was “possibly the major factor” affecting the JSE within an extremely “inflationary environment”. The all share index lost 16.53, falling to just 31724.73 on Friday, taking its decline to 0.4% last week.

Expectations of rising inflation and a climbing oil price did not bode well for the outcome of the Reserve Bank’s monetary policy committee meeting on Thursday. The market had hoped that a “best case” scenario would entail a 50 basis point interest rate hike, but Goss was concerned that the recent oil price spike would cause the Bank to increase rates in a more aggressive manner.

Akira Amari, the Japanese trade minister said that oil prices topping $130 a barrel could slow global economic growth and urged the world’s biggest energy consumers to cut demand. The minister spoke at a meeting of energy ministers from the Group of Eight industrialized nations, plus China, India and South Korea at Aomori in Japan.

However, members of the Organisation of Petroleum Exporting Countries (OPEC) saw no need to pump more oil in response to the surge in oil prices last week. Shokri Ghanem, head of Libya’s National Oil Corporation thinks “there is enough oil in the market”.

The various energy ministers looked inward for solutions to oil’s spiraling prices, arguing the “need for domestic efficiency rather than piling pressure on a resistant OPEC to pump more crude”. It was decided to vigorously continue the promotion of policies and measures aimed at improving energy efficiency. The 11 ministers’ countries account for two thirds of the world’s energy consumption.

Goss said that the JSE was “already in the middle of a downturn” and there is danger in the belief that there was going to be a slowdown in the larger economies. A slowdown in commodities and resources would have a profound impact on the JSE, as they have been important for its growth in recent years.

Group director of retail investing at Stanlib, Paul Hansen said, “It will negatively affect the market in general. In particular, interest rate sensitive shares such as banks, life assurers, retailers and property. Those will be the first to be hit because a high oil price implies higher inflation and therefore potentially higher interest rates”.

Hansen also said that the high oil prices were partly responsible for the higher food prices, with maize in the US reaching an all time high on Friday of more than $7 per 27kg bushel. The World Bank forecast in January indicated that the global economy would expand at a more gradual pace of 3.3% in 2008 compared with last year, citing a poor US outlook.

In South Africa, the minister for minerals and energy, Buyelwa Sonjica proposed that the tax on fuel be reduced in a bid to lessen the burden of spiraling oil prices on consumers, particularly the poor. Europe and the UK are in the midst of protests by fishermen, trucking companies and taxi drivers over fuel taxes on top of an oil price that is said to be driving them out of business.

The information in this article is courtesy of Nick Wilson (“South Africa: Soaring Oil Prices Raise Fear Over Growth, Rates”, Business Day, 9 June 2008).

If you would like to buy or sell property in South Africa, please visit www.sahometraders.co.za.

House Price Drop May Not Be So Drastic

Price Drop May Not Be So Big

Property economist for FNB, John Loos was recently reported as predicting a 40% drop in house prices by year-end. An article published in Personal Finance refutes these predictions with reports from ABSA’s senior property analyst, Jacques du Toit, who shares a similar outlook as property economist Erwin Rode - while house sales could certainly drop by as much as 40% in the year ahead, this does not mean that house prices will fall by the same percentage.

“You cannot draw a straight line between the deposit banks are asking mortgage owners to pay and a possible drop in house prices. There is much more to the calculation and it’s simply not that straightforward,” du Toit says. In fact, he does not foresee a 40% drop in prices across the board by the end of 2008.

“While we do expect the downward trend in house prices to continue, it definitely won’t be to the extent stated [by estate agents],” du Toit insists. He expects the down cycle to bottom out in late 2009, with a slight sideways shift before the property market recovers gradually from 2010.

When it comes to factors that need to be considered in looking at the property market, du Toit highlights inflation and interest rates. “Inflation is likely to remain quite high for some time and so will interest rates. The housing market is interest rate sensitive and people are likely to sell despite the fact that they are going to get lower prices than they would have a year ago. This applies particularly to people who bought property as speculators with the intention of selling later at a high profit,” says du Toit.

An increase of 32% has been seen with mortgage bond repayments and this on the back of nine rate increases since June 2006. According to du Toit, the percentage of overdue mortgage loans increased from a low of 1% at the end of 2006 to 1.5% at the end of 2007 and most likely increased again this year. Even so, they are still far beneath the average 6.6% recorded in 1999 after interest rates peaked at 25.5% in 1998.

Standard Bank’s property economist, Sizwe Nxedlana says that inflation is expected to remain above the Reserve Bank’s target band of 3%-6% for the next three years. He adds that further interest rate hikes will result in fewer people passing the affordability test for new mortgage bonds, consequently fewer mortgages will be granted and registered, and a growth in house prices will be less likely.

Erwin Rode explains that there is generally a lag of 9 months between a change in interest rates and a change in house prices. “If you take into account that we are expecting two more interest rate hikes and then are looking at an effect on house prices nine months after the last interest rate hike, we are looking at an extended period of stagnation, if not a decline, in prices,” according to Rode.

Rode says that many sellers are still expecting unrealistic prices for their homes, based on the high price growth experienced in the last few years. He adds that sellers need to drop their prices to more realistic levels. “When you are making a buy-or-sell decision, you should never consider the historic cost of the house, as this is irrelevant. For example, if you bought a house for R2 million six months ago, the price you paid then has nothing to do with the price you will get for the same house if you sell it today. People assume they must get a better price than the price they paid, but that’s not how the market works,” says Rode.

How can you survive the property blues? The fact remains that high interest rates and inflation are here to stay for a while. It is unlikely that a drop in either will be seen in the near future, argues Rode. Thus, if you do not urgently need to sell your property, you should sit out the drop in the market for at least the next two years. In other words, if you have a strong cash flow and can afford your bond repayments, you should not try to sell your property right now.

However, if you have bought property for an investment purpose, Rode suggests that you put it up for sale and get out of the market as soon as possible. He believes that the residential property market is not likely to be a good investment for the next five years. In fact, many homeowners who took on a mortgage bond of 100% or more over the last five years are likely to face a negative equity situation in the next year and a half.

Essentially, a negative equity situation means that you owe more money on your mortgage bond than the actual value of your property. If the property you have bought is your primary residence then this does not necessarily pose a big problem because all you need to do is ride out the next few years and ensure that you meet your mortgage bond repayments, as they increase in line with rising interest rates.

However, Rode advises that you refrain from taking out any further loans against your property in the near future because should you be forced to sell in the next two years, it is not likely that your selling price will cover the entire mortgage amount owed. Rode suggests that now would be a good time to renovate, as small builders are being hit hard. “You will probably get better quality work done on your home now because small builders are more likely to look after their customers in the current environment,” says Rode.

If you are in the market to buy a property, Rode advises that you wait a year or two, as you are more likely to pick up a bargain as the property market worsens for sellers.

Those who are looking to fix their interest rate on their home loan to avoid dealing with further interest rate hikes and the stress of higher mortgage bond repayments should beware. Mokgatla Madisha, a fixed-income analyst at Investec Asset Management cautions that this could be a costly decision and “you could end up paying more in interest than if you were to ride out the cycle”.

Although in agreement with property economists that inflation is likely to remain above the Reserve Bank’s target band, Madisha does not believe South Africa is facing a situation of ever-increasing inflation and interest rates over the coming years. Instead, he thinks that inflation is more likely to be elevated over the medium term. “A year from now, interest rates could start to fall, but they are not going to fall very fast, neither are they going to fall very far,” he predicts.

Fixing your interest rate for two years could mean that you are stuck paying off a mortgage bond at 16% in 2010 when inflation could have dropped to 6% and interest rates could be reduced to 12%. Banks usually offer you the option to fix your rate at about half to one percentage point above the prime rate (currently 15%) for a period of up to two years. A variable interest rate linked to the prime rate is generally anything between one and two percentage points below prime.

Modisha says that Investec does not foresee a 3% interest rate hike for the rest of the year. “We anticipate a further 1%-1.5% rate hike until the cycle peaks, which would mean that the homeowner on a fixed rate is even worse off. He could be stuck for another year at the fixed rate, while those on a floating rate, or a rate linked to the prime rate, could start enjoying the respite of lower interest rates,” explains Modisha.

The information in this article is courtesy of Neesa Moodley-Isaacs (“Property price drop may not be as big as feared”, Personal Finance, 7 June 2008).

If you would like to buy or sell property in South Africa, please visit www.sahometraders.co.za.

High End Property Market Suffering in SA

Shock Drop for High-End House Prices

An article in Business Day has drawn attention to a shock prediction for high-end house price decline. A leading property expert says that house prices could fall as much as 40% by year-end, especially at the top end of the market.

A scenario of rising interest rates and high inflation has intensified pressure on the residential property sector since the start of 2008. A major player in real estate, Lew Geffen, chairman of Lew Geffen Sotheby’s International said that the predicted 40% drop meant the residential market was essentially going to “roll back two years”. He warned that the “prices of two years ago will be the prices at year end”.

Geffen indicated that his view was brought on by the fact that banks are now only offering mortgages where clients put in 5%-25% equity. An official communication from ABSA to his group stated that the bank would provide 100% home loans only for properties valued up to R800 000. For properties valued from R800 000 to R2,7m, the bank was granting 95% loans and for those above R2,7m up to R4m, it was providing 90% loans.

“This means the higher the price of property, the more equity the prospective home owner has to put in. This indicates that the banks see attrition in the market in the bracket valued from R3m upwards and less attrition in the lower-priced segments,” explained Geffen.

He adds that the drop would be coming off a high base, as there was a price increase of 35% between 2006 and 2007, with a further increase of 15%-20% in 2007-2008. Geffen stressed that the property market is tough and homeowners are coming under increased pressure.

In order to get a R2m bond today, the person would have to earn R87 000 a month and still have to put in equity. Buyers who overcapitalized themselves last year and could not afford bond repayments would now have to downgrade and buy cheaper homes.

A memorandum sent out by Geffen to his staff about “recessionary strategies” in the residential property market indicated that there were 60% fewer buyers in the market than at the same time last year, with poor attendance being experienced at show houses. Sales occurred only when the agent used “aggressive parameters” and convinced the seller to drop the price 40%.

Property economist Erwin Rode of Rode & Associates said that on average prices could decline by up to 10%. “The higher you go up the price scale, the more it could be,” he said. “But one mustn’t confuse a sharp drop in the number of transactions with a decline in prices. The two are not highly correlated. The two are weakly correlated. It is important not to overreact”.

David Green, MD of Pace Property Group, said that it was important to “segment the market” and the assumption was that the lower end of the residential market would be less affected by value depreciation than the middle section of the market.

Green indicated that the market, particularly for homes worth more than R2m would be the “most vulnerable”, largely as a result of high gearing levels taken by the buyers. He said that this applied particularly to those purchasers who had acquired property in the past 2 years.

The information in this article is courtesy of Nick Wilson (“South Africa: High-End House Prices Face Shock 40 Percent Drop”, Business Day, 5 June 2008).

If you would like to buy or sell property in South Africa, please visit www.sahometraders.co.za.

Report Shows Good News for SA Property

Surprisingly Good News for SA Property

The Bizcommunity website has published an article detailing evidence released by a recent report that reveals South Africa’s property market is in good shape and that while growth may be slowing in certain cities, actual property prices are not dropping.

Knowledge Factory, a leading marketing insights company, released their “Report on South African Metropolitan Areas: Property Price Growth”, which bases its data derived from the company’s popular South African Property Transfer Guide (SAPTG). Essentially, the data presents an ‘overview of both historical trends and predicted property price growth rates for South Africa’s major cities’.

Veronica Kotze, regional sales consultant in the Western Cape for the SAPTG authored the report and says it “might surprise some property professionals because it confirms that property prices have not dropped recently, but are just growing at slower rates in some areas than has been previously experienced”. She adds that, “It’s really a ‘good news all round’ report. Overall, the whole country is in good shape and has been experiencing strong growth everywhere”.

All of the SAPTG information is based on figures garnered from the latest Deeds Office data, in conjunction with other proprietary datasets obtained by Knowledge Factory and this report is no different. The major cities covered include Bloemfontein, Cape Town, Durban, East London, Johannesburg, Port Elizabeth and Pretoria. The properties examined included all free standing and sectional title homes larger than 40m², but excluded those properties categorized as smallholdings or farms.

“We also used median purchased prices, as opposed to averages, to make the data as accurate as possible,” Kotze explains, “because we’re obviously dealing with very large areas and extremely diverse property types”. As well as indicating median prices for the past three years, together with the year-on-year growth rate achieved, the report also makes predictions about expected growth for 2009 and 2010. “Although it should be noted that these forecasts do not take economic factors, such as the impact of interest rates, into consideration,” says Kotze.

Johannesburg recorded a price growth rate of 21% between 2006 and 2007, but this has dropped dramatically between 2007 and 2008 to -17%. This is something that Kotze believes is a normal indication of the end of a city’s property boom and should be “no cause for alarm”.

According to Kotze, “Johannesburg has, to a large extent, led the national property boom of recent years and so it is natural that it should also be the first city showing a slight downward trend because of demand dropping off. There has been a slight drop in prices, as the result of a combination of complex factors, but generally, it still continues to grow, just not as rapidly”. She is also confident that if the report were extended for another five years, it would balance out.

Pretoria has been experiencing a similar type of growth as Johannesburg, but not quite so acutely. The city enjoyed a 14% price growth rate between 2006 and 2007, but this has tapered off to 4% between 2007 and 2008. “Pretoria has always fluctuated less and been more stable than Johannesburg,” says Kotze. “[T]he median price of property is higher than in Johannesburg. This suggests that the city doesn’t have as much middle to low cost housing and therefore, has older, more stable residential areas”.

The property price growth rate in Cape Town is also slowing down and this indicates that the property boom is also tapering off there. The growth rate of 22% recorded between 2006 and 2007 dropped to 6% between 2007 and 2008, but the city continues to offer the highest median values for property found across the country.

In stark contrast to the three major metropolitan areas in South Africa, regional cities like Bloemfontein, East London and Port Elizabeth are currently experiencing their own property booms and enjoying healthy property price growth rates of 40%, 30% and 14% respectively. “This is good news,” says Kotze, “and a reflection of both big economic injections, like the building of the 2010 stadiums and strong property development”. However, she does expert these growth rates to taper off in the coming years.

While the report shows that some metropolitan areas are experiencing significant growth and prices are coming down in others, Kotze stresses that this is really just a reflection of where each city is in the property cycle and current levels of demand for property, rather than the actual value of the property within it.

“This report is only a very high-level snapshot of a complex set of underlying conditions,” adds Kotze, “but it still clearly shows that property prices have not dropped. They are just growing at a slower rate than they have in recent years. Some properties have indeed been sold ‘at a lower price’, probably due to recent rate increases, but this is not a trend yet. Further hikes and other economic pressures may very well change that. It may well take longer to sell a property in the three big cities right now, particularly in relation to expectations that were set three or four years ago, but the value of property is still growing”.

The information in this article is courtesy of Knowledge Factory (“Report reveals good news for South African property market”, Bizcommunity, 2 June 2008).

If you would like to buy or sell property in South Africa, please visit www.sahometraders.co.za.

SA Market Ripe for Property Investment

Expert Says Invest in Property

An article published on the Bizcommunity website reports on a recent visit by Dolf de Roos to South Africa. De Roos is an international speaker, educator, investor and author of eight best-selling books on property, including the New York Times bestseller, Real Estate Riches. He has run property investment seminars for over 20 years and is “passionate about the psychology of wealth”.

During a recent presentation made to 800 guests hosted by the Private Property Group at Montecasino, de Roos put across a strong message that “there is ample opportunity to generate wealth through property, especially in our current economic climate”. Private Property sponsored the expert’s trip and hosted this particular event for valued clients and business partners.

Justin Clarke, chairman of Private Property Holdings, says, “Dolf reminded us that we should not get stuck in the moment. If we look at how property prices grew during the up-cycle, most of us have done pretty well, even with a small decline in the market”.

Clarke adds the he was “fortunate enough to spend a fair amount of time with [de Roos] and was impressed that [he] took the time to understand the SA market. He was able to apply his international experience to developing a real opinion on what’s happening here”.

When asked by someone at the event if de Roos would risk investment in South Africa, his reply was simply, “What do you think I’m doing here?” The expert’s seminars aimed at teaching people how the world is dealing with the property market downturn and what South Africans could do to capitalize on the situation.

According to Clarke, “My lasting impression is of a powerful, immensely wealthy man who was content to fly Kulula and mucked in to unpack boxes when necessary. He showed a better depth of knowledge of the subject matter than any other property guru I have met to date”.

He adds that, “Private Property Holdings is extremely confident in the property market, which is why we were delighted to sponsor the events and share Dolf’s positive outlook with guests and delegates”.

The information in this article is courtesy of Private Property (“Invest in property,” says international expert”, Bizcommunity, 3 June 2008).

If you would like to buy or sell property in South Africa, please visit www.sahometraders.co.za.

List of Negative Influences Expanding

More Burden on Property Prices

An article published in Business Report draws attention to growing concern over the ever-lengthening list of negative factors burdening property prices in South Africa. Reserve Bank governor, Tito Mboweni has made hawkish statements to the effect that the market should expect a repo rate hike of 100 basis points this month, which takes the prime interest rate to 16% and there is chance of a yet another hike of 50 basis points in August.

According to First National Bank (FNB), this would push monthly repayments on a R250 000 home loan over 20 years to R3 478 at 16%, from R2 496 in June 2006, when prime was just 10.5%. Property strategist for FNB, John Loos acknowledges that times in the residential property market are “tough”. The list of negative influences continues to expand, including high interest rates, rising inflation, a slowing economy, the National Credit Act, post-Polokwane unease, the Eskom crisis, Zimbabwe’s political dramas, xenophobic violence and low income yields.

Loos said that, “The list has become significantly longer than previously anticipated and especially interest rate hiking has gone further than we had forecast. As a result, a 21% decline in the value of new mortgage loans and re-advances is projected in 2008 and a period of national house price deflation is now forecast”.

Lightstone Risk Management’s national house price index reflects an annual property inflation drop to 7.8% in April, which is half a percentage point lower than in March and significantly lower than the rate of 14% in April 2007. Lightstone reported that higher value areas seem to be performing the worst and may have moved closer to zero or even negative nominal growth. Furthermore, house price inflation appears to be declining the fastest in smaller provincial markets.

According to the index, “Although nominal house price inflation is still positive, one major difference from last year is the decline in real house price inflation (adjusting for consumer price inflation). Currently, real house price inflation is around –3%, which is significantly down from last year when real house price inflation was 7%”.

Based on external economic forecasts involving factors such as domestic product growth, consumer inflation, disposable income growth and debt service ratios, Lightstone expected the downward trend in national house price inflation to continue and bottom out towards the middle of 2009. There is still a good chance that the low point for national nominal house price inflation will remain positive, although in some segments house prices are likely to decline even more.

In the analysis for January, Lightstone’s indication of national inflation came in at 9.2%. The high value segment, which includes properties priced between R1.5m and R750 000, continued its steep decline, dropping to 6.4%, while the more affordable sector (less than R250 000) continued to outdo the other segments and reached inflation of 24.3%.

As far as freehold property price inflation was concerned, it continued to outperform sectional titles by 3 percentage points. In January, a drop to 10.8% inflation was reported for freehold against 8% for sectional titles. Provincial growth performance in Gauteng for January reached 8.5%, which is lower than any of the other major provinces. The Eastern Cape performed best, with prices increasing by 9.7%.

The growth in coastal property prices, Lightstone found had shown surprising strength until the end of last year, but took a sharp downturn in January, dipping 2.7 percentage points to 8.5%. Growth fell back below non-coastal inflation, which came in at 9.4%,

The information in this article is courtesy of Wiseman Khuzwayo (“Growing list of negative factors burdens property prices”, Business Report, 1 June 2008).

If you would like to buy or sell property in South Africa, please visit www.sahometraders.co.za.

Property Investment Bargain for Big Players in SA

Property Investment Bargain for PIC

An article in Business Day reports that the lower property prices and spiraling interest rates have created investment opportunities for big players, such as the Public Investment Corporation (PIC).

At the 40th annual convention of commercial property association SAPOA, held at the Cape Town International Convention Centre, head of PIC property investments, Wayne van der Vent said that this was “almost an ideal market” for the acquisition of property assets. The property will be acquired for the Government Employees Pension Fund, which PIC manages.

In recent months, the commercial property market, especially the listed sector has literally been hammered and the PIC has been a “cash buyer”. Van der Vent said that life has been easier “in that we are moving from a seller’s to a buyer’s market”.

The PIC is said to be implementing an aggressive growth strategy to build up its property portfolio to between 5% and 8% of the value of the pension fund in the next three to five years. Currently worth R20bn, the property portfolio accounts for about 2% of the fund’s total assets of R750bn and the growth planned would take the property portfolio to about R75bn.

Even though the market is deemed favourable, van der Vent indicated that the PIC’s focus on “returns” meant that it was not prepared to “pay any price”. The PIC had to “leverage changes” in South Africa, such as transformation and green building initiatives. Van der Vent noted that the listed property sector has not seen enough transformation and that the government had been “pushing for transformation around property ownership”.

While this was important, transformation has to occur elsewhere in the sector, not just at the board level. “There must be enterprise development. New property managers must be given an opportunity. I don’t think we’ve been creative enough about empowerment. Ownership is one aspect of transformation”.

The information in this article is courtesy of Nick Wilson (“South Africa: PIC Hunts Property Investment Bargains”, Business Day, 30 May 2008).

If you would like to buy or sell property in South Africa, please visit www.sahometraders.co.za.