Still Money to be Made in SA

Investment Opportunities Still There

An article in The Times discusses the recent drop in value of assets under management experienced by private client operations following the recent fall in markets. Sean Farrell, CEO of RMB Private Bank, says that the falling markets have affected the private banking sector, as clients have seen the value of their property and equity portfolios decline.

According to Farrell, primary residences tend to have the least effect, as people still need a home in which to live. However, the decline in property prices can also result in homeowners having negative equity in their homes, investment properties and business premises.

“Fortunately, we have not seen that in our business so far, as many of our clients who run into trouble on the lending side are able to trade out of their positions by shedding some assets,” said Farrell.

When it comes to equity, Farrell says that clients can literally see their net asset value decline as the market falls. Even so, RMB Private Bank’s net inflows into its wealth management business were over R1 billion in August, which suggests that clients still have cash to invest.

“We have built a very robust process when it comes to asset allocation. Wealth managers are particularly keen to establish clients’ short-term income and liability needs, so that there is no need to engage in fire sales in declining market conditions to meet their obligations,” said Farrell.

He went on to say that, “When there is a short-term liquidity need, we are not going to pump all the assets into equities, but rather keep an appropriate portion in cash. As a result, clients are well positioned to ride out poor market conditions and their losses remain paper losses that are reversed when markets turn”.

The poor market conditions serve to reinforce the need for a proper strategy that has been presented to and agreed with by clients. “We are going through an extreme downturn. Provided their strategy is still relevant, they must sit tight and ride the cycle and not panic. In equities there has been a fair amount of sector rotation and a weighing towards more cash than direct equities. It is in poor market conditions that your process is tested,” argued Farrell.

Mark Logan, head of private clients at Grindrod Bank, said that another consequence of poor markets is that revenues on the investment side of business fell. “However, falling markets also provide opportunities as it is at such times that clients start questioning their private banks’ investment philosophy and performance and there can be some churn as clients shift banks. Bad markets can result in you gaining or losing clients”.

Logan went on to say that volatile markets also force private banks to increase their level of communication with the client to both reassure and keep them in touch with events and market trends. He said that the wealth management operations of private banks must have a credible strategy and an investment philosophy that clients support.

The information in this article is courtesy of Andrew Gillingham (“Still plenty of cash to invest”, The Times, 27 September 2008).

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New Rules When it Comes to Property

Property Game Has Changed

There is no doubt that this year will be put down as one of the most shocking in South African property market history, with the army of estate agents shrinking unbelievably and panicking sellers struggling to offload properties.

Add to the mix the recent financial crisis in the US, Eskom’s incompetence and the political turmoil set in motion with Mbeki’s dismissal by the ANC, the nation has had a lot of drama to deal with this year. Even so, the news isn’t all bad.

Survival of the fittest applies:
When it comes to estate agents, the order-takers can’t cope and are leaving the market in droves. That means that buyers and sellers should be left with a much more competent group of real estate specialists who know the value of hard work. Dr Piet Botha, chairman of Nationlink said, “When the market was hot and homes were selling before they even reached the market, you didn’t need to worry about getting the best agent – just the cheapest”. Now you need a top salesperson. He advises, “Interview agents rigorously and insist that they present you with proof of their recent successes and a well-conceived marketing plan that goes way beyond the usual internet listing, one or two show days and a tiny weekly advert”.

There is more money to be made for the survivors:
Considering that the pool of estate agents is smaller, this should translate into more money because there will be more stock shared amongst fewer players. Also, some of the more savvy operators are offering their agents bonuses if the home is sold within 30 days or at the asking price, which is a clever way to motivate agents into selling your home first (Nationlink).

Tough times call for financial savvy in order to survive:
Interest rates have given consumers quite a beating this year and they show no sign of easing just yet. This means that it’s a good idea for property owners to tighten their belts and keep cash available for emergencies. We seem to have entered an era of “goodbye bling, hello thrift”, which is a trend that has been seen internationally. It seems that the “buy now, pay later” mindset is over and this “means no more conspicuous consumption, at least for a year or two. Instead we have conspicuous carefulness,” according to a personal finance advice site (fool.co.uk). The latest trend will be bragging about bargains rather than big brands.

Renting is hip:
It seems that it is no longer “in” to be a property buyer, as renting is looking increasingly more attractive. Lanice Steward, managing director of Anne Porter Knight Frank, says her agents “come across young, upwardly mobile people who tell [them] that they prefer to rent at discount rates in a good area rather than compromise with a less attractive home in a not-so-fashionable suburb”.

Steward goes on to say that this philosophy is “short-sighted”, as it is popular with “yuppies who earn good salaries, drive expensive cars and believe that they have what it takes to ‘make it’ in today’s commercial world – but the day will come when they rue their decision”.

“They will find themselves without a home of their own and condemned to annual rent increases in perpetuity,” argues Steward. When it comes to buying homes, those who scrimp and save to put a deposit together, buy a home and then work on it will see that every five to seven years they are able to upgrade at very little extra cost, indicates Steward.

Speculators find new hobbies:
There are many speculators who seem to have left the market; especially those who saw residential property as a get rich quick scheme and have now had their fingers burned. With property losing popularity as an investment option, investors who do stay in the market are likely to make more money in the long run. That is assuming that less stock will be built.

Developers are switching from residential to commercial:
With banks continuing to pull the plug on funding new residential projects, developers are moving their attention to commercial property. Nedbank’s move with La Residence in Sandton, which angered estate agents who had already attracted a number of quality buyers, is a prime example. The fact that FNB has announced it will withdraw funds for buyers in new developments means that in the long run, this should be good for residential property prices – rental and sales. The supply in certain areas has exceeded demand at times.

Predictions for the future:
The construction sector has been under exceeding pressure, but big developments are going ahead. This indicates that those with money to spend still see potential for their investments in South Africa. There are announcements almost every week with international investors boasting big property projects in the country. Local hoteliers like Sun International report excellent bookings for 2010 and the Fifa Confederations Cup in 2009 will bring even more visitors. The new President has also reassured the nation that economic growth and a successful 2010 World Cup are priorities, so things seem to be looking up for a brighter South African future.

The information in this article is courtesy of Jackie Cameron (“Property game’s ‘new rules’”, Realestateweb, 26 September 2008).

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SA Political Saga Won't Affect Property Trends Says Expert

Politics Won't Affect Property Yet

FNB’s property strategist, John Loos believes that the recent change in president may have rattled some cages, but it “is unlikely to change an already deteriorating residential market trend”.

Kgalema Motlanthe’s somewhat dramatic entry into the presidency following the ANC’s recall of Thabo Mbeki and the subsequent resignation of cabinet ministers en masse has certainly caused a stir, but Loos says that this will not have a significant impact on residential real estate.

Loos issued a report yesterday saying that, “Insofar as such events create negative sentiment in and towards the country, they are potentially negative for residential property performance”. The direct impact can be in the guise of higher emigration rates from sensitive “suburban” markets, which are still dominated by three minority population groups.

According to Loos, “Indirect impacts can occur when general investor confidence is negatively affected, which can have a negative impact on economic growth and thus on purchasing power for residential property”.

The recent events have likely created the perception of factional divisions within the ANC and highlighted a party whose succession plan was not clearly thought out, especially given the temporary uncertainty surrounding the minister of finance, Trevor Manuel, who has played an integral part in stabilizing South Africa’s economy.

Where some would refer to the situation as a crisis, Loos is more inclined to “call it democracy functioning reasonably well”. He notes that constitutional procedures have been observed and the outgoing president “has accepted the decision, has not mobilized his army or a band of thugs to protect his position, and has not started to import weapons from China or any such thing”.

Loos went on to say that the public spat between Mbeki and ANC leader Jacob Zuma “looked pretty tame” in comparison to the showdown between US politicians of late. Mbeki has merely stepped down and the country does not seem to require a special negotiation process to remove him from office.

However, the events can’t be expected to alter the trends of declining residential property sales, home loan applications and emigration selling that continues to plague the South African market. Loos believes that economic factors should overshadow political events and that there are various things needed to turn the market for the better:

- An expected turn in inflation in the final quarter of the year, with an improvement in numbers “expected to cause real disposable income growth to turn upward as from early 2009”;
- A declining debt-to-disposable income ratio for households, which in turn is expected to cause the debt service to fall in the last three months of the year;
- Interest rates falling, which is expected from April; and
- The “ultimate recovery of the global economy”, which will have a positive impact on the local economy.

Loos seems to think that “a year from now, when the dust has settled on the current process of political leadership change”, the economy will turn for the better and combined with the benefits of 2010, there will be a significant decline in emigration. He added that policy shifts are more important than people shifts or policy wish lists.

“The world’s and our own political history tells us that the utterances from new leaders on their path to power are not always a good indication of what policies are to follow,” Loos advised.

In the meantime, head of Seeff Properties, Samuel Seeff has warned that an improvement in the property market could be further off than expected, thanks in part to the latest political saga. With an estimated 20 000 estate agents being forced out of the industry, the residential sector has taken a firm beating this year, with sales plummeting and falling property prices.

The bad performance in the housing market has been linked in part to negative sentiment about South Africa, with sellers increasingly citing emigration as a motivation behind offloading a home and consumers finding it increasingly difficult to obtain finance due to the stricter credit laws in place.

Many sellers and players in the industry have been biding their time in the hope that interest rates will improve, but even that looks unlikely with recent hints being dropped by SA Reserve Bank governor, Tito Mboweni.

The information in this article is courtesy of Realestateweb (“Politicians won’t move property market yet – bank”, 25 September 2008).

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Emerging Markets Under Pressure After Wall Street Crisis

While the main saga plays itself out in New York and London, there has been a significant ripple effect on the rest of the world. Investors in emerging markets like South Africa, which are known as “second tier economies”, have predicted an era of stunted growth and weaker currency.

Overall, emerging markets are already down 33% this year, which is far worse than the performance on Wall Street itself. Concern over Washington’s $700 billion bailout plan played a part in the tumble of the rand on Tuesday by more than 2%. Stock markets in India, Turkey and Russia all fell by more than 3%.

However, there are very few market analysts that predict a return to the financial drama that overwhelmed Asian economies in 1997, as well as Russia, Brazil, Argentina and Turkey in subsequent years. Emerging markets like South Africa are far more robust financially than in the past, with healthy surpluses that have been accumulated for just such a rainy day. There are some that might even attract investors wary of Wall Street and London.

According to Arnab Das, head of emerging markets research at Dresdner Kleinwort, an investment bank in London, “The unfortunate reality is that in one way or another everyone in the world is exposed, but that doesn’t mean there won’t be winners and losers”.

Mark Williams, an analyst of emerging Asian economies at Capital Economics, a London consulting firm, says, “Whenever something like this has happened, risk aversion has always won out and emerging markets tend to suffer more than most when the world gets into trouble”.

The primary factor for concern is that these countries generally run large current account (trade) deficits, which continue to rely on foreign investment to balance the books. South Africa’s deficit is close to 10% of gross domestic product, while in some countries like the Balkans and the Baltics it is even higher.

Royal Bank of Canada’s emerging markets strategist, Nigel Rendell says, “The financial stress leads investors to avoid things that are high risk. Emerging markets can be a high risk and an area to keep out of”. He goes on to say that if investment dries up then these countries could be left short of cash. Consequently, the only option left is to let the currencies slide.

The currency “is either devalued, or allowed to depreciate, or you have to slow down the domestic economy and slow imports from coming in at such a rate,” Rendell says. This could signal a sharp slowdown in growth rates in Turkey and Eastern Europe.

India Leaking Capital

India also seems to have been ‘leaking capital’, which has resulted in a failing currency that has subsequently put upward pressure on inflation, with figures currently more than 12%. “Comparatively, we would say India is relatively insulated because its economy is relatively closed, but we have seen capital leaving India and pressure on the currency,” says Hugo Navarro, an economist at Capital Economics. “It’s to the stage where the government is stepping in and taking steps to strengthen [the rupiah] because of concerns over inflation”.

The more optimistic news is that there are emerging economies like Russia and Brazil that are flush with cash due to peak commodity prices, as well as an economic boom in China. But even these countries are not immune, as leading Shanghai stocks are down more than 60% from their peak. The Russian market was suspended for 2 days last week having fallen more than 50% over the past four months.

It has been noted by Williams that emerging Asian stocks have dropped by more than those in developed countries, but this does not mean that the region suffers from the same financial imbalances as those affecting Western finance. “We’ve seen nothing like the kind of property bubble that has grown up in the US and UK, so there is good reason to think that Asian growth will hold up pretty well,” he adds.

The big question seems to be whether the US and European economies will slow down enough to affect Asian exports, but Williams believes that both India and China are well protected in the fact that much of the demand is generated by domestic consumers. “But some of the smaller economies like Singapore, Malaysia and Taiwan are very reliant on exports to the US and Europe”.

Another gauge of how healthy emerging markets are is the premium that has to be paid by borrowers. This has been steadily increasing in recent months, making loans much more expensive and initiating questions about whether borrowers will actually be able to pay off their loans when due dates fall.

Refinancing Loans

Dutch bank ING has calculated that $111 billion worth of emerging market bonds will have to be refinanced in the next year. With credit tight, there is doubt as to whether corporate borrowers will be able to refinance their loans.

Das doesn’t believe that we will see a sovereign debt default problem, where countries are unable to pay back their loans. Instead, the focus will be on banks and companies “that have been major issuers into the credit bubble”.

He goes on to say that, “Russia, Kazakhstan and Ukraine had a number of banks issuing debt. They haven’t all lost access [to credit], but if even Gazprom is having to pay higher [interest rate] spreads [on loans], you can be sure that the weaker names will continue to have a much harder time getting bond deals done”.

The information in this article is courtesy of Mark Rice-Oxley (“Emerging Markets Hit Hard by Wall Street Crisis”, The Christian Science Monitor, 24 September 2008).

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Less People Building Homes in SA

Home Building Sector Slipping

A business reporter for Dispatch Online has drawn attention to the lack of business confidence in the home building sector, which appears to have dropped to levels last seen 7 years ago, according to data released by ABSA Home Loans and Statistics South Africa. This is on the back of rising food prices and high interest rates in the first half of this year.

Stats SA has findings that show building plans passed in the Eastern Cape for new houses, flats and townhouses between January and July 2008 are down by 27.6%. “With the household sector under severe financial pressure as a result of rising inflation and interest rates over the past two years, activity with regard to alterations and additions to existing properties has also tapered off markedly,” according to Jacques du Toit, a senior property analyst at ABSA Home Loans.

These recent developments in the building and construction sectors have ensured that confidence has plummeted to levels last experienced in 2001. “This is a clear indication of current conditions and the prospects for this sector in the economy over the short medium term,” says du Toit. Building plans for alterations and additions in the Eastern Cape also went down 44.4% since the beginning of the year.

Figures in the Eastern Cape paint a much darker picture than the national average drop of 19.8% and 20.6% for new residential projects and alteration plans respectively. This can be interpreted as 50236 units nationally from the period January to July 2008, as compared to 62634 units over the same time last year.

However, Cashbuild managing director Pat Goldrich says that the trend is not evident in the building materials supplier sales. In fact, results for the year ended June 2008 show that revenue rose by 17% nationally, despite the national average drop of 19.8% in building plans passed. “We’ve just released our annual results and we’ve grown attributable profit by over 30%. With the right pricing, service and location we’ve managed to grow our sales and profit,” Goldrich said.

Progressive Builders is based in East London and manager Mark de Swart said that his business did not experience abnormal fluctuation in the first seven months of this year. “There has been some decline, but it’s nothing outside normal fluctuation. Overall, it’s not that significant,” he said.

Even so, building plans passed in the Eastern Cape fared a lot better than other provinces: Gauteng (-28.5%), North West (-50.5%), Free State (-39.1%) and the Northern Cape (-32.2%). In contrast, the Western Cape has actually improved by 12.6%, while KwaZulu Natal and Mpumalanga are both up by 0.6%. According to analysts, the trend is likely to continue over the next year or so as economic conditions remain bleak.

“The expectation is that the residential building and construction sector will continue to experience difficult business conditions for the rest of the year and into 2009 on the back of macro-economic and household sector related developments and trends,” said du Toit.

The information in this article is courtesy of Siya Miti (“EC home-building suffers downturn”, Dispatch Online, 22 September 2008).

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Property a Resilient Investment Class

Property the Safest Bet

While global markets and investors literally shudder in the aftermath of the collapse of Lehman Brothers and AIG, South African property investors are somewhat smug in comparison.

Paul Hansen of Stanlib, a major asset management company, noted that the JSE was about 25% off its high and close to lows seen in January as a result of the chaos that ensued on world markets following the crisis on Wall Street.

In an assessment on the impact the crisis will have on South African investors, Hansen said, “The JSE looks good value all-round, but if world markets continue to fall, the JSE may do likewise. With the MSCI World Index down 27% (in dollars) at 2005 levels and the JSE All Share Index down 25%, we don’t think this is a time to be selling, even though there may be more downside to come”.

However, amid the falling share prices, there is good news for some investors. Hansen said, “Remember that over the past few months in SA, three of four asset classes have done well (listed property, bond and cash)”. Investors in publicly listed property companies aren’t the only ones who are breathing a deep sigh of relief.

The collective opinion seems to be that investing in brick and mortar at least gives you something tangible after the crash, while making a wrong move with equities or even cash in a bank with unsecured deposits may just give you grey hair and plenty of useless paper for your troubles.

The recent property statistics released by Lightstone Risk Management go a long way towards comforting investors, as the snapshot goes back to 2000 and indicates that South African residential property prices, unlike shares, are all in positive terrain. Granted, they are falling and likely to drop further, but they aren’t likely to plunge dramatically like shares do at times, which is an excellent reason to include residential bricks and mortar in a personal investment portfolio.

In general, property prices tend to go up at a fairly sedate pace and wind down slowly, more or less in line with interest rates. It’s not likely that you’ll wake up one morning to find your property worth 25% less than it was the day before, which is something that could easily happen with equities.

The stark contrast in performance between residential property and shares in general this week has highlighted the volatility of the stock market. Bill Rawson, founder of Rawson Properties once said in an interview that he believed buy-to-lets were the answer for people looking for a steady stream of income. He pointed out that even blue chip companies on the stock market cannot be taken for granted when you are dealing with important financial requirements, as even the big companies come and go.

Pieter de W Louw has released a new book for the P3 Investment Group called Property – Your key to wealth. In it he says that he couldn’t believe his own eyes when he read the 2005 Financial Planning Handbook of South Africa to find that residential property is portrayed as ‘high risk’ investment class.

“What has gone wrong in this industry? Are the learned professionals of the financial industry so biased that they have completely lost their minds? I am honestly sad when I have to say that you should be extremely cautious when taking investment advice from just anyone who boasts with the ‘highest qualification in financial planning’ (CFP) behind their name. Why do I think that the risk is low? The answer is common sense. Show me an entry level property in South Africa that has declined in value over the past decade,” he argues.

Reinforcing this view that property is a low risk investment with high returns are some recent statistics from ABSA, which indicate that property beat all other asset classes over 5, 10, 15 and 20 years – and is almost as ‘low risk’ as cash. However, this doesn’t mean that it’s all plain sailing for property investors. Whatever the case, when it comes to making money in property, the reality is that you can’t win if you aren’t in the game and playing the game also has its ups and downs. At the end of the day, property does appear to be a resilient investment class in comparison to other types at the moment.

The information in this article is courtesy of Jackie Cameron (“Property: the safest investment bet”, Realestateweb, 19 September 2008).

Property for sale in South Africa.

Threat of Land Grabs in SA Not Over Yet

It was recently reported that the Portfolio Committee on Public Works debating the proposed Land Bill had suspended its deliberations on the 14th of August 2008. Now a top law firm has warned clients that the land grab law could well be back on the table by next year.

Webber Wentzel, an SA law firm has issued a warning to clients regarding the controversial land expropriation bill and alerted them to the fact that the draft law has not been withdrawn, despite a statement by the Ministry of Public Works to the contrary.

There has been extensive media coverage on the issue, with Realestateweb recently reporting that the law had been shelved, but not withdrawn. Earlier this week, one of the country’s top law firms revealed to the media that it was spelling out all the details of the contentious law to its clients, which bears extreme similarities to the land grabs that have led to the well-publicised economic demise of neighbouring Zimbabwe.

Peter Leon, partner and head of Webber Wentzel’s natural resources and regulatory practice group, has said that the statement saying that the bill had been withdrawn was issued, but “the Minister of Public Works has not withdrawn the Bill, as required by the National Assembly’s Rules. And all indications are that the Bill could well be reintroduced after next year’s general election”.

He warned that the withdrawal looks to be only temporary, as the precise legal status of the Bill remains unclear. “On the 17th of September 2008, the Director General of the Department of Public Works indicated to the media that it was possible that the Bill could be reviewed in 2009. It has also been reported that the future of the Bill is being discussed by the chairperson of the committee and the Minister of Public Works,” the law firm said in its statement.

It went on to say that, “The Bill empowers the Minister of Public Works to expropriate any property for a public purpose or in the public interest despite public hearings on the Bill that raised concerns that it would severely discourage foreign investment and infringe the Constitution’s property clause”.

According to the Bill, “public interest” includes “the nation’s commitment to land reform and to reforms to bring about equitable access to South Africa’s natural resources”, while “property is broadly stated to include ‘a right in property’ as well as ‘moveable property’”. Leon interprets this as meaning that shares in a company, as well as various other rights in property, such as intellectual property rights, could be capable of expropriation under the Bill.

Leon also said that prospecting and mining rights granted under the Mineral and Petroleum Resources Development Act 2002 would also constitute property for the purposes of the Bill. “As the Bill has not been formally withdrawn, doubt remains as to whether it will be completely redrafted or merely reconsidered at a later stage. At the time of its ‘withdrawal’, the portfolio committee chairperson stated that the general consensus within the committee was a desire to see the Bill reintroduced when either feasible or appropriate,” he said.

The law firm outlined the steps in the legal process as follows:
- The draft Expropriation Bill 2008 was tabled by the Minister of Public Works in the National Assembly on 16 April 2008 and was subsequently referred to the Portfolio Committee on Public Works;
- The Portfolio Committee invited written submissions on the Bill in late April 2008, which were to be submitted by 16 May 2008. Extensive public hearings were conducted by the Committee in Parliament, as well as each of the nine provinces in late June 2008;
- The consultation process on the Bill gave rise to a number of objections;
- Despite the intensive public hearing process, the reason given to justify the Bill’s sudden “withdrawal” was a lack of proper consultation;
- On 14 August 2008, the Committee announced that it had suspended its deliberations on the Bill.

The information in this article is courtesy of Realestateweb (“Land grab law: set to make a come back – warning”, 18 September 2008).

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Call for Review of Property Laws

Push for First Time Buyer Concessions

Jeanne van Jarsveldt, financial director of RE/MAX Southern Africa has indicated that a serious review of the law is needed to stimulate the property market and encourage first time buyers to invest. He would like to see the current threshold on payment of transfer duty to be enforced on sales over R1 million and this should be accompanied by tax breaks for first time buyers.

A “rescue package from government” seems to be what is needed in order to avoid further distress in the South African property market. Van Jaarsveldt said that the US anchored its recently launched Housing Stimulus Bill around a tax break of over R52 000 for first time buyers in an effort to stabilize the flailing market.

A similar tax concession in South Africa would go along way towards relieving some of the pressure on affordability for first time buyers, who are trapped by the five percentage point interest rate increases over the last two years.

Van Jaarsveldt also believes that a temporary suspension of transfer duty on all price categories is worth considering, at least until the market has begun to recover. He indicated that the Real Estate Institute of Australia is pressuring the government for an exemption from stamp duty on first time buyer transactions, as well as on retirees downsizing their properties. The same is happening with Britain’s National Association of Estate Agents in the UK.

According to economists, abolishing transfer tax would cause the treasury to lose around R10 billion a year, which would not make too much of a dent in the government’s budget, but would certainly ease the buying and selling of homes.

Mike Bennet, head of ProProp Franchising Group, agrees with van Jaarsveldt in his call for a temporary suspension of all transfer duty on sales under R1 million until the market starts to improve and would also like to see banks given permission to relax the National Credit Act rules on houses selling for less than R700 000.

Van Jaarsveldt refers to the property market as “a pillar of our economy” and believes that the current high number of negatives surrounding the market make it absolutely crucial that some concession be made in order to stimulate home ownership.

He said, “To ignore the situation seriously jeopardizes the growth of the emergent black middle class who we all know are vital at this stage of our country’s transformation”.

The information in this article is courtesy of Jeanne van Jaarsveldt (“First-time buyers need a break – ReMax”, Business Report, 17 September 2008).

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US Stock Market Crash Hits SA Property Development

Lehman Collapse Resounds in SA

The troubled US bank at the centre of the global stock market woes has financial ties to a massive development in the Cape set to rival Century City. It is through a private equity fund that Lehman Brothers is involved in the R4 billion Annandale Farm development, which is expected to be complete in about 5 years time.

The Annandale Farm development is situated on the N7, not far from Century City, directly opposite the oil refinery. The plan is to build 3000 residential units, as well as 200 000m² of retail, commercial and industrial space.

According to Mike Flax, executive director of Madison Property Fund Managers (JSE: MDN), the Lehman Brothers’ Private Equity Real Estate Fund has entered into a joint venture with the JSE listed property company Redefine (JSE: RDF). Flax said that the fund is off balance sheet and is therefore not caught up directly in the bankruptcy, however the individuals involved in the deal are and they are uncertain about their future.

The South African partners have apparently been told that it is “business as usual” and it is believed that the investment management division is the crown jewel in the company, so the liquidators will want to sell for as much as possible. However, a committee will soon decide whether to continue investing in the Annandale project, which requires around R500 million just for servicing the 70 hectare site (about half the size of Century City).

Flax indicated that the transfer of land has not yet gone through, but the Lehman fund has “invested quite a few millions already”. If their investment does not continue then the other partners will be forced to find a replacement. Several parties have already expressed their interest, including another international bank and the word appears to be spreading like wild fire among South African institutions looking for new real estate opportunities.

According to Flax, Redefine is a junior partner in the project and is not looking to take a larger stake. The whole Lehman Brothers saga has obviously been “very negative for financial services and property in general”. It would also have a negative impact on the supply of credit generally, which is yet another “kick” for the property market, Flax said.

The property asset management expert predicted that a substantial drop of around 3 or 4% in interest rates in South Africa would be necessary if the impact of global economic problems on the domestic market is to be offset. With regard to the impact on Madison shareholders, Flax said that it generates fees from schemes such as this, but Annandale is one of only 40 and the company has not yet budgeted for any income from this particular scheme.

The information in this article is courtesy of Realestateweb (“Lehman collapse hits SA property companies”, 16 September 2008).

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Where to Invest in Offshore Property

Top 5 Offshore Destinations

An article by Mariana Tolken published by Moneyweb discusses five offshore property hotspots that show promise as retirement destinations, immigration possibilities and big city investments with sound diversification opportunities.

London
This is always one of the top destinations with South African investors, as London shares a similar time zone and has a cultural background and history linked to this country. 30% of central London’s properties will never come up for sale in our lifetime, as they are bound by non-distribution family trusts. The tenant base in London is an added benefit in that it is one of the highest worldwide, with 42% of all Londoners unlikely to become property owners in the city they reside. There is a constant shortage of accommodation in traditional suburbs, which works to keep prices high and capital values increasing. A one bedroom apartment in a reputable London area will cost you at least £250 000, although you would likely need to spend around £300 000 to be in a good neighbourhood. The most expensive penthouse apartment was recently sold in Hyde Park for £100 million.

New York
With the dollar at a record low against all other currencies, the city that never sleeps is the ideal buyer’s market. One of the biggest cities in the world, New York is the global hub of TV, advertising, fashion, music and publishing, rivaling London and Tokyo. Considering the base interest rate of just 2% and this being the biggest economy in the world, this is perhaps the best time to invest. Finding a tenant couldn’t be easier, as there are 8.2 million residents per 790 square kilometres and the population is destined to increase to 9.5 million by the year 2030. Manhattan houses a population of 1.6 million, with an added 1.3 million who commute to work on a daily basis. It also holds two thirds of all jobs in New York, with the highest per capita income in the United States. The average price of an apartment in Manhattan is around $600 000, compared to an average $300 000 in the US.

Australia
Now one of the motivating factors behind property investment in Australia is the country’s appeal among South Africans as an immigration destination. The lifestyle, excellent climate, political and economic stability, as well as the growing population and a GDP on par with most European countries, paints a more than appealing picture. When you add the favourable Sterling Exchange rate, this means that you are likely to get more for your money in Australia. However, there is a strict immigration and visa application process in place and those wishing to buy property must hold a permanent resident visa or a special category visa/permission. Australian property may not be the greatest buy to let investment, as the rental income is not high enough to cover all costs and interest rates are higher than in the UK. However, it is the perfect option for many South Africans as a result of its affordability, the shared language, sunny climate and low crime rate. The average cost of an apartment in Melbourne is about AUS$340 000.

Mauritius
This is without a doubt one of the best retirement options for South Africans not wishing to invest too far abroad, as Mauritius has the irresistible island appeal. It is easy to invest here in South African rands and there is the added benefit of residency for you and your dependants, which means that you can almost feel the sand between your toes. The appeal is heightened by the lack of exchange controls and inheritance tax, as well as the 15% flat tax for individuals and companies. Buying into an Integrated Resort Scheme (IRS) is the only way that foreigners are able to own property on the island. Mauritius is an excellent investment in terms of political diversity and property values are expected to hold. However, it is not the ideal place to invest in buy to let property, as the income is not only very seasonal, but around half of rental income is the norm for letting marketing and management services. The entry and exit costs are also quite steep, including stamp duties of between $50 000 and $70 000 on both purchase and sale, while furniture pack cost in IRS shemes is around $100 000. The starting price for an IRS unit in Mauritius is around $800 000 and could even reach $3.5 million.

Crete
This location was included mainly for its appeal as a holiday home investment option. Crete is the biggest of the Greek isles and offers those in the market the opportunity to diversify their assets and gain a foothold in the European property market at a fraction of the cost in bigger cities like London. While Crete is relatively undiscovered and unexploited, the property market is well established and prices have risen steadily over the last ten years, with the Euro having an appreciating track record. A mortgage can be obtained from a Greek bank for up to 80% of the purchase price at an interest rate of around 5.5%. Letting opportunities are also seasonal, but letting management fees are not as high as in Mauritius. There is capital gains tax that applies, but no inheritance tax. A villa on the island would cost in the region of $200 000 to $300 000 and this would assist, if not virtually guarantee, a residency visa application for the country should one wish to settle there permanently.

The information in this article is courtesy of Mariana Tolken (“Five off-shore property hot spots”, Moneyweb, 15 September 2008).

South Africa property.

Estate Agency Boss Issues Warning to Landlords

Landlords Beware

The CEO of RealNet Property Group, Tjaart van der Walt has warned that landlords looking to increase rentals could land in financial trouble. The current market has seen rental accommodation in strong demand, which has consequently placed landlords in a stronger position than in previous years.

There is anecdotal evidence however, that tenants are showing increasing resistance to the rapidly escalating rentals and that landlords should carefully consider the benefits of a long-term relationship with reliable tenants before pushing up the rental.

If landlords continue to hike the rent unreasonably, the reality is that tenants with good credit records will have no problem whatsoever finding alternative accommodation. While the tenant has to then go through the inconvenience of sourcing another unit and moving out, the landlord will be left with the prospect of finding a new tenant that may or may not be as reliable in paying the monthly rental.

Van der Walt goes on to say that landlords should keep in mind the costs involved in sourcing new tenants. For instance, costs may include advertising, cleaning, repairing and perhaps even repainting the property. A second consideration is that there will be no rental income while the property is being prepared for new tenants and even at an increased monthly rental for the new tenant, it will take a good deal of time before the lost income is made up.

There is a third factor that might prove worrying is the danger of vandalism when properties stand empty and the cost of temporary security measures should be considered. In short, van der Walt suggests that landlords are likely to find that once all the costs are added up, they might well have been better off had they given their initial trustworthy tenants a break.

The information in this article is courtesy of Tjaart van der Walt (“Tenants resist rising rentals – estate agency boss”, Realestateweb, 13 September 2008).

South Africa property for sale.

Household Debt on the Mend in SA

Good News At Last

According to John Loos, FNB’s property economist, there is improvement expected in the household sector’s financial situation that is likely to reverse the fortunes of the ailing residential mortgage market in South Africa. This means that after steep declines year on year since the middle of 2007, the value of new mortgage loans is expected to show positive growth year on year towards the second half of 2009.

When it comes to the strength of the residential property and mortgage markets, the well being of the country’s household sector is key and it is also important to keep a close eye on the economy. “In recent times, we have started to see the early encouraging signs that the household sector’s financial position may start to turn for the better,” says Loos.

He goes on to say that, “Most notable was the South African Reserve Bank not hiking interest rates in August and as oil prices decline and global food price inflation tapers a bit, we are increasingly hopeful that the country has finally reached the end of interest rate hiking”.

Loos indicates that with the expectation that interest rates will only begin to fall around April next year, it is also believed to be the start of a declining trend in household debt to disposable income ratio, which is anticipated to lead the all-important household debt service ratio (the cost of servicing household sector debt as a percentage of disposable income) commencing its decline at the end of this year, prior to being assisted by interest rate cuts.

“But life hinges around more than just debt and the encouraging global inflation news in the form of declines in commodity prices bodes well for local inflation. We may well be very near to the peak in consumer price inflation numbers and with the country’s wage bill inflating steadily, a decline in inflation should translate into a recovery in disposable income growth in real terms, possibly late in the current year, after a declining growth trend spanning back to the beginning of 2007,” says Loos.

The anticipated recovery in real disposable income growth is expected to precede a recovery in economic growth, but this is based on the assumption that although economic growth will go slower for a while, South Africa will not fall into a recession.

The information in this article is courtesy of I-Net Bridge (“Household recovery good news for property”, The Times, 11 September 2008).

Property South Africa.

Some Positivity for SA Property Market

Property Sales on the Up

Tony Clarke, managing director of Rawson Properties has reported a dramatic improvement in property sales recently. He went on to say that all players in the residential sector have been watching the economic indicators because it is an historic fact that an upswing in the economy usually sets in motion a rise in property prices. However, while we all may be desperately in need of this to happen, Clarke believes that it is still not quite here yet.

The economy took a marked upturn in the second quarter of this year, growing by 4.9% quarter on quarter after a dismal growth of just 2.1% in the previous quarter. However, this should not be taken as an indication that we are now in a strong economic period. The improved figures have to be considered in context with those of the first quarter, in which the mining and manufacturing sectors have been hit hard by the Eskom crisis and exceptionally high fuel prices.

The second quarter of the year has seen power supplies more constant and fuel prices have finally starting to fall, while prices in the agricultural sector have been bolstered by the sudden upturn in global prices around the world. Although this is not likely to become a permanent phenomenon, low food prices are now generally a thing of the past.

While the improved second quarter was a welcome relief, weaker growth is now expected throughout the latter half of this year. Industries in the consumer market, the financial sector and real estate development will continue to function well below their 2007 peaks. Even those who did quite well on the back of a weaker rand will feel the effects of considerably reduced commodity demands in the last half of the year.

When it comes to property, Clarke remains positive and has said publicly that with interest rates likely to be stable from now on, the residential sector is set to bottom out. He believes that prices will stop falling within the next two or three months and by January there will be real growth creeping back into the market. Currently, Rawson Properties has seen a dramatic increase in market activity, up to 35% month on month. That being said, this is an extremely good time to buy for anyone looking to build up a useful buy to rent property portfolio in the residential sector.

The information in this article is courtesy of Tony Clarke (“Dramatic improvement in property sales – estate agency”, Realestateweb, 11 September 2008).

Buy or sell property in South Africa.

SA Leaning Towards International Property Trends

High Rise Here We Come

An interesting article published on iafrica.com has drawn attention to the international trend towards high-rise living and how this seems to be playing out in South Africa. It seems that despite efforts made by developers to promote the sales of apartments like those in Melrose Arch in Sandton and the Point area in Durban, South Africa has a long way to go before it reaches the same popularity as high-rise living enjoys in London and New York.

According to Mike Bester, CEO of Realty1 International Property Group, “This type of lifestyle could become very important in the future if we look at the rising costs of land and building”. Statistically, ABSA’s report on property trends in luxury housing released in May 2007 showed that population density increased by 89.4% in the country’s metropolitan areas during the period 1996 to 2005, while only increasing 33% in rural areas.

Bester explains that, “This kind of pressure means higher numbers of people looking for housing in urban areas and although the current occupants of flats are more likely to be lower income individuals who can’t afford better accommodation, we’re seeing this starting to change with the increased supply of luxury apartments coming onto the market”.

High-rise apartment complexes, such as Melrose Arch in Sandton and the New Ponte in Hillbrow, generally offer residents a variety of added benefits, from gyms on-site, to restaurants and shopping facilities, as well as the all-important 24 hour security and parking facilities.

Richard Goller, a former editor of the Sunday Times magazine and now freelancing in London, says that he lived in a high-rise apartment in central Johannesburg by choice. “I’ve always loved the idea of the apartment lifestyle – chic and convenient,” he says. “The amenities in the building were great and the apartment itself was a good investment”.

Goller believes that a city like Johannesburg, with its huge population growth and ever-increasing problems of urban sprawl will no doubt follow international trends. “If there is sensible urban planning, it means more people per square kilometre which means more high-rise apartments,” he says.

Bester tends to agree with Goller, “This form of housing could certainly help to alleviate the pressure on the urban areas. And with the traffic problems and the cost of fuel unlikely to reduce substantially in the long term, people want to cut their traveling time and expenses,” he says. “What better way to do this than to live close to your place of work?” Bester believes that a rising trend amongst the more affluent South African families seems to be in line with living close to the city during the week and having a home further out where the family can disappear to over weekends.

Bester’s theory is certainly based on recorded sales of high-rise apartments. In June last year, a newly converted high-rise block in Durban (the Berea Lofts) sold out all 133 units, which included 3 glass-fronted penthouse apartments within days of release. The ultra luxurious and expensive Nedbank La Residence in Sandton recently changed plans in favour of using the space for offices, but had sold half of its 152 units at the time of cancellation for up to R40 000 per square metre.

Having said this though, the new luxury apartments in Durban’s revitalized Point area haven’t done quite so well. The reason for this lack of success seems to be the surroundings, which appear to be discouraging the buyers. Bester explains, “It’s difficult to consider buying a R1,2 million apartment in a secure block if you have to run the gauntlet of drug dealers, pimps and prostitutes to get to the building”.

When asked how high-rise living in South Africa currently compares with that in London, Goller answered, “Well, apartment lifestyles are still cheaper in South Africa when it comes to property, but in London you get a different kind of value: security and being at the centre of things”. Bester goes on to say that, “While luxury high-rise living may well be the way of the future for many South Africans, it’s going to take a while before we start to view ‘flat life’ as a viable alternative lifestyle to an upmarket sectional title unit”.

The information in this article is courtesy of iafrica.com (“The way of the future”, 10 September 2008).

Buy or sell property in South Africa.

SAHometraders Press Release

SAHometraders Property Portal Goes Mobile

SAHometraders is proud to announce the mobile launch of its national property website as of August 2008.


FOR IMMEDIATE RELEASE
PRLog (Press Release) – Sep 08, 2008 – This latest innovation in the South African property portal industry is aimed at providing users with the opportunity to browse property listings anytime, anywhere simply using their cell phone, with the help of intuitive mobile-friendly search tools.

A dynamic property media marketing company, SAHometraders specializes in the provision of a national property portal representing real estate agents across South Africa. The aim is to meet the demand for alternative forms of advertising with progressive online marketing ideas and state of the art design features. Active since 2003, the site has over 600 subscribers, listing some 35,000 properties, with 120,000 unique visitors every month.

With an estimated 12 million mobile phone users in South Africa, the potential market exposure is infinite. This option is available to all WAP enabled mobile phones and can be accessed via http://saht.mobi. Users are now able to find listings of properties for sale or rent throughout South Africa, view images and descriptions, send enquiries by email: all from the convenience of the palm of their hand.

SAHometraders – South Africa’s most effective way to buy, rent, sell or let property!

# # #

About SAHometraders: A media marketing company that operates as a national property portal and real estate directory representing estate agents who wish to market their product online, listing properties for sale or rent throughout South Africa.

Find property for sale in South Africa.

South African Tax Law Amendments

New Tax Break on Residential Units

If you own at least 5 residential property investments then SARS may soon hand you a gift by changing the tax law. Tax expert David Warneke explains that the new Revenue Laws Amendment Bill issued on 1 August 2008 has a number of interesting, but fairly complicated amendment proposals to the Income Tax Act. Among these is the proposal to revamp the section 13ter allowance applying to residential housing units let out by the taxpayer or occupied by the full time employees of the taxpayer.

Warneke is a tax partner at Cameron & Prentice Accountants and he examines the proposal in a guest column published by Realestateweb. He says that the amendment essentially entails a write off at the uniform rate of 5% over 20 years, which replaces the current total write off of 12% in the first year and 2% every other year for a period of 45 years with an upfront loading of deductions.

However, where the unit consists of only part of a building, for instance a single flat in a sectional title scheme that was not developed by the taxpayer then the cost on the write off is deemed to be only 55% of the taxpayer’s actual cost. This means that if the flat cost R1,5m then the write off will be 5% of 55% of R1,5m or R41 250 per annum. Where the unit is a stand-alone property, such as a house or if the taxpayer built the flat then the 55% reduction does not apply and the full 5% per annum of actual cost may be claimed.

Warneke goes on to say that the new dispensation will only apply to new and unused residential units or improvements. “Residential units” are essentially defined as a residential building or apartment, other than guesthouses, hotels or holiday accommodation. The section requires that the taxpayer own at least 5 residential units within the same geographical vicinity to qualify for any deduction. Furthermore, the residential unit or improvements must be wholly or primarily used for producing rental income in the course of a trade carried out by the taxpayer. It is also allowed for the unit to be occupied by employees of the taxpayer or of another company within the same group of companies as the taxpayer (if the taxpayer is a company).

According to Warneke, the write off accelerates to 10% straight line where the building is a “low income residential unit”, which is defined as a residential unit where the cost does not exceed R200 000 and if an apartment, the cost does not exceed R250 000. These amounts do not include the cost of land and the bulk infrastructure. The section also requires that the owner of the low income residential unit must charge a monthly rental of no more than 1% of the cost, i.e. R2000 pm if a building and R2500 if an apartment.

The information in this article is courtesy of David Warneke (“New tax break: Allowance on residential units revamped”, Realestateweb, 7 September 2008).

Property to buy or sell in South Africa.

Latest House Price Index Stats from ABSA and FNB

What's the Worst Case Scenario?

The latest reports from FNB’s house price index indicate that a drop of 5% is the worst South African consumers can expect before things in the residential property market begin to improve. Before now, FNB’s property watchers have relied primarily on data retrieved from other sources, but the bank has now developed its own index, using details from mortgages approved to produce price inflation figures.

According to FNB, the results of this new index are relatively similar to ABSA’s, with the figures indicating a 2.3% year on year increase in house prices in August. This is down 3.5% from the data recorded in July and reflects a continuing “declining inflation trend”. In real terms, FNB’s property strategist John Loos says that there has been a drop of almost 9% and that basis prices are dropping month to month, with a –0.3% fall in nominal terms in August.

“While month on month house price deflation is already here, year on year price deflation is expected to arrive soon. However, no ‘freefall’ is anticipated. Rather, around a –5% year on year deflation is expected at the worst part of the price cycle in the first half of 2009,” says Loos. He goes on to say that after that, price inflation is predicted to resume late next year “on the back of recovering economic growth and declining interest rates”.

According to FNB’s market sample, the average house price transacted as at August was around R681 000, while the median price was about R550 000. “In reality though, both measures are over-estimates of what the average house value in South Africa really is. This is because higher income households are generally more mobile than low income ones, which means that a greater percentage of total stocks gets traded in middle to upper income areas, as opposed to, for example, black townships,” explains Loos.

Loos argues that if every property could be valued, even RDP housing, regardless of whether it gets transacted, the average median values would be considerably lower. The FNB house price index is calculated using the average value of housing transactions financed by the bank. He says that in order to eliminate outliers from the data sample, transaction values have to be above 70% of the property valuation, but below 130%, while sales concluded above R10m and below R20 000 are excluded.

The strategist emphasized that the house price depicted in indices does not really show the “full extent of residential market weakness”. In fact, “sellers are somewhat inflexible when it comes to dropping their asking price. Some would stay out of the market during these weak times, while others hold on longer to obtain their price, often incurring higher holding costs,” Loos says.

Therefore, sales volumes would probably give a better reflection of the current state of the market than prices. Agents are generally seeing volumes down by close to half of what they were at the same time last year. Meanwhile, ABSA also released their house price index on Thursday and put the average house price at about R962 500. The average nominal price of a medium sized house with an average price of around R946 200 increased by a mere 2% year on year in August, which incidentally is the lowest growth rate since January 1993, this according to ABSA’s senior property analyst Jacques du Toit. Larger houses (up to 400m²) increased by a little over 1% according to the data supplied by ABSA, which brings the average house price to R1 368 000 and small houses increased by just under 4%, bringing the average house price in this sector to about R682 500.

In real terms though, ABSA says that house prices have been falling for the last six months with a drop not far off 10% in July. The bank believes that real house prices are set to drop by another 7% this year, which is the first annual decline since 1999. The nominal growth rate for 2008 is expected at around 4.5%.

“It is, however, only in 2010 that nominal price growth is expected to rise to a level of above 10% again, while real price growth is projected to turn positive in the same year after two years (2008 and 2009) of real price declines,” according to du Toit. He goes on to say that the latter part of this year and early 2009 will probably be “the best time to buy property”.

The information in this article is courtesy of Realestatweb (“Residential property prices: the worst-case scenario”, 4 September 2008).

Buy or sell property in South Africa.

Asset Manager Argues for Investment in Equities and Bonds

Should You Buy That House?

Shaun le Roux is a portfolio manager at Alphen Asset Management and in an article published by Realestateweb, he poses the big question pervading the minds of many smaller investors: is residential property really a great long-term investment?

Many South Africans, along with their American counterparts up until some time last year, appear to have an unshakeable belief that residential property is a great investment. In fact, when it comes to paying rent to a landlord so that he can afford to pay off his bond, there seems to be a determined attitude to rather own property and put savings towards your own bond. This begs the question whether this tendency to own rather than rent and invest the difference elsewhere is always appropriate?

The answer is generally dependent on a number of factors. For instance, timing would have a profound impact from a capital appreciation perspective – if you entered the residential property market in 2002 then a house can make a great investment. However, the sad reality is that most of the time it doesn’t. For most property owners, a house is bound to be the largest financial investment that they will ever make and is deemed a key factor in their overall net worth.

There are many financial planners who choose to exclude a client’s residential property from the list of assets in order to determine the level of savings and asset allocation necessary to meet their financial needs. The prevailing view seems to be that you never know what price you will achieve when you decide to sell, especially in light of a market that is prone to ‘wild swings in confidence’. More often than not, a large percentage of the value realized would have to be used to discharge debt.

Even so, there are plenty of smart operators so to speak that habitually earn profit from an extensive knowledge of the relative value of specific properties and because the market is not liquid, pricing can be extremely inefficient. This skill is not really something attributable to the average homeowner though.

When it comes to residential property outperforming as an investment class, there are several factors working against it. First of all, the transaction costs on a sale or purchase, which include transfer duties, estate agent fees, conveyancing charges and high selling costs. In comparison, transaction costs in a liquid market trading in securities like equities or bonds are but a fraction of this.

Second, the home that you reside in does not generally produce an income. As any investment expert will tell you, the holy grail when it comes to investing is the power of compounding. Of course, some may argue that paying off the bond on a house allows the investor to benefit from this power by virtue of the fact that the outstanding debt steadily decreases. However, a house is really a depreciating asset, as the value of bricks and mortar falls in real terms over time. To add to this, the average house, especially an older one tends to require a significant input of cash for annual maintenance.

Le Roux goes on to say that investing in a growth asset like equities or income yielding investment property has far more long-term advantages. Mark Seymour (Alphen Angle) discussed the South African equity market and said that an annualized real return of about 9.5% has been achieved over the past 50 years.

If the returns achieved on the price index of the SA equity market are compared with the ABSA House Price Index over the past 40 years then the JSE has been a vastly superior investment to average houses and this is before even taking into account the re-investment of dividends. This superior return on growth assets comes from the ability of sound investments to generate returns in excess of inflation and the opportunity to re-invest and compound these returns into new growth options. In the case of equities, the excess capital distributed to shareholders in the form of dividends is tax-free.

To top it off, bond repayments have to be made out of disposable after-tax income and a monthly contribution to a retirement plan sees the first 15% of before-tax income directed to such a savings plan enjoying considerable tax benefits. A retirement plan that is started early that has high allocation to growth assets is likely to be the most important investment that the average investor will ever make. When retirement arrives, they will still require a home to live in, but they will also need to draw an income from somewhere to meet their monthly expenditure.

The advice is not all doom and gloom when it comes to investing in residential property though. Le Roux believes that the strongest case to be made for residential property is the manner in which a bond acts as a vehicle for forced saving. The savings rate in South Africa is currently abysmal with many consumers surviving on credit and living beyond their means. Monthly bond repayments do enforce a degree of saving, but at the same time, this is weighed heavily in favour of the bank and at the expense of the homeowner, particularly in the first few years after taking out a bond as the repayments go towards paying off interest and not capital.

There is another argument in favour of residential property that posits property values as underpinned and supported in the long-term by the fact land is a scarce and finite resource. This is particularly true in areas where there is high demand, such as cities or on the coast. However, le Roux argues once again that while the value of land is bound to appreciate and so inspire investment, it is still a non-income yielding property. The average man in the street may not be so fortunate as that who called the market right or picked the next Plettenberg Bay.

While le Roux’s comments may not have a profound impact on the trend towards owning property rather than renting in South Africa, he does has a valid point. Perhaps the best piece of advice when owning or planning to invest in a home is to ensure that you do the maths correctly. You shouldn’t be living beyond your means and you should be meeting your retirement objectives with your existing savings levels and investment portfolio.

The information in this article is courtesy of Shaun le Roux (“Residential property: a great long-term investment?” Realestateweb, 2 September 2008).

Buy or sell property in South Africa.

House Prices Falling on Global Scale

House Price Crash Stats

An article in the UK’s Guardian has highlighted a global phenomenon in the house price crash that began in the US and spread across the globe, this according to international estate agents Knight Frank, which also indicated that there are steep declines taking place in Europe and Asia at the moment.

The country recording the worst fall in house prices seems to be Latvia, where figures stand at a plummet of 24.1% over the past year. New Zealand, Denmark and Lithuania have all experienced price declines, along with Malta, Germany, Ireland, Estonia, Britain and the US. Even countries that have not seen a dramatic fall in prices are witnessing a rapid deceleration in price growth.

The article mentions that South Africa’s rate of house price inflation has collapsed from 15.5% at the same time last year to just 3.8% today and is expected to be negative soon. In countries like France, Spain and Greece, price growth has literally halved and is recorded at less than 3.2%.

Russia was the fastest growing market last year, with an unbelievable house price growth of 53.7% in the second quarter of 2007, but this has since fallen back to 26.5%. According to Nick Barnes, head of international research at Knight Frank, “The index shows that global house price inflation is continuing to fall back, with much of continental Europe now seeing low or negative growth. Housing markets in countries such as Spain, Denmark, the UK and Ireland are all being severely challenged by the global credit squeeze”.

In the long-term, the rate of global house price growth fell to 4.8% in the second quarter of 2008, which is down from 6.1% in the first quarter of this year. There are a number of countries that are now entering their second year of house price declines and Germany is among the worst hit, with a falling rate of 4.4% last year and 2.5% this year.

Barnes says, “There is less demand for owner-occupied property in Germany than in many other European countries and there is no shortage of supply”. In Spain, the Knight Frank index reflected a price rise of 2.4% annually, but it warned that falls in house prices are now almost inevitable.

“The well-publicised problems in Spain have not yet fed into house price statistics. So far, price falls have been concentrated in the coastal resorts and among new developments in the large cities,” Barnes indicated.

“Spain looks likely to fall into recession later this year and house sales fell steeply during June. The number of sales dropped by 34.2% in May and 29.6% in June, suggesting that wider price falls could be imminent”.

However, investors who have bought second homes in Bulgaria have plenty of reason to feel bullish. According to Knight Frank, the current annual house price growth is 32.2%, which is only slightly lower than the 33.7% recorded in the first quarter of the year.

Biggest fallers in 2008:
Latvia 24.1%
United States 16.8%
Estonia 16%
Lithuania 9.9%
Denmark 9.6%
Ireland 8.1%
UK 3.9%
Malta 2.7%
Germany 2.5%
New Zealand 2.2%

The information in this article is courtesy of Patrick Collinson (“House price crash goes global”, Guardian, 2 September 2008).

Find property in South Africa.

Tricks of the Investing Trade

Bear Market Survival

With damning statistics and predictions of impending economic doom, it is no surprise that many investors are tempted to believe that the local markets are in crisis. According to an article published in The Times however, the experts say that equities will always outperform inflation in the long term – the trick is to hang in there and ride out the storm.

Graham Ledbitter, senior portfolio manager at BoE Private Clients, says that equity markets should always outperform both inflation and cash in the long term, except in countries afflicted by civil war or gross economic incompetence.

“The statistics show that over the past 48 years, shares on the JSE generated a total return of 20% a year compound. For the same period, inflation was 8.6% a year, while cash before tax returned only 9.8% over the same period,” says Ledbitter.

He goes on to argue that the reason behind the relatively strong performance of equities lies in the necessity for all countries to develop their gross domestic product (GDP) in real terms over time. “Virtually all countries need to have a growth strategy in order to prevent unemployment as populations grow. In simplistic terms, a growing GDP leads to growing profits for companies, resulting in growing dividends, which causes share prices to rise,” Ledbitter says.

In fact, most major economies, including South Africa, were growing at a strong rate until recently. Corporate profits and dividends were good and stock markets responded by generating very strong returns, especially the local bourse. “When the stock market is in a bull phase, all good news is pounced upon as an excuse to drive share prices higher and bad news just gets brushed off as irrelevant. Conversely, in bear markets bad news drives share prices lower and good news tends to be regarded as irrelevant,” according to Ledbitter.

The senior portfolio manager at BoE Private Clients notes that the current downturn in the market is only one of many economic ‘crises’ over the last few decades, which include the major collapse of the rand following P.W. Botha’s notorious ‘Rubicon’ speech and the global stock market collapse in 1987, which wiped a value of 38% off the JSE in just a few days.

Negative sentiment also had a profound impact prior to the elections in 1994, when nervous investors believed that the incoming ANC government would expropriate or nationalize property. There were similar feelings that came to the fore during the emerging-markets crisis in 1998, where certain governments defaulted on their debt, as after the 9/11 attacks in 2001 and the collapse of the rand in the same year.

“In each case…it appeared to many investors as if there was no way out and that nothing would ever be the same again. But in each case, the world didn’t end. Nor will it end now. Problems will get sorted out, growth will resume and shares will start rising again,” Ledbitter asserts.

He goes on to say that once you have made your investment, you should not get over-excited when the price rises or nervous if it declines and should rather “fix in your mind the long-term returns on equity – that is 20% a year compound. And with that in mind, relax and enjoy your share investments”.

According to the latest Merrill Lynch fund manager survey, 50% of local managers are bullish on equities and relatively few are bearish on bonds. When it comes to the commodity market, 25% of managers think it is undervalued, with 69% seeing more buying opportunities. A total of 44% want to invest in construction, beverages and food producers, bond and offshore investments, while domestic cash levels fell to 15% this month.

Mark Appleton, chief investment officer at BJM Private Client Services, says that resource shares are looking significantly more attractive after an average pullback of 23% since the end of June. He says that resources have under-performed considerably in the industrial and financial sectors recently and this has created a buying opportunity. The valuations for quality blue chip resources are well below ten times earnings, which presents the perfect opportunity for companies to add to their portfolio.

Tips on surviving a bear market:

- Have a sensible time line – about five years or longer and do not try and time the market.
- Buy shares in companies that have been around for a long time and have consistently produced good earnings and dividend growth
- Spread your investments over several sectors – do not concentrate them in the flavour of the month or ignore one that is out of favour
- Invest in shares that pay good dividends and if possible, re-invest so that they compound over time
- Buy a business newspaper every day and read about companies that either interest your or in which you have made an investment
- Only sell shares if there is a fundamental reason to do so, not due to fall in share price and the reverse also applies.

The information in this article is courtesy of Madoda Milazi (“How to survive the bear market”, The Times, 1 September 2008).

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