Property fundamentals explained

Johannesburg - Players in the listed and residential property industry often attribute healthy returns and still-growing house prices to the fact that South Africa's fundamentals are solid.

So what are the property fundamentals, and what makes them solid?

Supply and demand are the basic fundamentals of non-residential property, according to Erwin Rode of Rode & Associates. If there is an oversupply of office and industrial buildings, speculators and property developers struggle during bad times, as buyers will simply shop around and find a cheaper option.

Replacement and construction costs also affect the supply side of the property industry. When cement prices soared, it became more expensive to develop properties, resulting in smaller supply and eventually a rise in rentals.

However, during the recession and despite a property boom in 2007 which boosted development, South Africa's oversupply of properties was still at lower levels than 10 to 15 years ago.

According to analysts, the demand side of the property industry is affected by the country's economic health. In a recession, companies and households simply can't afford their property payments. A good indication of confidence levels is that retailers won't take out new space if they believe people won't be buying their goods.

Rode said tighter lending criteria by banks before the recession also ensured that property fundamentals remained solid. "They curtailed the country's excesses," he said. This helped prevent households from losing their homes due to over-indebtedness.

One of the reasons property values in the UK and US dropped to epic lows during the global financial crisis is that banks were struggling to survive. Because the banks could not refinance listed property companies when their debts came up for maturity, they called on these companies to repay the debt.

Naeem Tilly of Avior Research said this resulted in firesales, where the companies had no choice but to sell their properties to finance their debt. In turn, valuations also dropped and the entire industry saw its values eroded.

South Africa's banks never found themselves in the same dire situation and were able to refinance the property companies' debts. However, banks still upped the interest charged on debt, making it more expensive for companies to finance the building of offices, warehouses and shopping centres.

Economic growth, the strength of its banks and the relatively healthy state of household finances meant that South Africa's property fundamentals were solid enough for house prices to start showing real growth again at the beginning of 2010, and listed companies to report total returns to their shareholders.

 - Fin24.com