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Investing in residential property

Aug 25 2017 15:36
Glenda Williams

Carel Grönum is managing executive at Absa home loans. (Picture: Supplied)

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The residential property market remains a mostly resilient one despite the country’s economic and political challenges. 

But unsurprisingly, consumer sentiment is subdued and that is impacting the performance of the residential market. 

According to Absa, properties are staying on the market longer. The current average is 15 weeks against 11 weeks in 2016. 

Asking prices are dropping, with Absa citing 92% of houses selling below asking price compared to 88% in 2016. Home loan applications are down 1%.
  
Yet 74% of those surveyed in the bank’s Homeowner Sentiment Index are still positive about the South African residential property market.

“The majority of consumers, three-quarters of them, still believe it is better to buy than rent,” says Carel Grönum, Absa home loans managing executive.

Significantly, 78% expressed positive sentiment about property as an investment. 

“As a vehicle for creating wealth, investing in residential property is still a good option,” Grönum tells finweek

And the recent interest rate cut of 0.25 percentage points is encouraging news for those hoping to step onto the property ladder.

Wealth creation

For the ordinary person in the street, growing wealth is intrinsically linked to growing equity in the largest investment they are likely to make – their home.
 
A well-chosen property is almost certainly likely to appreciate in value over time. Underpinning house price growth is location, supply and demand. 

Add to this the economic and political headwinds that influence the amount of equity homeowners can realise from their homes.

Yet subdued national house price growth of 3%, further impacted by inflation of 5.3%, paints a somewhat sombre picture. Or does it?

Turns out there’s reason for some optimism. Statistics reveal that capital growth is still very much achievable… in some areas.

The Western Cape continues to make headline news, outperforming the rest of the country with 8.6% house price growth, reports Standard Bank. 

Cape Town still tops the list of metros with the highest year-on-year house price growth, registering 13.8% for the second quarter of 2017, says FNB.

Andrew van der Hoven, head of home loans at Standard Bank, tells finweek: “Affluent buyers are still driving growth in coastal areas with cash transactions now accounting for around 54% of deals in the Western Cape.”
 
The country’s two most expensive markets, the Atlantic Seaboard and City Bowl, remain the strongest performing regions in the second quarter of 2017, the former registering 29.9% year-on-year growth and the latter 21.1%, reports FNB.

According to a Seeff study, Cape Town is now home to nine of the 10 richest suburbs in SA. Clifton tops the list with an average selling price of R23m. 

Sandhurst in Gauteng is the only suburb outside of Cape Town to make the list, coming in fourth with an average selling price of R16.5m.

Millennials too are making their mark along the Atlantic Seaboard and City Bowl. Three Anchor Bay, with its average price now R3.2m (up from R1.5m in 2012), tops the list of popular millennial suburbs on the Atlantic Seaboard with 31%, says Seeff.

While KwaZulu-Natal’s house prices have not really been able to beat inflation, the story is somewhat different along the North Coast where, according to Lightstone, the median price of properties in the last five years has increased by 48% in Umhlanga and 32% in Ballito.
 
“Semigration” of predominantly Gauteng buyers has been a big driver of demand for property in the Western Cape and the trend has also taken root along KZN’s North Coast. 

According to Pam Golding Properties (PGP), some 60% to 70% of buyers in the upmarket Zimbali area come from Gauteng. 

Residential property around economic hubs, those close to Gautrain stations and in areas benefitting from infrastructure and investor development continue to profit from demand and concomitant house price growth. 

So too homes in estates, the increasing demand for these homes evidenced by ongoing development of estates around the country. 

Take Investec Property’s development The Neighbourhood in Linksfield, Gauteng, where all 184 stands in Phase 1 are either sold or reserved. 

But house price growth, while important for wealth creation, impacts affordability.  

Affordability, the missing middle and first-time buyers

Gauteng remains the most affordable of the major metros, with Tshwane, Ekurhuleni and City of Johannesburg continuing to post low single-digit house price growth at 4.48%, 3.71% and 3.31% respectively, reports FNB.
 
“House price growth tends to drive out middle-income buyers who are the main drivers of demand in mortgages,” explains Standard Bank’s Van der Hoven.

Jacques van Embden, managing director of urban property developer Blok, says these buyers are driven into more “affordable” suburbs located outside of economic hubs, like Durbanville in the Western Cape, Lonehill in Gauteng and Waterfall in KZN.

Blok’s pilot 80/20 model FORTY ON L, an urban apartment development in Cape Town’s Bo-Kaap area with units priced between R1.975m and R5.1m, allows Blok to add 20% more apartments to its original scheme. 

These units, targeted at the middle-income market, will be made more affordable with those in the original scheme subsidising their land, finance and planning costs. 

The Western Cape’s more affordable areas are those on the Western Seaboard like Blouberg and Melkbos. 

Highlighting affordability deterioration in the metro, Cape Town’s first-time buyers average a mere 6.64%. In Gauteng, Tshwane and Joburg benefit from greater levels of first-time buying, outstripping the national average of 21% with 28.58% and 21.8% respectively, according to FNB.
 
There are high levels of confidence in Johannesburg’s vibrant Rosebank courtesy of the Gautrain and significant development like that of Redefine Properties’ Park Central residential development.
 
Rosebank is a popular destination for young professional home buyers who favour sectional title properties priced between R1.2m and R3.5m, says PGP. 

Historic Killarney meanwhile offers a somewhat more affordable option, the purchase of a one-bedroom apartment under the R900?000 transfer fee-free limit still doable.

Is it time to buy a second home?

“Currently, and for the next few years, we could see house price growth underperforming rental inflation, which would gradually lead to higher income yields on residential property. 

That means that gradually it will become a better buy-to-let opportunity,” John Loos, household and property sector strategist at FNB, tells finweek.

In addition, Loos expects holiday home buying to be put on the back burner. A 4.8% year-on-year price growth in holiday house prices remains a reasonable rate in a weak economy, but Loos expects primary residential demand-driven cities to outperform holiday-town markets for the foreseeable future.

“I’m not convinced that holiday-home markets will benefit from what we expect to be a small rate cutting cycle (a further 25 basis-point cut is expected in September). Despite the rate cut, the environment is one that I think will create a more financially cautious household sector where luxuries such as holiday home buying are put on the back burner by many.” 

Looking ahead

Loos says the household sector is already significantly less vulnerable to interest rate hiking or economic shocks than it was back in 2008 due to the decline in the debt-to-disposable income ratio.

Despite subdued homeowner confidence expectations for the balance of 2017, and real price deflation of around 2% expected for 2017 and 2018, there is some cause for optimism.
 
This year’s consumer price index figure of 5.3% is an improvement on 2016’s inflation of 6.3%, and an additional interest rate cut expected in September will further alleviate financial pressure on consumers.

Add to this next year’s performance improvement predictions. The economy is expected to grow at 1.2% and FNB predicts national house price growth of 4.7% in 2018, all of which could positively influence market sentiment and in turn the performance of residential property.

This is an extract of the cover story that originally appeared in the 24 August edition of finweekBuy and download the magazine here.

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