Property Sector’s Slow Recovery

TradeInvest Africa (Cape Town)

28 June 2011

analysis

South Africa’s property market took a big knock during the recession and as the local population continues to be affected by high debt levels, fluctuating business confidence and high unemployment, the recovery is set to be slow.

One of the major causes of the recession in the late 2000s was the bursting of the US housing market bubble. South Africa was badly affected by the recession but it was not directly caused by a local property bust. South Africa’s economy experienced its first year of economic contraction in 17 years in 2009 and with it came a drop in spending, increased unemployment and increased indebtedness. This had a negative impact on both individual and company activity in the property market and continues to hamper a more robust recovery.

South Africa’s property market was riding a wave of large returns during the mid-2000s, with overall returns in the commercial and industrial property markets varying between about 15 and 27% per year1. Residential property growth was also extremely high, with growth as high as 30%2 in early 2005. The market then took a big knock in 2008 and 2009, with the residential property market shrinking in 2009, while the commercial and industrial properties markets experienced reduced growth in 2009. The growth in these latter two sectors was around 8%3, which was significantly down from the 30%4 growth experienced in 2005. The property sector has shown some signs of recovery but there are still challenges ahead.

Residential property

The South African residential market experienced some of the highest growth, worldwide, in home prices in the mid-2000s. The overall price of residential properties rose at rates as high as 35%5 during early 2005, particularly the case of the high-end market and partly supported by high demand from foreign buyers. The prices did, however, start to drop off after this in the later months of 2005 but continued to see fair growth until 2008. By the beginning of 2009, the average property prices started to drop and the industry started shedding jobs at an alarming rate as fewer and fewer estate agents were needed.

There was some growth in 2010 again but by the beginning of this year, growth had slowed to virtually nil. The real growth rate in property prices actually decreased in the first quarter of 2011, as the inflation rate remained above the growth in property prices.

There have been certain positive trends to emerge during the past year or two. The first has been the continued growth of estate property.

While the demand for freehold properties has diminished between the 2008 and 2011, the demand for homes in security estates has continued to grow. There is a hope that this will remain one of the growth areas in the sector. Another encouraging sign has been the emergence of the black middle class in the mid- to upper-bracket of the residential property market. This sector will continue to be a major driver in the residential market as the South African economy continues to become more representative and there is a growth in future generations of black middle class people.

The residential sector will continue to battle if debt levels remain high but it is hoped that decreasing home prices will entice new buyers.

Commercial property The commercial property sector has had also been hit by companies struggling with the recession’s effects. According to Paul Duncan, Investment Manager at Catalyst Fund Managers (a fund management business, specialising in the analysis and investment in the real estate sector), “Commercial property fundamentals have been weak over the past 18 months but there are signs of improvement recently, with an increase in the level of enquiries for good quality commercial space.” Duncan says that vacancy levels appear to have troughed but only when they start to drop, will market rentals start to improve again.

His assessment of the prospects for the commercial property sector for the next year are that, “although vacancy levels have troughed, a recovery and filling of this space is probably 12 months out, with market rentals still being weak. The growth in the sector will come from the longer term leases, where the contracted annual increases in rent will drive it.”

Positive trends in city infrastructure development

The inner city renewal projects, particularly in Cape Town and Johannesburg, have been very successful in revitalising these areas, with significantly improved safety and cleanliness, being accompanied by more investment and greater demand for the property space. These areas will join the ranks of high-demand property zones and support the growing portion of the sector.

These initiatives have been accompanied by new transport projects, including the Rea Vaya Bus Rapid Transit System in Johannesburg together with the Gautrain and the MyCiti bus service in Cape Town. These major projects have made the city centres better connected with a larger number of suburbs and have made pubic transport more desirable for people in most income brackets.

Lastly, the world cup has left a great legacy in terms of the districts surrounding some of the stadiums, particularly in Cape Town and Durban.

The new stadium areas have become frequently visited areas by both locals and tourists and therefore provide a good location for nearby retail and/or residential properties.

Moving forward

South Africa’s property sector is set for a slow recovery, with vacancy rates still high in the commercial and industrial sectors and a depressed appetite for residential property. Signs of improving manufacturing output and improved retail sales over the past 18 months are signs that these property conditions could be improving. A rise in demand and consumption of all products could very well lead to the reserve bank raising the repo rate and this would then again have the effect of raising the burden of debt on all lenders. This precarious position is what the property sector will face in the coming year.

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