In what could be described as the perfect storm, South Africa finds itself at the centre of three major challenges – and one exceptional opportunity. How does state capture, a record drought, several corporate scandals, and a new President affect property?
The economy and politics
When we break property investment down to its basic core, we see that people’s access to funding plays a central role. The more an economy struggles, the less disposable income citizens have, the less they have to spend on homes.
This impacts the real estate investment world in two ways: on the one hand, those with access to capital may be able to pick up a bargain in a struggling market.The challenge would arise when trying to rent your property to prospective tenants with a small budget. For those looking to get into property investment for the first time, high interest rates could prove difficult to overcome.
A central issue for many South Africans over the past few years has been the health of our economy and the subsequent credit downgrades by agencies like S&P and Moody’s. The 2018/19 Budget speech was crucial in avoiding further downgrades, with most South Africans waiting with bated breath for the country’s financial plan.
An austerity Budget of note, Finance Minister Malusi Gigaba announced that VAT will increase with one percentage point, the first time it’s been raised since 1993. Other tax hikes will be seen in the price for fuel, an increased estate tax of 25% for those above R30m, and the regular increase in sin taxes. Dr Andrew Golding, CEO of Pam Golding Property Group, remarks: “Given the hand they were dealt, government has performed a delicate balancing act which it is hoped will serve to reignite confidence in investment in South Africa, regain our global credibility and satisfy the credit ratings agencies.”
Richard Gray, CEO of Harcourts Africa, states: “The effect of these tax hikes impacts the man on the street in a direct manner, and this might have an effect on the rental market on the lower end.”
Household and property sector strategist at FNB, John Loos, remarks that the issue of affordability has had a profound effect on the Cape Town housing market. He explains that, when a housing market is strong for some time and affordability issues come into play, then demand usually slows as prices overshoot the market. Price inflation then slows until incomes catch up. Demand then strengthens once more.
Gray adds: “Overall it was a far more balanced budget speech than initially expected, with a focus on rebuilding, which is in line with the newly elected President Cyril Ramaphosa’s messaging.”
The budget speech also had some positive news for the property sector: Duties on the transfer of properties remain unchanged. This, along with the realistic and cohesive message sent out by the ruling party, is good news for investors. Mike Greeff, CEO of Greeff Proeprties, believes that property continues to be a good investment: “Malusi Gigaba’s 2018 Budget Speech has done much to allay the fears of investors and the public by presenting a balanced budget speech set within the framework of the State of The Nation Address”
Golding agrees: “Speaking from a property perspective, this is a market which is fuelled by sentiment, and as a consequence, a Budget which satisfies the above criteria – on the back of the election of President Ramaphosa – is expected to go a long way towards reaffirming investor confidence in real estate.”
Samuel Seeff, Chairman of the Seeff Property Group, emphasises the need for decisive action: “Although the succession of Cyril Ramaphosa as ANC and SA President has seen the mood in the country turn increasingly positive and his SONA 2018 address has sent the right messages, we need to see this translate into action. We need a return to economic and political stability so that investors can feel confident about investing and growing the economy.”
He explains that low investor confidence is already evident in the property market: “Since last year there has been an accelerating decline in activity, especially at the upper end of the price scale, being above R8 million in Gauteng and above R18 million in the Cape. Those who do not need to sell or buy, are preferring to hold back. This means fewer transactions and a decline in transfer duty paid to government.”
So, how exactly did the political fiasco of the last decade affect property? Following the ANC’s ultimatum to Zuma, involving a deadline to resign or face a motion of no confidence, the local unit strengthened by nearly 2% from intra-day highs of R11.91 to R11.72 after Zuma resigned.
Back in 2015, Zuma’s shock appointment of Nhlanhla Nene as finance minister lead to the Rand’s collapse. This triggered the appointment of Des van Rooyen as replacement, followed by Pravin Gordhan taking over after only four days. Then, in early 2017, Gordhan was replaced by Malusi Gigaba – part of a 10-person cabinet shuffle. Once again, the Rand suffered.
With a new President and, seemingly, a clear plan for economical and political stabilisation, the Rand is – and citizens of South Africa – are positive. Gray explains: “There are many factors that influence buyers and sellers willingness to engage in real estate transactions, however, to a large extent buyers and sellers gauge potential success on general reports and opinions of the market, especially in an emerging market.”
Back in December, Rory O’Hagan, CEO of the Luxury Portfolio division at Chas Everitt International reported that the “orderly nature of the [ANC] conference and the election of Mr Ramaphosa as the new ANC president seem to have broken the log-jam, and we have already received a flood of enquiries just in the past few days for homes in the R20m to R30m range in Johannesburg.”
As often happens in situations where drastic change is imminent, the market was cautious in the lead-up to the conference. “With [Johannesburg] being the financial capital of Africa, there is generally no real shortage of luxury buyers in Johannesburg, but they have been holding back over the past few months in the sense that they have been reluctant to spend more than about R10m to R15m, pending the outcome of the ANC conference.”
Following President Ramaphosa’s maiden SONA in February, the businessworld sighed a collective sigh of relief. Jabu Mabuza‚ Convenor of the CEO Initiative said: “With certainty‚ stability and consistency we are confident that the country should see the much-needed improvement in investment that will stimulate growth and ultimately create jobs.”
Banking Association of SA MD, Cas Coovadia added that it was a relief to finally have a presidency that is committed to “build a society defined by decency and integrity‚ that does not tolerate the plunder of public resources‚ nor the theft by corporate criminals of the hard-earned savings of ordinary people.”
President of Agri SA, Dan Kriek also adds: “We enthusiastically applaud the practical steps outlined to ensure policy certainty‚ reduce government departments‚ grow the local economy‚ attract investments‚ boost the manufacturing sector and grow the small business environment.”
Neeshan Balton, Executive Director of the Ahmed Kathrada Foundation summed up how most South Africans must have felt while watching SONA: “It has been a refreshing change to have a SONA without walkouts, without security personnel removing members, without signal jamming and most importantly, without a president whose words, especially about tackling corruption, rang hollow.”
A welcome addition to both the Budget speech and SONA, was the acknowledgment of the need for support and funding for drought-stricken regions of the country.
Speaking on the possible effects of Cape Town’s drought on the local property market, Tony Clarke, MD of the Rawson Property Group, admits that it would be naïve to think that Day Zero won’t affect property in the Mother City: “If we take the middle to upper end of the market, for example, I do think sales will start to slow. Semigration, a huge driving factor in this segment over the last few years, is unlikely to continue at the same rate until we resolve our water situation. That means we’re not going to have as many affluent Joburgers and Durbanites driving demand for luxury property, and prices could take a slight knock in the short term.”
Richard Day, Pam Golding Properties national general manager and Cape regional head adds: “A contained situation for a few months will not impact the longterm desirability of living in Cape Town, but a prolonged situation would temporarily impact sentiment and valuations in the short term.”
With the Western Cape declared a disaster area, property insiders predict future problems, should taps run dry. Residential rental properties, in particular, are seeing a change of pace.
Paul Stevens, Chief Executive of Just Property, says that some large companies are encouraging their Cape Town-based staff to stay with friends and families in Gauteng and work remotely until the pressure on the water supply lifts. “We may see an impact on rental properties up-country if this trend develops,” he says.
Rowan Alexander of Alexander Swart Properties says that he’s seen many developers who are adjusting their products to properties with smaller gardens, requiring less maintenance. “These changes have been positively accepted by the market, which realises that water scarcity is the new norm in Cape Town. Both owner occupiers and investor buyers have responded positively to smaller, lower maintenance gardens,” he adds.
Dorah Modise, chief executive of the Green Building Council of South Africa says that they have seen a change in how people think about water: “The fact that Day Zero now has a date that is within a few months, even if it has been postponed, urges most of us to act, irrespective of location.”
John Loos, FNB Household and Property Sector Strategist, emphasises that the drought isn’t the only thing affecting the Cape Town market: “Take into account that after a number of years of strong price growth, affordability is a problem in Cape Town and that dampens the market. This is already reflected in our recent first time buyers report as this category feels affordability challenges first.”
He does agree, however, that a ”lack of water is bad for an economy and means a negative impact on job creation and household income. This then filters through to dampening the sentiment in the property demand. So, my guess would be that it will have a negative impact via the economic impact. There could maybe already be such an impact in agricultural areas outside the Cape Metro.”
It’s too soon, however, to predict what could happen to the property market a few months down the line – especially with an ever-shifting day zero.
Steinhoff and friends
Of course, corruption wasn’t limited to the Presidency. In December, millions of South Africans were affected by the effective crash of Steinhoff shares. At the time of writing, the embattled international retailer suffered yet another blow, when the Amsterdam Enterprise chamber ruled in a case brought by Andreas Seifert’s OM Handels and MW Handels businesses that Steinhoff should amend its accounts for 2016.
The scandal shone light on the private sector, and how seemingly easy it can be to get away with inaccurate accounting. Shortly after Steinhoff CEO, Markus Jooste’s resignation, US-based Viceroy released a damning report that eventually saw almost 90% of the company’s value being wiped off the board.
In early 2018, the REIT-markets went on the defensive, amidst rumours that a large listed property fund on the JSE was next in line to be targeted by the infamous short-sellers. Several funds pushed their reports forward, in a bid to reassure shareholders.
In February, a report by 36One Asset Management was leaked amongst the investment community, suggesting that the Resilient group of companies – including Resilient, Nepi Rockcastle, Greenbay, and Fortress have been using questionable accounting methods.
In the first few weeks of the year, the companies’ share prices fell by as much as 27% .
The property market, as a part of the economy as a whole, is largely dependent on sentiment. With a revitalised presidency and increased competency regarding the management of Day Zero, South Africans have reason to be optimistic.
And Land Expropriation?
One of the most controversial statements in President Ramaphosa’s SONA speech revolved around land expropriation without compensation. It’s long been a talking point among politicians, with many South Africans nervous about the impact this could have on the economy. Time will tell how the Presidency chooses to navigate this sensitive topic, but how would it affect residential property?
Thus far, the discussion has revolved around agricultural land, says Berry Everitt, CEO of Chas Everitt International property group: “We have no reason to believe that this policy is intended to include residential property – or that it will have any effect on residential demand or prices in the future.”
The Constitution is also very clear on the rights of the property owner, something Chris Tyson, MD of Tyson Properties, finds reassuring: “There is more chance of being defrauded in a property transaction than the government taking the property away.”