Real Estate Investment

The residential property market in South Africa as an investment vehicle !

It’s no secret, in the past few years since 2000, the residential property market in South Africa has outplayed, outwitted, outsmarted all other investment vehicles. Those heady levels may well have softened, but there are still positive, steady signs of real estate growth ahead, particularly in certain sectors of the property market. The South Africa residential property for sale market continues to be buoyant and even though houses for sale price growth has slowed down, houses for sale prices have not fallen and are not expected to.

Over the past few years since 2000, the residential property for sale market has performed extremely well following many years of mediocre growth in the real estate market up to the late 1990s. Between 2000 and 2006, average houses for sale price growth of around 20 per cent per annum was achieved in nominal terms and about 14.5 per cent per annum in real terms. The main support for this performance came from real estate economic growth of around four per cent per annum during this period. This was driven by factors such as real estate land availability, declining inflation, low interest rates, strong growth in real household disposable income and a rapidly growing middle class (boosting the demand for real estate housing in South Africa).

The growth in houses for sale prices may have softened substantially from the heady levels achieved in 2004 and 2005 but there are still areas of the real estate property for sale market that are outpacing others. Houses for sale price growth have become relatively flat across the board but there are noticeable differences in various price segments. Recently, faster real estate growth has been recorded in the lower and middle segments of the real estate property for sale market than among the upper end.

Nominal houses for sale prices in the affordable real estate segment (houses for sale of 40m² to 79m² and priced at R370 000 or less) increased by 18 per cent year-on-year to almost R250k on average in the second quarter of 2007. In real terms, houses for sale price growth in the affordable real estate category came to 10.3 per cent year-on-year in the second quarter.

In the middle-market segment (houses for sale of 80m² to 400m² and priced at up to R2.7­million), nominal house sale prices increased by an average of 15.3 per cent year-on-year to about R919 000 in this year's second quarter. In real terms, house sale price growth in this real estate category came to 7.8 per cent year-on-year. In both nominal and real terms, the year-on­-year growth in house sale prices in the second quarter was down on that of the first quarter, when it was a nominal 15.7 per cent and a real 9.2 per cent.

Nominal house sale prices in the luxury real estate segment (houses for sale valued at between R2.7­million and R9.9-million as luxury property) increased by an average of 9.2 per cent year-on-year to around R4.1-million in the second quarter of 2007 (8.5 per cent year-on-year in the preceding quarter). In real terms, house sale prices in the luxury real estate category increased by 2.1 per cent year-on-year in the second quarter (2.4 per cent year-on-year in the first quarter). Although house sale price growth in the luxury property category has been well below that of other segments of the property for sale market for some time, this real estate category of housing is influenced by factors other than economic growth, inflation, interest rates and household income in South Africa.

Some additional factors that may have an impact on real estate property for sale  include legislation and regulations (Capital Gains Tax; real estate property rates and taxes; and future luxury property housing developments); living trends (various types of real estate; views, especially along the coast for coastal property; and area); exchange rate movements, especially with regard to foreign investment in local property for sale; and the performance of other asset classes (the equity, bond and money markets, locally and internationally, as well as commercial and listed property for sale). Real estate housing at the upper end of the real estate property for sale market is sometimes not financed by means of a mortgage loan and macroeconomic factors sometimes play a lesser role in the decision to purchase a property for sale in South Africa.

According to the House Sale Price Index (HSPI), for the second half of 2007, nominal house sale price growth for residential property for sale averaged 15.5 per cent and is expected to stabilise at around 11.5 per cent in the first half of 2008. This is on the back of an upward trend in interest rates and the possible effect of the National Credit Act, bringing average house sale price growth to about 13.5 per cent for the full year. Nominal house sale price growth of 15.2 per cent was achieved in 2006.

The bank's latest House Sale Price Index (HSPI) for July shows that house sale price growth for houses for sale in the middle property for sale segment of the real estate market was a nominal 14.5 per cent year-on-year. This caused the average price of a house sale to increase to around R 932,100. For the first seven months of the year, average nominal house sale price growth was 15.4 per cent compared with the same period last year. This is expected to slow down further in the remaining few months to average around 14 per cent for the full year.

Based on the headline consumer price index, real year-on-year residential property growth in house sale prices was 7.5 per cent in June, compared with 7.9 per cent in May. Between January and June, real residential property for sale growth in house sale prices averaged 8.5 per cent year-on-year. On a month-on-month basis, nominal house sale price growth slowed further to 0.5 per cent in July (0.7 per cent in June), which was the slowest nominal month-on-month real estate property for sale growth recorded since September 1999 when it was 0.4 per cent. In real terms, house prices declined by 0.1 per cent month-on-month in June. Since March this year, house prices remained static in real terms.

In August, the Reserve Bank's Monetary Policy Committee (MPC) announced a hike of 50 basis points in the repo rate, this then caused banks to raise their prime and mortgage loan interest rates to a level of 13.5 per cent. Interest rates have been hiked by a total of 300 basis points since mid-2006. A wide range of factors contributed to the latest rate hike. CPIX inflation has been above the six per cent upper limit of the inflation target range for three consecutive months since May this year, driven by factors such as high international oil prices and a weaker rand exchange rate, while food prices have moved higher in recent months on the back of demand and supply conditions all of which effected the real estate growth in South Africa.

Short- to medium-term inflation expectations are forecast to remain on the upside in view of above-inflation wage settlement rates in various real estate sectors of the economy. Although there are signs that consumer demand is gradually tapering off, year-on-year growth in private property for sale sector credit extension is still well above the 20 per cent level. However, the effect of the NCA will only become visible during the next few months, with growth in real estate, residential property for sale, credit extension, including mortgage loan advances, expected to be markedly lower by the end of the year from current levels – this should have a positive impact on the real estate property for sale industry in South Africa.

In 2008, nominal houses for sale price growth is expected to average around nine per cent, driven by higher inflation and interest rates, lower economic growth, slower growth in real household disposable income, and the impact of the National Credit Act. From 2009 and up until about 2011, the residential property for sale market is forecast to be on an upward trend in terms of levels of activity and real estate price growth, largely driven by stable to lower inflation, declining interest rates, rising real economic growth, and improving real household disposable income growth.

Explanatory notes: The House Sale Price Index (HSPI) is based on the total purchase price of houses for sale in the 50m² to 400m² size real estate category, valued at R2.7m or less in 2006 (including residential property for sale improvements), in respect of which mortgage loan applications were approved by the banks. Prices are smoothed in an attempt to exclude the distorting effect of seasonal residential property for sale factors and outliers in the data. As a result, the most recent index figures may differ materially from previously published figures for residential property for sale in South Africa.

Author: Realtors Residential Property | Sponsor: South Africa Property for Sale

Volume 2: Reasons for property investments ! (continue)

Make use of a variety of financial structures

I do this for security and financial planning reasons. People do everything in their own names instead of in an entity. At retirement age you could make an error of judgement and everything you possess could be lost. Rather spend the money now and pay the legal fees to get the structure right - create a trust or register a business and protect your real estate property. You cannot do this with a policy.

It is a secure investment

It is called real estate. Banks say that fixed deposits are safe. Nothing that resides merely on paper is actually 'safe'. It is nothing more than a pledge (subject to many conditions), it is not tangible. Real estate property is tangible. For the same reasons people revert to gold in uncertain times.

You can be in control

You can't control politics, inflation, interest rates, or corporations' behaviour. These things drastically affect any policy or investment. You have much more control over real estate property, you can sell property when you want. If the interest rates drop you still have the capital value in the real estate property to fall back on even if other investments start failing.

You can manage the risk

By plotting the results of a variety of variable conditions (such as interest rate hikes) you can minimise the risk. In this way you can predict outcomes of several 'what-if’ scenarios. With other investments you have other people deciding what to do and you don't know what the end result will be. With real estate property you can withdraw whenever the risk exceeds the limits you set for yourself and know immediately what the outcome will be (if you have the real estate property sale software program and know how to use it).

You can analyse the property deal

Look at all the variables and identify what will happen if each of them increases or decreases. They are all visible and identifiable, so one can manage and measure them. There is not much that is unpredictable and one can factor in every variable right upfront (if you have the real estate property sale software program and know how to use it).

You can improve the investment with little or no cost

Fixed deposits cannot be touched or improved - the interest rates are quoted in advance and you are locked into the deal for the duration of the term (with heavy penalties for withdrawing early). By changing the nature of the real estate property - e.g. from a block of flats to sectional titles; if done properly it can cost you nothing but your income and the value of the real estate property could rocket. Rezoning the real estate property is another example.

There are amazing real estate bargains

If you differentiate between the price of a real estate property and its value you can pick up huge bargains by offering cash, or other terms which will influence the person to sell at a bargain property price. On the stock market this is only possible through futures and warrants and even then the discount in real estate property sale out-performs these speculative investments. Learn to look at the deal behind the property deal - the best bargains are hidden behind the face value - you need to teach yourself to look beyond the obvious.

You can negotiate

Fixed deposits are not negotiable, the interest rate and term is quoted upfront. With real estate property one can negotiate almost every participant: with the property owner (price), the estate agent (commission), the lawyer (fees), the bank (term, percentage, overdraft facility). You can even negotiate the amount you pay back - e.g. an interest-only loan or alternatively you can pay only 50% of the repayment for the first two years and capitalise the rest.

You can predict economic cycles

Buy when everyone else is selling property. A fixed deposit is fixed on a level, it is not matched to a cycle. You can act against a cycle when it suits you, or with a cycle when it is on the up. You cannot predict what effect a down-cycle is going to have on another investment.

Free market

There is no inherent price attached to a real estate property sale, it is a perceived price, a price by consensus. And because there is no price control, one can say that real estate property is one of the most ‘free’ investments you can make. It is a great example of the free market system where a combination of the forces of supply and demand ultimately determine the price. It is true that sometimes prices are inflated because of the demand. But the skill lies in spotting the real estate property for sale that is priced lower than the market would normally pay for it – and we will soon discuss the reasons for such low-priced properties.

Passion for real estate property

I believe that real estate property investment requires passion, it requires learning the skills and putting the principles into practice. The more you practice, the better your skills will become and the more you’ll be able to start working on certain hunches – the gut feel will become stronger and this will indicate competence. But you have to carry on searching! The real estate property ‘deal of a lifetime’ is all over the place. These real estate property deals exist all over, every day! The challenge is to spot them.

Author: Realtors Houses for Sale | Sponsor: South Africa Real Estate