At the end of 2013 industry experts all agreed 2014 would be a good year for the property industry, and to date they haven’t been proven wrong. Despite challenging economic conditions and barely avoiding a recession, the property industry has remained stable. The Rode report released by Erwin Rode in May this year showed that market rentals, industrial rentals and house prices have all maintained reasonable growth in the beginning of 2014. But, with lacklustre economic growth, a rise in the interest rate and South Africans under financial pressure, what will 2015 bring? We asked the experts to give you their property predictions for 2015.
What will happen during the first six months of 2015 in the property sector?
Tony Clarke, MD of Rawson Property Group, says: “The hikes in the interest rate over the course of 2014 and the predicted future hikes (expect up to 10.5%) will make it more difficult for buyers to qualify for mortgage finance, which will decrease sales volumes across the board in South Africa’s property sector. I believe that although sales volumes will dip for the remainder of the year, they will still show positive growth during the first six months of 2015. House price growth (which is currently still single-digit) is likely to remain constant in the first two quarters of 2015, however, I don’t think the drop will be too significant and in most price brackets, the growth will keep abreast or ahead of inflation. The property sector is going to face challenges in 2015; however, on the whole, the outlook is still positive and most areas will remain healthy.”
Richard Gray, CEO of Harcourts, says: “Stock shortages in the middle price range will continue, but developments will start to fill the gaps. These developments will become more prevalent and projects that struggled to sell in the late 2000s will become more viable. The market will continue its move to a seller’s market, with reasonable prices being achieved. Rising interest rates will have a moderate impact on the market, and will dampen some of the growth. First-time homebuyers will continue to provide impetus for the property market. They will create market churn as long as the banks continue lending to them. Bank lending will continue to be cautious, but market share will be important for them, as they move away from unsecured lending.”
Private Property’s COO, Simon Bray, says: “One thing appears to be true of the post-boom property market in South Africa, consistency. Nothing particularly volatile has happened in the market since the credit regulations of 2008. We see slow but steady recovery in transaction volumes and this trend should continue into the first half of next year. One thing that is encouraging is the significant growth in the new development sector. This increase in supply should stimulate fresh growth for 2015.”
Berry Everitt, MD of the Chas Everitt International Property Group, predicts: “We are expecting house price growth to slow down noticeably by winter next year, due to increasing affordability constraints on buyers arising from higher living costs (inflation), higher interest rates and extremely slow economic growth. These constraints, we believe, will outweigh the normal upward pressure on prices that occurs when the demand is much higher than the supply of homes for sale – as it is now and is also likely to be at the start of 2015. My forecast is thus for house prices nationally to grow by no more than 7% during 2015 as a whole. However, different micro-markets will, of course, do better – the metros, for example, are likely to substantially outperform the non-metro areas as people continue to be attracted to the greater economic opportunities they offer.”
Brian Azizollahoff, MD of Capstone Property, says: “It seems that interest rates will remain fairly flat with another 25bps predicted in the short term. I have heard the theory that there may not be any further hikes as a result of the African Bank debacle. With the fallout from ABIL’s troubles, there is a real threat that the availability of small loans to the mass market will be curtailed. This has implications for unemployment and growth, and consequently the Reserve Bank cannot afford to hike rates. Nevertheless, the environment of higher interest rates has been created and this means higher yields within the property sector. We are already seeing yields moving up and this will continue into 2015. Office rentals will continue to soften due to oversupply and slow economic growth. There is good demand for industrial space and in many nodes vacancies have been reduced to below 2%. The supply of regional retail space has continued unabated and now it is purely a case of retail centres cannibalising each other.”
Marna van der Walt, CEO of Excellerate Property Services, predicts: “During 2015 it is anticipated that the commercial property market will remain under pressure, with landlords continuing to prioritise containment and reduction in operation costs. As a consequence, the trend towards utilising property management companies that are able to provide a broad range of property related services – all under one roof – combined with cost efficiencies, will increase exponentially. Gradually increasing interest rates is on the cards, with inflationary factors such as utilities costs as well as labour issues likely to remain a general concern with regard to the economy. However, the commercial property market – including the retail sector in particular – remains resilient due to the strong South African shopping culture, even with the constrained consumer disposable income, stricter credit lending criteria and debt issues, which will carry over into 2015.”
Adrian Goslett, CEO of RE/MAX of Southern Africa, believes that the interest rates will increase slightly, however, he doesn’t expect this will have any real negative impact on buying patterns. “There will also be continued steady improvement in the market with house prices in metro areas beginning to rise due to lack of supply.”
Nicky Weimar, senior economist at Nedbank, says: “Over the past four years the residential property market has moved to firmer ground, but the recovery has been painfully slow. On average, property prices are growing at between 7% to 8%, but on thin volumes. Over the past three months, demand for mortgages has improved, and we have seen an increased willingness to extend mortgages among the major commercial banks. While these developments are generally positive, household finances have deteriorated, hit by higher inflation and the long strike in the mining industry and later in the manufacturing industry. Added to this, household debt burdens remain high and debt service costs are rising given the hike in interest rates. We therefore expect some moderation in the demand for and prices of residential property in 2015 as households tighten their belts in response to pressure on income and higher interest rates.”
Where will the biggest areas of improvement in the property industry be?
For Clarke, it’s homes in the R800 000 to R1.5-million range that are likely to see the highest price growth in 2015, while other price brackets are likely to see satisfactory growth. “The more expensive, upper-bracket homes, i.e. homes in excess of R5-million as well as holiday homes will probably not see significant growth.”
Bray says: “We still see significant room for improvement in the property transaction process. The average property still sits on the market for six to eight months before being sold and, in that time, goes through a frustrating cycle which we believe could be improved. All sorts of opportunities exist to speed this up, including, price education for sellers, estate agent turnaround times with buyers, effective marketing and presentation of properties for sale. We have some innovations in this space that we hope will speed up the process and with it bring real improvement to the overall market in 2015.”
Weimar thinks there has been good growth in affordable housing. “We generally expect this segment to remain robust, given the country’s historical legacy and the fact that the fastest employment growth is occurring in the public sector, with most of these first-time buyers. A sustained and strong improvement in both volumes and prices within the higher to luxury segments requires a more robust economy, greater confidence in property as an asset class and a significant improvement in general confidence levels.”
Pam Golding’s CE, Andrew Golding, thinks improvement could come from a number of sources. The top five in his books are:
• Accelerated house price appreciation off the back of increased stock shortages and increased buyer confidence.
• The long awaited genuine re-emergence of the second home and leisure market.
• Given affordability issues, which are a global phenomenon for aspirant homeowners (in particular first-time homeowners), the continued improvement in the buy-to-let market and the strength of the letting market generally.
• Off the back of stock shortages, the re-emergence of the development market/new build market.
• Notwithstanding rumblings of restrictions on foreign owners in government circles, the potential for increased foreign interest.
Chris Renecle, MD of Renprop, says: “I hope that the financial institutions have realised their error in focusing so much on the unsecured loan market. We hope that they will, despite Basal requirements, shift their focus to start lending more freely in the secured finance market.”
In the commercial sector, Azizollahof says: “Small retail centres with a grocery anchor and a few line shops in areas that have previously had no retail will continue to flourish as local residents utilise these centres to save transportation costs.”
Van der Walt says: “With regard to improvement in the commercial property market, the fundamentals need to stabilise before business confidence can increase. Landlords will continue their endeavours to retain tenants by offering competitive rentals and generous tenant installations.
From an investment perspective, office vacancies are still likely to be an issue and buyers are far more risk averse than a year ago. The best returns are still going to be with long-lease properties and with a strong cycle of development in key office nodes throughout South Africa. With more stock available on the market, businesses are thinking smart and there’s a marked, ongoing trend towards consolidation in order to conserve costs – in other words, relocating their offices or operations onto one site.
For warehousing and distribution users, easy access to transport such as major highways and airports will remain a priority as they continue to seek locations that are central to their specific operations and close to their client bases. These include areas such as Midrand and Centurion. Modern space is increasingly in demand and we see mainly two types of users – flourishing, high-profile, growing businesses typically look for larger, more practical modern space, and those who are moving to smaller, more economical space. As a result, large properties with wasted space, i.e. low roofs and a prevalence of supporting structures like pillars taking up floor space, will stay on the market longer.
Investment in industrial property is focused towards the industrial nodes that are central, offer value for money and where new ground is being opened up, such as Waterfall, and to some extent around airports. The trend in the industrial investment market will remain very much around long-term efficiencies and new green facilities. In terms of legislation, the Protection of Personal Information Act (POPI), which provides for the constitutional right to privacy and regulates the way such information is processed, has implications for the commercial property sector and this act needs to be taken into account by all stakeholders.”
Which types of housing will show the most growth in 2015?
Samuel Seeff, chairman of Seeff Properties, says: “The affordable sector, sub-R1.5-million, is likely to continue to see the strongest demand, but this is, of course, where interest and cost hikes are felt the strongest. Similarly, the low economic and job growth, high household debt levels, poor credit records and difficulty in obtaining home loan finance are likely to remain a challenge for this, which is the bulk of the property market. But, in sectional title properties, smaller, more compact homes will continue to be in high demand, both for affordability reasons, but also for security and the low maintenance required. Across the board, security will continue to be one of the biggest drivers, at the top end; the move to security estates is likely to continue strongly and such estates will show strong demand and good growth as a result.”
Goslett believes that gated communities are still on the rise. “Security in South Africa will continue to be a major factor. Homes with fewer maintenance requirements continue to be popular – mainly due to increased utility / municipal costs,” he adds.
Timothy Akinnusi, head of Sales and Customer Value Management at Nedbank Home Loanspoints out that the growth rate in different housing types is depending on the market segment (affordable to middle market) and the development cycle of the community. “As an example, in the newly developed urban areas, the fastest growing housing type is gated communities and mixed housing. This growth is driven largely by the increased need for security and community living that enables an ecosystem of everything in one area, from hospitals and schools to retail and entertainment facilities all within a 3km to 5km radius,” he says.
When asked about which areas he would recommend for investment during 2015, Akinnusi said it would be difficult to name areas; however, he would suggest investing in those that are experiencing rejuvenation with a good prospect of future infrastructure development in the area. “As the middle class in South Africa continues to grow, so the need for housing over the next five to 10 years will continue to grow. The growth will put pressure on the supply of housing in quality areas, which will result in real house price growth and hence good investment value in future,” he says.
What will be the most influential factors for determining the property industry’s results in 2015?
The most influential factors that will determine the property sector for 2015 according to Renecle will be the political landscape and the financial institutions. “Increasingly tough legislation around the property market will contribute to an already difficult business environment. The growth, or lack thereof, in the South African economy and therefore the property market will largely depend on what happens in the political and financial lending arenas. We should be following the rest of the world in terms of post-recession growth, yet we are not,” he says.
Bray says: “A healthy supply of credit remains the biggest factor driving market growth. If banks continue to grow their lending book as we have seen them do this year, then 2015 should be a good year for the property market. However, as the major banks are multinational businesses, they continue to be at risk from the global recession; this as well their recent credit rating downgrade by Moody’s may put pressure on their appetite to lend.”
Herschel Jawitz, CEO of Jawitz Properties, adds to this: “Aside from bank lending, interest rates and consumer confidence will be the two key factors in the market. Interest rates obviously impact on affordability, especially for first-time buyers who are most interest rate sensitive. If this market slows, it will impact on the overall recovery of the residential market as the market must recover from the bottom up! The other factor is consumer confidence. Residential property is a long-term buying decision and if consumers are feeling less confident about the economy of their personal circumstances, long-term buying decisions may be deferred. Interestingly, according to the latest FNB/BER consumer confidence index, consumers are feeling more confident about where they will be in 12 months’ time versus how they are feeling now and that is positive for the market. The real challenge for buyers is that with property prices rising, getting into the market is only going to become more expensive or difficult, whether it be higher deposits required or affordability of repayments, so despite possible future rising interest rates, it is still a good time to buy.”
What legislation will have far-reaching consequences in the property industry in the year ahead?
Gray believes it is the Property Practitioners Bill. “This has the potential to change the way that all estate agents and estate agencies operate and will need to be carefully analysed. Companies that can react best to the changes envisaged by this bill will have a huge competitive advantage.” Golding agrees that the most important legislation in 2015 is the pending revision of the existing Estate Agency Affairs Act into the new Property Practitioners Bill. “It will be extremely important in that it will govern the residential property industry for the immediate future, once it is promulgated.”
Lew Geffen, chairman of Sotheby’s International Realty in South Africa, says: “The first of these bills is the one proposing the limitation of foreign property ownership in South Africa. This may not affect property prices or even buying, but it will impact on the perception of South Africa in a negative way from a direct foreign investment perspective. In other words, it may not affect the housing market, but it will, in my opinion, affect the willingness of investors to get involved in other sectors of the South African economy. The second bill that will definitely affect the property market if it is passed is the one proposing 50% black ownership of all real estate companies. This is bound to be resisted by the industry as it defeats the process of the free market and could cause many real estate companies to close and many real estate professionals to simply take their business elsewhere. There is no denying that there is a need for transformation in the real estate industry, but this cannot happen by force. Government should rather think about incentives such as sponsorships for new recruits to the industry.”
We asked Nicky Weimar, senior economist at Nedbank, if she thought the interest rate would remain the same, drop or increase. “The Reserve Bank’s Monetary Policy Committee (MPC) has made it clear that interest rates are currently too low given trends in inflation, which is above the Reserve Bank’s upper 6% limit and likely to remain outside the target band for some time to come. The MPC has indicated that South Africa is in a tightening rate cycle or a rising rate cycle. Given these statements, one has to conclude that interest rates will increase further during the remainder of 2014, but also in 2015. The rand will be the key. The rand is currently very vulnerable given South Africa’s dependence on foreign capital inflows to finance our relatively large budget and current account deficits. Given that we need continued foreign capital inflows, much therefore depends on how foreign investors view the risk of putting their money into South Africa relative to the return they will receive. Risk perceptions towards South Africa have deteriorated as reflected by the series of sovereign risk rating downgrades since 2012, which have limited capital inflow and as a result weakened the rand, which in turn is inflationary. The rand is likely to be particularly vulnerable when interest rates in advanced countries, especially in the US, start to rise, as investors will then receive a higher return for very little risk by putting their funds into the US; to counter this, most emerging markets, including South Africa, will probably have to up interest rates in order to keep the funds flowing in, currency stable and inflation contained. The MPC is expected to increase interest rates by another 25 basis points before end 2014, and by another 100 basis points in 2015.”
The overall sense that seems to be pervading the property industry is that the next year will be tough economically. However, South Africans have already lived through one recession, and the property market is still recovering and showing steady growth for now. How long that growth lasts, however, will depend very heavily on economic growth.
Words: Angelique Redmond