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The Reserve Bank recently raised the repo rate by 0.5 percentage points –the second increase in a few months – and further increases are expected.
Economic growth is slowing down and the possibility of a recession is no longer excluded.
Business confidence is low and the government and business people are battling to prevent credit rating agencies from downgraded the country to so-called junk status.
Low international commodity prices are hitting local mines hard and they are increasingly scaling down their activities, or entirely closing their operations. The hardship also spreads to other companies in the supply chain.
This is all happening against the backdrop of severe volatility at home and internationally.
What do all these things mean for the real estate market? What are you to do: Keep, sell or look for bargains?
Confidence and affordability
Erwin Rode, property economist of Rode and Associates, said there is no doubt that confidence and affordability affect property value. However, the full impact of the difficult trading conditions are still to be felt. “Property is a lagging asset,” he says.
“Low confidence levels especially have an impact on commercial real estate,” he adds. “The events surrounding the dismissal of finance minister Nhlanhla Nene in December last year will spread to commercial real estate in the next year or so,” he stresses.
He points out that although good buys may become available, investors should take it slowly. Make sure that the investment makes sense in the long run, he says. “It is important to remember that this is not an ordinary recession. There may be many years of stagflation ahead for us. I will think twice or even more before I buy property, purely on the basis of slightly lower prices later this year.”
Rode says the entire property market has been slowing down for the past few months already. “Hard times are lying ahead,” he warns.
With the global and local economies slowing down simultaneously, investment opportunities are becoming increasingly scarce, Rode observes. “It’s becoming increasingly difficult to find a simple solution.” One should have invested more in overseas property before the rand decreased so badly, says Rode.
Those who are very pessimistic about the future of South Africa can still move their investments to other countries, but Rode is not that negative.
Agricultural land prices are mainly driven by the price of agricultural products, he says. In this market segment, some good buys can become available in the near future as existing farmers sell out due to the severe drought.
Drought brings opportunities
“This is one of the best options in the short term,” he says. Many farmers sell their farms because of concerns about land reform. “Then they move to town and other farmers farm successfully on that land,” he adds. It makes sense, because smaller farmers are eliminated in the process and larger farmers get scale benefits, which is necessary in the current environment where farming is becoming increasingly capital intensive, says Rode.
There are therefore now fewer farmers, but they do not necessarily produce less,” he explains.
Mike Schüssler, chief economist of Economists.co.za, says property prices have grown briskly in the last decade or so, but will fall further in real terms.
He says it will affect commercial real estate in particular. As pressure on consumers increase, more and more stores may close their doors, leading to an oversupply and pressure on the owner yield rates, he says.
In some places, however, property will keep on doing well, as in the Cape, where the increasingly aging population is retiring, said Schüssler.
If the population profile, with a growing number of older people and a large percentage of children, is taken into account, investments in retirement homes and around schools should perform well, he says. Numbers of university students, however, may decrease due to lower population numbers in that segment, as a result of the early impact of HIV/Aids, says Schüssler.
He thinks there are currently many offices that are empty and he would be cautious to invest in it, unless one deals with the very top market segment and customers who can pay. “Even in places like Sandton, offices are standing empty,” says Schüssler. Companies are increasingly trying to reduce their costs and allow staff to work from home. Other businesses close their doors and real rental income is declining.
Schüssler says he would rather stay away from office space as an investment.
The housing market is likely to grow more slowly in the next decade or so than it did in the previous ten to twenty years, says Schüssler.
He agrees with Rode that scale is important to make a success of farming and says investors in agricultural land must take this into account, as well as the effect of global warming. Other important considerations are rural safety, whether there are land claims on the property and – if so – what the status of the claims is.
Schüssler says that investors in agricultural land must ensure that they can afford it and that they have enough capital to put into farming. “Do not make too much debt at the beginning,” he says.
Farming is becoming increasingly specialised and one should not buy agricultural land unless one is very serious about agriculture and has the support of the people around one, Schüssler cautions.
According to Schüssler, storage space can be an interesting option in which to invest, and the development of online trading can promote it. “However, one should know that market well if one wants to successfully invest in it,” he emphasises.
Historical municipal debt
Ben Espach, director of valuation at Rates Watch, warns about the risks associated with ownership of property.
The verdict on January 29 by the Supreme Court of Appeal that a buyer who buys a property at an execution auction must pay the historic municipal debt of previous owners, has sent shock waves through the real estate world.
Until legislation changes or the verdict is set aside by the Constitutional Court, a buyer can do little to protect himself against a nasty surprise from the municipality, says Espach.
He says municipalities are not geared to give clearance to prospective buyers that all debt related to the property has been settled, and debts on property tax lapse only after thirty years. The fact is that, according to the court ruling, the municipality is completely within its rights to sell the property in execution if the new owner does not pay the outstanding debt.
Espach points out that the cost of property ownership has increased much faster in recent years than the rate of inflation did. One has some extent of control over one’s water and electricity bill, but increases in property taxes and even refuse removal are within the discretion of the city fathers, he said.
Data under suspicion
Especially in Johannesburg, municipal data is sometimes suspect. This includes incorrect meter readings and inaccurate meters; and in some cases the meter is connected to the wrong property, or not connected at all. It is difficult and time-consuming to solve these types of disputes and municipalities usually require that the owner must first pay the outstanding balance.
Espach says delays in the assessment of new buildings create problems for owners of commercial properties. If the building has not yet been valued six months after the issuance of the certificate of occupancy, for example, the valuation may eventually be backdated. The owner will then be responsible for property tax for the full period.
Before there is a property tax bill, however, an owner normally cannot recover it from his tenants. Six months later, those tenants are either no longer there, or they simply cannot pay the accumulated outstanding amount.
In such cases, Rates Watch helps its clients to make projections of what the property tax may be, but tenants often refuse to accept it. This causes tension between tenants and owners, and places an administrative burden on the owner, says Espach.
He says this situation is particularly prevalent in Johannesburg. If the valuation is backdated, the wrong date is sometimes used. The owner must then oppose it, but in the meantime the municipality insists on having its money. Owners who refuse to cough up, run the risk that the municipality will cut off their power.
What property tax is concerned, owners of agricultural land run a great risk that their land can be categorised incorrectly, according to Espach. Especially land on which there is no farming activities, is often categorised as vacant land, which is taxed at a much higher rate.
Espach says it is a wide-ranging problem particularly in Johannesburg, and that it is also a “huge problem” in Madibeng. This is mainly due to inadequate definitions of agricultural land in municipalities’ property tax policies, he explains.
The economy is under pressure: how do we do with property?