Why you should avoid South African property - for now
By
Heather D'Alton
Mar 24, 2006
If you don’t yet own your place in the sun and you’re thinking about buying your second home along the beautiful coastline or among the luscious winelands of South Africa, reconsider before taking the plunge – at least until next year.
The boom in the country’s residential market is over – and along with it the near-40% per year mega-profits made in the past three years. While a few housing-market pundits still predict a housing collapse, the general consensus is now that residential house prices will ease back gradually, with South African bank Absa expecting nominal growth in house prices of some 12% this year. In February, the country’s house-price index increased by just 14.5% year on year, the lowest year on year (y/y) increase since May 2002.
So what has caused the declining price growth and why are the analysts predicting more to come? Following the surge in house prices in the past six years – prices have rocketed by 238% since 1999 – South Africans are feeling the pinch, says Erika van der Merwe on Moneyweb.com. According to Absa, housing has become less affordable to the average resident, so buyers are now putting up resistance against the high asking prices.
Luxury houses in particular have seen steep declines in growth, with prices in nominal terms falling 1.9% y/y in the fourth quarter of 2005, the equivalent of 5.4% y/y falls in real terms, says Gaylyn Wingate-Pearse, also on Moneyweb.com. The fall in the luxury market – houses valued between R2.2m (£200,000) and R8.2m (£760,000) – is simply due to too much supply, says Absa, and negative growth is only expected to turn positive again in 2007.
The result? An increasing number of housing-market commentators are advising owners of second, or even third, properties to sell now, while prices are still high, and look for better returns elsewhere, says Joan Muller in FinWeek. According to Wayne McCurrie of Advantage Asset Management, many investors have doubled their money in the past three years, and with housing costs rising, it’s no longer the best asset class to be in.
“If you have already made a reasonable return, it would be wise to sell now,” he says in FinWeek. That goes for buy-to-let investors too: a growing supply of rental flats and townhouses will have little income growth for at least another three years, says Muller, with most landlords not expected to see any income growth at all this year.
Yields on rental flats and townhouses have already more than halved from three years ago, down from some 12% to less than the current 5%. Cape Town buy-to-let investors in particular are warned that high-end of the market flats, with rentals at around R4,000 (£370) per month, are vastly oversupplied, and would be “well advised to start cashing in”, says Muller.
As a result, McCurrie advises investors to opt for equities, bonds, or bank deposits, all of which should see better returns this year. Alternatively, commercial property is showing signs of growth, boosted by a lack of warehouse and industrial space and the prospect of office space development, says Van der Merwe. It should also offer better income yields and capital growth than residential property, Muller says. And they’re lower-risk, with income-streams more predictable than residential property, and are easier to buy and sell and have lower transactional costs. It’s worth looking at commercial property funds listed on the JSE too.
Published in Property
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by
Heather D'Alton
