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 Lots of opportunities for SA property buyers who take the long view

 

 After years of lower-than-inflation price growth and stagnant sales, the property market in South Africa is not a happy place for real estate agents and sellers, says Shane Padayachee, property investments area manager at Business Partners Limited (BUSINESS/PARTNERS).

For an intrepid investor, however, the depressed market means lots of opportunities for finding bargains, provided that the properties are carefully chosen with thorough due diligence and a long-term investment horizon in mind.

Several factors have conspired to keep the property market in the doldrums, says Padayachee. The main one is the overall anaemic state of the South African economy. With household spending under stress, businesses under pressure, an eye-watering unemployment rate and GDP growth scarcely north of 1%, the market is not exactly teeming with investors with large deposits to put down and financiers eager to extend property loans.

Hanging over all of this is the dark cloud of a down-grade to junk status of South Africa’s credit rating due to worries about the management of the country’s economy.

In different circumstances the weak rand - which is almost certainly bound to grow weaker - would have boosted the local property market because the dollar price of South African properties becomes so much cheaper, enticing foreign investors to buy.

But the fall of the rand since the firing of Pravin Gordhan as finance minister has not led to an increase in property purchases by foreign investors because the same sentiment that causes the weakness of the rand, namely fear that the economy is being badly managed, also makes them wary of investing in immovable South African assets.

Another factor inhibiting the property market is the fact that real estate is not as desirable an asset class as it used to be before the financial crash in 2008 - globally and also among local investors. It used to be that property investments routinely outperformed other asset classes, says Padayachee, but lately the bond markets have outperformed real estate.

The net result is that a property buyer in South Africa today would find himself on a relatively open playing field, with lots of options to choose from.

Bargains are certainly available, but one aspect of the property market keeps it from being a picnic. Sellers, fearful of making a loss on their investment, tend to hold on to their properties rather than bring down their price. Properties therefore tend to stay on the market for a long time, and buyers still have to bargain hard for a good price despite the fact that the market conditions favour them.

Another ray of light in the gloom is the fact that interest rates have come down slightly and have been kept steady lately, with talk even of a further drop as inflation pressures ease.

It is uncertain, however, how the downgrade of South Africa’s credit rating to junk status would impact on inflation and interest rates.

Padayachee recommends a three-pronged approach to investing in South African property today. The first is to take a long view on the investment - of at least ten year. The property market is weak mainly because of political and economic uncertainty in South Africa, and will only strengthen once those uncertainties are removed. This will take time, especially if South Africa will have to claw its way back from a junk credit rating.

Secondly, Padayachee recommends a proper due diligence process for every property considered for investment. The broader economic conditions are bad enough without running the risk of added costs because of a hidden defect in the building, or of invalid building plans that can lead to a demolition order.

The third prong of the approach is to place even more emphasis on buying in the right location. Well situated, high-end properties in the major metropolitan centres have been proven to be the most resilient against economically hard times. Here, the chances of a bargain property are fewer, but so are the risks.

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