“The property market is not independent of the overall economy and how it performs,” says Gerrie van Biljon, executive director at Business Partners Limited (BUSINESS/PARTNERS). Rising inflation, a falling currency, doubts over the stewardship of the economy and expected economic growth a hair breadth away from recessionary levels all mean that property values will remain low for those who have it, and unaffordable for those who want to acquire it.
“Businesses are under severe pressure to survive the difficult conditions and limited disposable income of households contribute to prices of property not beating inflation. The rising costs associated with a property investment will influence the decision to invest or not,” says Van Biljon.
However, a closer look at the different sub-sectors of the property market reveals a more nuanced picture which is far from uniformly sombre. The worst performer is the residential property sector, which has delivered low or negative real returns since 2007.
But commercial and industrial properties have managed to keep their own “with even pockets of exceptional growth,” says Van Biljon.
There are even signs that office space, which suffered a glut in the early years after the financial crisis, have largely been mopped up and may start returning value.
Van Biljon reckons the relative strength of commercial and industrial properties is not because retail and manufacturing are booming, but rather because returns on other asset classes are so paltry that investors are chasing whatever value they can get.
The flip side of this dynamic is that the owners of commercial and industrial properties are holding tightly onto their assets. Therefore, even though shop and factory buildings are growing in value there are very few of them on the market.
Under these circumstances, property investors seem to be sticking to a holding pattern, not expanding their portfolios but managing them carefully so as to avoid risks and losses.
Occasionally, the more adventurous will splash out with a development reminiscent of the pre-crisis days, except that it captures so much more attention now for being unusual. The Atterbury Property Group recently opened the Mall of Africa in Midrand, which at 131 000 square metres is South Africa’s biggest single-phase shopping mall development ever.
But Van Biljon believes that it by no means heralds a return to the shopping-centre craze that drove an explosion of retail space before the financial crisis. “Commercial developments follow economic and population growth. For now, we can expect a levelling off of the growth of retail space,” he says.
An interesting sector that almost certainly will show strong growth in the foreseeable future is student accommodation, says Van Biljon. Figures show that South Africa has 550 000 students who need accommodation, and the state, in the form of the universities and colleges, can only provide rooms for about 100 000 of them. “The rest will have to be provided by flats, spare rooms and of course property developers taking up this opportunity.”
The lack of proper accommodation has been one of the main reasons for student unrest over the years, which in turn has added to the sombre economic mood. In the case of student accommodation, therefore, the development of properties can help remove at least one negative factor from the economy.
None of the gloom hanging over the property market means that it has lost its value as a long-term investment, says Van Biljon. It is just that “there are hardly opportunities available for a quick profit in the short run”.
Individual investors should therefore not expect immediate returns on their investment in a property. For now, the long-term capital growth should be the goal, as well as any strategic consideration, such as securing the position of a business by buying the building from which it operates.
In such a case, affordability is the main consideration when deciding to buy or not. Instalments are generally higher than rentals, at least in the first five years, a reality which poses a cash-flow challenge for a business that decides to become its own landlord.
Rentals are subject to annual escalations, so in later years instalments will become more affordable than the rentals the business would have paid, but only if the rise of interest rates is contained.
And that, again, is a function of the broader economic outlook which will probably remain gloomy for a while.