Real Estate Investor Magazine | Investment Magazine South Africa
South Africa leading print and online magazine and targeted at investors who want to build wealth through property investment. REIM is designed to be a helpful guide that provides readers with valuable advice, tips and actionable information investors and landlords need to make better investment decisions.
REI Expert Guide to Real Estate Investment
Part 2: Get your finances in order and credit ready to apply for a bond
By Neale Petersen
In last month’s issue, we covered the first step to investing in real estate which is to invest in yourself and your education. The second most important step is to ensure that you prepare your finances properly.
Understand your financial statement
Your banker never asks to see your university degrees or school report card. A banker wants to see your financial statements. You must know how to read and understand the three parts of your financial statement: Profit and loss statement, balance sheet and your cash flow statement.
The difference between an asset and a liability
One reason many people are in financial trouble is because they confuse liabilities with assets. For instance, many people think their house is an asset when it’s really a liability. A simple definition of an asset is anything that puts money in your pocket. A simple definition of a liability is anything that takes money out of your pocket.
The difference between capital gains and cash flow
Many people invest for capital gains, meaning they’re betting on the price of something to go up. Unfortunately, today, many people are taking it in the shorts. Investing for capital gains is akin to gambling, only not as much fun. Instead of investing for capital gains, the wealthy invest for cash flow and capital gains are icing on the cake, if they do happen. Your primary investment goal is to improve your personal financial statement. Ask yourself these questions about a potential property purchase:
• How much cash do I need for a deposit for the amount of cash flow I want?
• If the tenant moves out and the property sits vacant, how long can I afford it?
• If there’s a costly maintenance problem, will I be able to afford it? This is another reason to start small. If my friends with the dilapidated house had started with an industrial building, that driveway would have cost them much more and would probably have caused them a much bigger financial problem than the industrial property.
The purpose of real estate investing is to solve your financial problems, not give yourself bigger ones.
Prepare your financial statement
Record all your current income. This could be income from a job, income from assets, income you make working for yourself. Record all expenses including taxes, rent, electricity, school fees, car payments, credit cards, insurance, etc. Calculate your surplus or shortfall to see if you have any funds left over to invest.
Qualifying for a bond
The best is to apply for a mortgage bond through a bond originator as they handle all your applications, paperwork, pre-qualification and know which banks will grant you bonds. When you apply for a bond, one of the first things your bond originator or bank will do is check your credit score, that all-important indicator of the level of risk you represent to the lender.
‘A good score is the key to being able to access all forms of credit including car loans and store accounts as well as home loans – and is based on your history of payment on all previous and current accounts, as well as the percentage of your available credit already being used,’ says Rudi Botha, CEO of BetterBond.
‘It is a quick way for lenders to gauge the probability of you repaying your debts and managing your finances responsibly, and it is so widely used that it is very surprising to us that most South Africans have no idea what their score actually is, or what factors could exert a positive or negative effect on it.’
The different credit bureaux in SA all have slightly different ways of calculating your credit score, he says, but in general scores range from around 350 to 999, and what you should be aiming for is a score of 600 or more. At this level, you should not have any problem getting a loan, provided it is within your means to pay the monthly instalments.
The higher your score is above 650, the more likely you are to be able to negotiate interest rate concessions, which in the case of a home loan can save you hundreds of Rands a month and many thousands of Rands over the lifetime of the loan.
A 0,5% concession on a 20-year loan of R1,5m translates into potential savings of R6000 a year off your home loan instalments, and more than R120 000 worth of interest over the lifetime of the loan. This is why it can come as a big disappointment to find that your credit score is not as high as you thought it would be, especially when you’re diligent about always paying your bills on time. Most of the reasons this could happen are relatively easy to fix.
• The first potential problem is that there have been too many recent inquiries logged against your credit profile. Of course it can pay to shop around when you’re looking for credit on favourable terms, but each time you request a quote, the lender will want to see your credit record, and if your requests are spread over more than few days, each inquiry will be logged separately and it will look like you are applying for several different loans or other forms of credit.
This is one of the reasons why you shouldn’t apply for car finance, for example, at the same time as you are trying to buy a home. It is also why it is always better to apply for a home loan through a bond originator. They only need to pull your credit report once before submitting your application to multiple lenders and ensuring that you get the most competitive interest rate.
Secondly, your lower-than-expected credit score could be your past catching up with you. We often find, for example, that prospective borrowers have black marks on their credit records from years ago because they forgot to actually close an old bank account, for example, and the monthly fees have been mounting up unpaid. Or they may have changed address and missed a bill or two.
Alternatively, you may have had a debt judgment against you and paid it off, but not realized that they needed to advise the credit bureau and have it removed from their record. Sometimes it is just a question of the credit bureau actually having the incorrect information, such as the wrong initials or the wrong ID number and penalizing the client for someone else’s bad payment record. This is why you should check your own credit record at least once a year.
Thirdly, consumers can be penalized not for using too much credit, but for using credit too much. Your score will be lowered if you max out your credit card every month, even if you pay off the balance on time and in full before the due date. What matters here is how much credit you have available and how much you’re using – or your credit utilization ratio – so you should try to keep the balances as low on possible on all your lines of credit.
Finally, not using credit at all can also have a negative impact on your score. Many people have been taught to save for what they want and never get into debt, but if you have no credit history, there’s nothing to show that you’re a responsible borrower who can manage balances and payments. It’s better to maintain at least one active account, like a phone, store or rent account, that you are careful to pay in full and on time every month.
Next month: Part 3: Finding an Investment Property
Back when he was one of Hollywood’s highest-paid actors earning as much as $40 million in 2009, Nicolas Cage owned a collection of some of the world’s most interesting homes including a San Francisco home built in 1914 for Armenian sculptor Haig Patigian – now for sale at $10.95 million.
With a long string of blockbuster hits under his belt including ‘Moonstruck’ and ‘Peggy Sue Got Married,’ Nic won an Oscar in 1996 for his role in ‘Leaving Las Vegas’ about an alcoholic screenwriter who moves to Las Vegas to drink himself to death. By the early 2000s, Cage was ploughing millions of his movie-star dollars into real estate, owning as many as fifteen homes.
Nicolas Cage owned a collection of some of the world’s most interesting homes
His collection included two European castles, an island in the Bahamas, a waterfront home in Newport Beach, a country estate in Rhode Island, a Las Vegas mansion, a 1928 castle in Los Angeles where he had walls covered in purple velvet, and the LaLaurie Mansion in New Orleans. According to Cage, LaLaurie was ‘the most haunted house in America.’
In 2007, Cage bought one of San Francisco’s most historic homes perched high on Francisco Street with some of the city’s best views.
Built on Russian Hill at a time when the neighborhood was still rebounding after many of the ritzy homes were destroyed by the 1906 San Francisco Earthquake, the large Tudor Revival home of 6,305 square feet spans four floors, all with spectacular views of San Francisco Bay. It is only two blocks from the zigzagged Lombard Street near parks and some of the city’s most beautiful homes in all styles of classic architecture – a perfect location for leisurely scenic strolls.
The open and airy main floor includes a large foyer with classic staircase, formal living and dining rooms, library, powder room, and an eat-in kitchen that connects to the two-car garage. Architectural details include much of the original millwork, led and stained glass, wood-burning fireplaces in both living room and library, and the far-reaching views over the bay. The second floor contains two en-suite guest rooms, the large master suite with two dressing rooms and a large bath, a linen closet and a mirrored wet bar. The third level has two more en-suite bedrooms with vaulted ceilings and the lowest floor includes a large family room, a gym, wine cellar and sixth bedroom and bath.
The listing agent is Mark Allan Levinson of Compass Realty, San Francisco, California.
According to the experiences of professionals involved in property development and construction, it currently takes an average of between four and eight years to complete a development in Cape Town – double the time when compared to a few years ago. This expanded timeframe, largely due to a long, complex and uncertain regulatory approval process, is now severely curtailing the development of much-needed private and public infrastructure and has come to undermine the construction industry significantly.
In response to this, academics from the University of Cape Town’s (UCT’s) Nedbank Urban Real Estate Research Unit (URERU) and industry members representing the Western Cape Property Development Forum (WCPDF) have joined forces to produce a Property Development Process Model in a major effort to determine why the development process now takes so long, the objective of which is to identify the blockages and find solutions to shorten the unwieldy timeframe.
The model was revealed to the public at the annual conference of the WCPDF, held at the Century City Conference Centre on Thursday 16 May, by Rob McGaffin ̶ a senior lecturer with UCT’s Department of Construction Economics and Management which also hosts the URERU. The process model was originally conceptualised in 2014 by project management firms, MDA and its consultants Jedd Grimbeek and Johan Slabber, and Alwyn Laubscher & Associates’ current CEO, Deon van Zyl, to graphically identify their own firms’ experience of the protracted development initiative timeframes. Grimbeek and Van Zyl are both members of the WCPDF Management Committee, with Van Zyl being the organisation’s chairperson.
In 2017, noting the impact that the long development process was having on housing affordability, Rob McGaffin from URERU agreed to further develop the model with the assistance of (then) recently graduated student Lewin Rolls and, later, Mida Kirova, a town planner with Nigel Burls & Associates. Chris Steffen, a quantity surveyor with Talani, later incorporated costings into it to highlight the time-related financial implications. Further valuable input was also received from various professionals in the industry along the way.
Explaining the need for the model at this point in time and the drive to complete it in time for the conference, Van Zyl notes: “The crisis in the development and construction industry is really only now hitting the media headlines, because companies as large as Group Five are closing their doors. But members within our industries have been warning of this crisis for years, and it is one driven largely by politics and bureaucratic red tape.
“This crisis is also the reason that we have themed this year’s conference ‘The Perfect Storm: Investment and jobs or bureaucracy and stagnation,’ and our model underlines the severity of the situation. But its primary aim is to provide both the private and public sectors with something of substance to discuss and debate so that we can get one of the largest contributing sectors to the economy rolling again.”
The model displays an indicative graphic timeline of the property development process in Cape Town, and illustrates the complexities of the process from start to finish, from the initial three-year project initiation phase to obtaining land rights, and then through procurement, construction and ultimately project handover. It also enables users of the model to access regulatory, up-to-date documentation and information on legislation governing the industry.
“But what this model is, in particular,” adds McGaffin, “is a tool to facilitate engagement with the relevant roleplayers in order to unblock the blockages.”
“The model gives a detailed breakdown of why developments are now taking between four and eight years to complete. How long a process should take and the reality of how long it actually takes, are worlds apart. This model substantiates what many developers have been saying for some time – that there is a crisis that is leading to the current destruction of the development and construction industries.”
The irony, notes van Zyl is that this is not only a private sector problem: “If I was a civil servant responsible for the delivery of housing projects, schools and clinics, I would be saying exactly what the private sector is saying. The development of public infrastructure accounts for 80% of the output of our industries. Every government project that needs to be delivered goes through exactly the same quagmire as the private sector.”
Another concern to the WCPDF is that the City underspent on its own capital budget by 27% in its previous financial year and looks again to underspending 24% in the current financial period. “If you do the calculations,’ says Van Zyl, “the City of Cape Town will have underspent by R2.8 billion by the end of its current financial year. That equates to R788 million in labour wages that has not been spent in the metro. Why has no red light yet gone on? Construction companies don’t fall off a cliff because they didn’t get a job yesterday. They fall off a cliff when they haven’t been getting work for three to five years.
“Plus, if the City’s budget cycle is three years long, how can it honestly budget for infrastructure projects not knowing when these are themselves going to get through the City’s own statutory processes that can delay a project for years before it breaks ground?”
Noting the City’s tender process as one of the areas failing the industry, Van Zyl refers to the City of Cape Town’s claims that it takes 24 weeks to award a tender: “However, companies on the ground will tell you that it actually takes anything from 54 to 90 weeks.” Adding to this, Grimbeek stresses: “The reality on the ground is that the construction sector has failed. We have one company after another folding and we have hit the wall.
“As the WCPDF, we are hearing from all the representative organisations that make up our membership base how the regulatory complexity and the lags in approval are killing the industry. Hundreds of thousands of construction jobs have already been lost, not to mention the investment that has gone elsewhere when willing investors do not get their projects even past first base.”
In the past, notes Grimbeek, the highest risk was always cost, but what has now replaced this is the time it takes to obtain land rights and planning approval: “This model enables us to see what the timelines should be, and measure what they have now become.”
But perhaps the most problematic result of this stagnation, apart from the loss of important construction job and investments, notes Grimbeek, is that: “The current regulatory environment is promoting gentrification. The delays being experienced and the costs associated with it reduces the viability of more affordable projects, which means developers are forced to produce exclusive products that will sell at higher prices. Who can afford these products? Only the wealthy. We are now increasingly unable to service the most important markets where the real residential demand lies, and the result is an ever-overheating bubble at the top end.”
In conclusion, Van Zyl notes: “A takeaway from the national and provincial elections is that the electorate is no longer tolerating excuses for lack of delivery. The model developed by the URERU and WCPDF is a tool that can help government to unblock its own delivery pipeline and help private sector investors to objectively understand the property development process.”
A record number of registered delegates turned up for the first day of the 6th annual conference of the Western Cape Property Development Forum (WCPDF), held on 16 and 17 May 2019, at the Century City Conference Centre in Cape Town.
Speaking in his opening address, WCPDF chairperson, Deon van Zyl, noted that not only was there representation present from all quarters of the private property development and construction sectors, but also – for the first time since the inception of the conference – a strong presence from both municipal and provincial government, as well as from financial institutions.
“I believe this speaks to the gravity of the current situation that the property development and construction industries find themselves in,” said Van Zyl “as well as the fact that the steady deterioration of our industry is now being felt across many economic platforms.”
Elaborating on the theme of this year’s conference – The Perfect Storm: Investment and jobs or bureaucracy and stagnation – Van Zyl compared the industry a year ago to where it was today, listing a number of factors that have contributed to the “storm”. These included the significant drop in both property sales and prices; pushbacks on commercial rentals; the length it now took for consultants, contractors and subcontractors to be paid and the unsustainable discounts that these professionals were offering, just to bring in work; and the unaccountable decision-making processes and red tape that were being encountered and which were subsequently strangling the industry.
Commenting on the recent election results, Van Zyl noted that: “The electorate has spoken. Society is telling us to ‘drain the swamp’ by rooting out corruption and the inefficiencies in the system that are holding back economic growth and service delivery. “We are fortunate in the Western Cape that the levels of corruption and self-enrichment that we see in national newspapers has, largely, not taken place locally. We are reasonably clean, or so we think. But a plethora of red tape, together with too much bureaucracy, is an excellent breeding ground for corruption, and I am saying that
it will be the inevitable route to which our industries will turn, if red tape is not dealt with in a surgical manner at this critical point in time.”
Kickstarting this process of activating the economy was the template the WCPDF used to determine the programme for this year’s conference, from keynote speakers such as Cas Coovadia (Managing Director of The Banking Association South Africa) and Minister Beverley Shäfer (Western Cape Government’s Provincial Minister of Economic Opportunities), to presentations such as Can the public and private sectors work together? (delivered by the HSRC’s Professor Ivan Turok, Executive Director, Economic Performance & Development) and Reducing Red Tape – the ease of doing business with government (John Peters, Chief Director: IEDS, Depart of Economic Development, Western Cape Government).
Speaking about the outcomes expected of the conference, Van Zyl noted that there were also a number of robust panel discussions to be held, from which it was hoped a path forward could be determined. These included a frank discussion around the future economic outlook for the province (chaired by Tim Harris, CEO of Wesgro) and the challenges behind procurement procedures within the City of Cape Town (chaired by Dr Len Mortimer, senior extraordinary lecturer, School of Public Leaders at the University of Stellenbosch).
Commenting on the fact that the public sector was finally starting to acknowledge the crisis in the industry, Van Zyl said he was hearted by the fact that a large number of City and Provincial officials were attending.“We have already challenged the Premier Elect, Alan Winde, to establish an economic war room to facilitate formal engagement between government and the private sector, with the sole purpose of addressing bureaucratic and process bottlenecks. And we are pleased to announce that Minister Shäfer has agreed to take up this challenge, alongside Wesgro, which has already started to facilitate engagement between ourselves, government officials and the financial institutions.
“Considering that property and the real estate industry falls within the largest sector contributing to the local economy, namely finance & business services which hold a 35% share of the Western Cape economy and construction accounting for 4% of the provincial economy, it is only a matter of time before these figures register the knock-on effect of the crisis in our industries.”
As winter bites across South Africa, suddenly all those little home maintenance jobs that you didn’t get to fixing start haunting you. A leak here and a draft there can make your home uncomfortable at a time when you want to be enjoying the warm indoor spaces.
Not only are these problems irritating, but, when left unattended, they can create bigger problems which are costly. A faulty gutter can create a serious damp issue and a leaking roof can ruin your wooden flooring.
In addition to essential maintenance, there are some minor cosmetic changes that can instantly make your home a cosier space.
Estelle Nagel of Gumtree SA says “there are many ways that you can make your home more comfortable in the colder season, and you can do it cheaply by buying almost anything you need online”.
Nagel offers these ten handy tips to a warmer home in winter.
Check all windows for gaps allowing draughts in. Use rubber self-adhesive weatherproofing to block those spaces and, if the putty or sealant around your window is failing, replace it.
For openings at the bottom of doors, buy a stopper or make your own stuffed roll.
Clean the gutters around your home to allow water to run away effectively.
Maximise the warming sunlight during the day by clearing any obstructions near windows like bushes and trees.
Fit thick curtains to lock in warmth.
Put rugs over any tiled floor areas.
Call in a roofing expert to check your roof for leaks and patch any areas that need fixing or replace any tiles that may be damaged.
Install ceiling insulation – it’s estimated that a building loses one-third of its heat through an uninsulated roof. A standard roll of insulation on Gumtree can cost as little as R100 and the average home needs six rolls for thorough insulation.
Wrap your geyser to keep electricity usage down while maintaining a decent supply of hot water. You can buy a geyser blanket on Gumtree for R160.
Invest in an electric blanket to ensure you have a snug bed on a cold night.
A Real Estate Investment Trust (REIT)is an effective mechanism of investing in real estate that allows private investors to access liquidity in a short space of time compared to physical property investment. REITs investment removes the hassles and costs of traditional direct property investment. The core difference between the two is the limited benefit of leverage applied to REITs compared to the benefits of leveraging finance with traditional real estate investment.
REITs are bought and sold on the Johannesburg Stock Exchange (JSE), just like any other share purchase it does take investment capital to get started. REITs are created when companies use investors’ private money to purchase and operate income properties. Depending on the REIT they tend to focus more on commercial investment holdings such as shopping centres, office buildings, industrial parks, storage units and a lesser focus on residential units.
This gives the private investor the opportunity to invest locally into commercial property mega shopping malls to the likes of Mall of Africa, V & A Waterfront, Canal Walk or Sandton City or even offshore REIT’s commercial investments in a selected offshore destination. REIT private investors can now reap the benefits of investing in those type of assets. It has the benefit of being easier to access, faster time to transact and also the ability to invest alongside experienced experts giving a safer investment with solid returns.
A REIT aims to pay out maximum (sometimes 90%) of its taxable profits in the form of dividends to its shareholders to keep its status as a REIT. By doing this, REITs avoid paying maximum corporate income tax, whereas a regular company would be taxed for its profits and then have to decide whether or not to distribute its after-tax profits as dividends. Since the 1960s in the United States, REITs have been a popular choice for income investors due to their reliable dividend pay-outs and massive capital appreciation potential.
From the rental, parking tariffs, advertising and other sources of income the property expenses such as rates, taxes, electricity, repairs and maintenance are deducted. This leaves a net property amount where interest and costs for debt finance are also deducted. The approximate average leveraged bank debt for REITs is around 35% and the rest is made up of equity. Yields can be anything from around 6 – 10% returns. The key benefit of a REIT is the liquidity and convenience an investor can derive from the investment while achieving growth. Many REIT’s invest in new, growing sectors such as industrial, storage, affordable accommodation and retirement.
Every month REimag releases latest updates on all REITs in South Africa.
Atlantic Leaf Properties Limited is a UK-based REIT that focuses on commercial property assets in strategically positioned light-industrial and distribution nodes in the UK. The Company announced a full year distribution of 9.3 GBP pence per share, an increase of 2.2% from prior year.
Commenting on the results, CEO Paul Leaf-Wright said, “2018/2019 was a tough year for property companies and we are pleased that notwithstanding the challenging environment, to deliver an increase in distributions to shareholders.”
A key event subsequent to year end was the conversion of the Company to a UK REIT on 1 March 2019 (previously a Mauritian real estate company). Leaf-Wright commented, “Becoming a UK REIT was a goal we had previously communicated to shareholders. We believe that, especially given the pending changes to tax in the UK (where all our properties are held) that this move will have material long-term benefits for all shareholders. It also means that Atlantic Leaf’s future distributions will now be more directly comparable to other listed REITs, where distributions are all on a pre-tax basis.
EPP is listed on the stock exchanges in Johannesburg (JSE) and Luxembourg (Euro MTF). EPP successfully completed an equity raise of ZAR 1.45 billion equating to approximately EUR90 million. The Polish retail company will use the equity to fund tranche 2 of its M1 portfolio transaction. The company expects to complete tranche 2 of the M1 transaction by June of this year. The deal is expected to add an additional 184,000 sqm of retail GLA to EPP’s portfolio.
EPP is the largest owner of retail real estate in Poland. It operates like a REIT, with a current portfolio of 19 retail properties, six office buildings and two development sites in Warsaw, with one currently under construction, offering a total of over 835,000 sqm in Poland’s most lucrative cities.
“We’re pleased with the market’s faith in our growth plans. This equity raise provides us with more liquidity ahead of the next step in our M1 transaction, but more importantly it will give us the ability to continue to deliver strong returns to all of our stakeholders,” said EPP CEO, Hadley Dean.
EPP was the top performing stock in the listed property sector on the JSE last year and the company announced its third year of record returns last month.
Fairvest Property Holdings Limited announced solid results for the six months to December 2018, with interim distributions increasing by 8.3% to 10.616 cents per share.
Top performing SA REIT with 25.7% annual total return to shareholders
Distribution for period increased by 8.3% to 10.616 cents per share
Total property portfolio increased by 5.1% to R3.14 billion
Net asset value increased by 2.3% to 232.98 cents per share
Vacancies contained at 3.5% of total lettable area
Like-for-like annualised net property income increased by 6.4%
Tenant retention remain high at 79.8%
Distribution growth of 8% to 10% expected for full year to 30 June 2019
CEO, Darren Wilder said: “Fairvest’s focus on a differentiated sector of the market and its unrelenting drive to excel at property fundamentals, have allowed investors to reap the rewards of consistency. Low vacancies and arrears, high tenant retention and solid growth in net property income continue to deliver distribution growth at the top end of the market. “
Fairvest maintains a unique focus on retail assets weighted toward non-metropolitan and rural shopping centres, as well as convenience and community shopping centres servicing the lower income market in high growth nodes, close to commuter networks. The Fairvest property portfolio consists of 45 properties, with 241 214m² of lettable area valued at R3.14 billion.
The portfolio remains well diversified across South Africa, with the four largest provinces, Gauteng, KwaZulu-Natal, Western Cape and Free State contributing 77.6% of revenue. The high national tenant component of 74.8% of the portfolio provides shareholders with a low risk investment profile, with national food retailers occupying 34.1% of the portfolio.
Vacancies were contained at 3.5% or 8 520m² during the period, with 99 new leases concluded covering 11 064m². Fairvest successfully renewed 19 929m² of leases, with a modest negative reversion of 0.5% being achieved on these renewals, in return for tenant retention of 79.8% and a lengthening of the lease expiry profile.
The company said that the retail trading environment in South Africa remains under pressure however, retail assets servicing and trading in the lower LSM sector continue to show more resilience than the balance of the retail sector.
What Retirement Villages will need to stay up to date with the current generation
Developers in the Retirement Village industry need to up their game: the next generation of retirees won’t be impressed with a sad colour scheme and tasteless food at the canteen. Grandma has been replaced by Glam-ma and she needs a good internet connection to FaceTime with her grandkids.
‘I believe in the generational theory. At present we are dealing with three generations. The so–called Silent Generation who live in our retirement villages, the Baby Boomers some of whom are in their 70’s and considering retirement villages and their adult children Generation X, who advise mom and dad on retirement decisions,’ says Arthur Case, Brand Marketing Director at Evergreen Lifestyle.
‘Developers need to understand the difference between these generations and be able to communicate with all three. The Boomers, in particular, are looking for a different value proposition to their parents. Competition is on the increase in South Africa, the old age and nursing homes of the past will face financial challenges and eventually be phased out as is presently happening in the USA. These homes will in time need to be repurposed or demolished as they will not attract new investment.’
Until now, developers have enjoyed a market of massive undersupply. Retirees have been only too happy to find a roof over their heads. However, small villages are struggling and some have even closed down. Then the likes of companies like Evergreen, Shire Retirement Properties and Oasis are embracing the demands from a growing black middle class and a generation of buyers looking for an extension of an already active and engaging lifestyle.
‘Future retirement village developers will need to develop sustainable villages to reduce costs and mitigate the risk of Eskom blackouts and Day Zero eventualities. They’ll also need to have strong balance sheets to weather the ups and downs of the economy, develop sufficient scale (300 – 800 units) to keep purchase prices and levies affordable and offer continuous care facilities so that purchasers don’t need to relocate late in life,’ says Case.
According to Case, the following will also be expected of Retirement Villages:
To be equipped to offer care with dignity for seniors who develop dementia
To offer smart technology like fibre-to-home, telemedicine and high–tech security
To understand that this is both a people and property business, but that people come first
Currently, developers are noticing that the new crop of retirees expect more and want a say in their day to day experience. For example, they demand detailed billing, options for everything and highly flexible services, a single point of interaction for services, cashless transacting within the estate and rules that facilitate the lifestyle and not rules that treat people like children.
‘Part of the reason that developers are not up to date with the important trends is that there is no single place to go for advice or statistics. Government stats are a mess and there is very little cooperation or organised sharing of information in the industry despite many attempts to organise. Events like the Retirement Village Summit at the end of May are vital to the communication process,’ says Rob Jones, founder of Shire Retirement Properties.
‘There is a strong reliance on estate agents for some information, but this often comes at the selling point, which is often too late anyway. Other sources are Architects and Engineering Consultants. Retirement village living consultants like myself are few and far between, and many developers do not recognise the value we add until too late. Retirement Villages are all about service in the long run, and few developers understand services or how to build infrastructure to facilitate service delivery, says Jones.
According to Jones, a critical factor is setting the price points of both the property and the levies in such a way that there is stability in the levies over the long-term. ‘There are many aspects to this planning that go totally ignored in many developments – and the residents sometimes pay the price.’
With the elections now over and the results announced, we can now start to expect more movement in the commercial property sector across South Africa. Along with decreasing property vacancy levels, the election results should yield a positive capital inflow of foreign investment and bring stability to the interest rate.
Lower yields and improved investor confidence
We can expect prices across the commercial property sector to rise while yields improve over the next 18-month period. This will be driven by an increase in investor sentiment as well as occupier confidence, causing more movement in the sector.
During the lead-up to the elections, investors were cautious of an upset and, given the geared nature of the asset, possible significant capital loss. With increased political clarity and the elections now out of the way, we can expect investors to once again transact which will be a much-needed shot in the arm for the commercial property sector.
Improved business confidence
Should Cyril Ramaphosa remain at the helm of the ANC, I believe that we can expect an improved business confidence index, based on his “pro-business, pro-capital” narrative. This will lead to occupiers taking steps to actively invest in or expand their operations, which directly impacts demand for space and therefore the entire commercial property sector. There is usually a lag period which would see us waiting for at least 6 to 12 months to see any impact in take up. We did however see an immediate uptick in enquiries for space as soon as the elections started to show results, which were largely in line with expectations.
The ANC’s win could give Ramaphosa the mandate to roll out his plan to boost the industrial sector with incentives, however government is typically slow to move, so one would imagine the market would only see this type of transition happen in the next 18-24 months. When the roll out does happen, we can expect it to have a significant impact to the sector as well as job creation.
Some of the key commercial property investment strategies leading up to the election included a largely wait and see approach. Those properties that did trade, did so at a discount. I anticipate that the impact of the election will only be felt by the commercial property sector towards the end of the year, given the length of time it takes for the next commercial lease event to present itself. Investors that grabbed opportunities during the lead up to the elections will be well poised now as the market begin to gain momentum again.
Listed property sector
The listed property sector has just come out of one of the worst 12 months in its history, with significant revisions already seen. A recovery in the market in general would see good returns and if business confidence does indeed improve, we can expect the REIT sector to recover over the next few quarters.
Questions remain around Eskom
With the Eskom situation remaining fragile, what is needed right now is capital spend to bring the infrastructure up to spec. In order for the government to make meaningful improvement to Eskom, the country’s GDP must grow. For this to happen we need clear policy, a stable political landscape and increased business confidence.
I believe the ANC’s relatively strong victory (although reduced) will give confidence to the ratings agencies and am hopeful that South Africa can fight off another downgrade. A stable rating gives investors breathing space and allows them to sweat their assets and attract tenants on the basis that South Africa maintains its stability and growth on the back of government’s plans.
Looking forward, commercial property across the board should benefit from a positive election outcome. Those investors that took advantage of the soft yields that were being offered in the market in the run up to the election stand to gain, with the industrial sector being one of the quickest to react.
Post-election rebound anticipated for SA’s residential property market
The generally market-friendly election outcome will in all likelihood create a degree of certainty and stability and go some way towards addressing the issues currently affecting confidence in the South African economy – and as a consequence have a positive effect on the South African residential property market.
“While It is anticipated that, in the wake of the favourable election outcome, the residential property market will rebound, in reality, any significant recovery is only likely to materialise in the later stages of the year after the seasonally quiet winter months,” says Dr Andrew Golding, chief executive of the Pam Golding Property group.
“Furthermore, while it is fair to say that the post-election environment is likely to be better for the property market generally, a number of specific questions arise, including how the land reform question will play out in terms of policy amendments or variations and also whether or not other market-friendly reforms are introduced.”
“It is also worth noting that casting a general market view over the entire market is often not necessarily advisable or accurate – as different provinces, regions, cities and sectors perform differently. For example, there is a shortage of accommodation for students and retirement developments in different parts of the country. As a result, activity is likely to be brisk in these market sectors despite the subdued conditions in the broader national housing market.”
With household incomes likely to remain under pressure in the short term – with continued petrol price hikes (including the introduction of a carbon tax in June) – and with a large percentage of renters and buyers coming to the market for the first time, the lower end of the market is likely to continue to hold up well relative to other sectors of the market. Smaller sectional title properties will also perform better as a result since this sector is often favoured by students, first-time buyers and down-scalers.
“These sectors of the market would also be those that would benefit most from a rebound or turnaround in the economy. First-time buyers are typically most sensitive to prevailing economic conditions and are a strong potential source of demand for the market. In areas where market price corrections have improved the perceived affordability of a property, it seems time on the market is declining and buyers are showing a willingness to purchase.
“For example, Cape Town remains the country’s top-performing market. The Mother City is seen as a truly global city with a growing international profile and long-term appeal, while technological innovations such as fibre optic connectivity are placing it on a par with its international counterparts. It is also becoming a hub for corporate accommodation as international blue-chip companies have set up office in areas such as the V&A Waterfront.
“This is a micro market because of its unique geography with world-class scenery including mountains and a pristine coastline, plus its location ensures limited availability. Cape Town house prices continued to grow strongly in recent years, even as the rest of the South African housing market cooled in response to the tepid economic growth rate. This was in part due to the semigration trend which saw people move to the Cape. As this trend naturally slowed, this prompted a correction in Cape Town house prices, in turn resulting in buyers seeing value return to this market across all sectors”.
“In Cape Town, the City Bowl and Atlantic Seaboard were the first to see a correction in house prices – the first in the last 20 years – undoubtedly because these had risen the most in these areas. Now that prices in these areas have adjusted, these suburbs may well be the first to show signs of a turnaround as buyers perceive renewed value in this sought-after market,” says Basil Moraitis of Pam Golding Properties.
“This has also presented a significant opportunity for the savvy buyer who wishes to acquire a strategic asset on the Atlantic Seaboard.
At the same time, it makes sense that Gauteng and KwaZulu-Natal would recover before the Western Cape, as these markets have been well-balanced for several years now, so already reflect current prevailing economic conditions. On a further positive note, Gauteng appears to be experiencing an influx of younger, potential buyers and rental tenants attracted by this major economic hub.
“In Johannesburg East, in recent months a number of sellers, mainly in the price bands around R2.7 million and R4.5 million mark are choosing to rent instead.”
“Buying opportunities abound in the current market, with some capitalising on the medium and long-term benefits offered through buying in a new development which includes features such as excellent security, lifestyle, energy-saving and ‘green’ features such as grey water recycling, heat pumps, modern design and the ability to buy now and pay later, as well as prices which are VAT inclusive with no transfer duty payable,” says Dr Golding.
“Buyers are advised to pay attention to value in relation to what’s on the market. Buy the home that offers the best in relation to location and requires the least building interventions, also proximity to schools and shopping centres. Sellers are advised to ensure their home stands out when competing with the homes for sale in close proximity.”