About Me

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I am a qualified Attorney. I specialise in Property Law, Commercial Law, Corporate Law and Trusts.
Please visit our website at www.prop-law.co.za for more details.
I am an elected Committee Member of the Property Committee of the Association of Pretoria Attorneys and through my involvement, I like to ensure that I am constantly at the "sharp-end" of Conveyancing Practice.

I am the elected Chairman on the Gauteng Council of SAPOA. The South African Property Owners Association (SAPOA) is the biggest and most influential institution in the property industry. SAPOA members control about 90% of commercial property in SA, with a combined portfolio in excess of R150 Billion (about $22 Billion). I am also on the National Council and the National Legal Committee of SAPOA.
Member of the Institute of Directors South Africa and Member of the Sirdar Governance Panel.

07 February 2012

The Don`s conversion to residential units complete

The Don`s conversion to residential units complete

An announcement on the group’s future is expected in two weeks’ time.

CEO of the Don Group, Thabiso Tlelai, says the process of converting its hotels into residential units has been completed while negotiations with potential buyers are continuing.

“We are in talks and negotiations with various parties, mostly about disposable property. We have had a number of offers both on individual property and the total property portfolio,” Tlelai told Moneyweb after the group’s annual general meeting on Friday.

Tlelai added an announcement in this regard would be made in about two weeks’ time. The group renewed its October 2011 cautionary on Monday morning. At that time Tlelai also said a decision by the board was imminent.

I can say from the company’s point of view we are making good progress. Property things unfortunately take time, everything in this space takes a huge amount of time, negotiations take a huge amount of time”, he explained.

As for the letting of the residential units Tlelai said only one of its properties in Sandton north of Pretoria, had not been fully converted due to a prior agreement. “The process of rentals is going well. I am happy with the prices we are getting”, Tlelai said.

In October last year the company said it owed the Industrial Development Corporation (IDC) R70m. Asked how the group intended to settle its debt, Tlelai said the group was considering several options. One was selling the properties and repaying the IDC. The other was finding a financial institution to take over the debt or to subscribe new shares making finance available.

Tlelai said the IDC had requested the Don Group to pay the money back earlier than originally agreed due to the business changing from hospitality to residential letting.

Despite the difficulties, Tlelai said the group was not considering de-listing from the JSE. “It is not on our agenda to de-list. What we intend doing is to strengthen our hand in the property market.”

The company’s listing on the JSE had not been without controversy some eight years ago, as banks threatened to liquidate the group, Tlelai stepped forward with a R1 offer for 30% of the company.

Take great care in the choice of your rental agent

Take great care in the choice of your rental agent

Make certain the agent has a track record of assessing tenants’ previous rental and credit history.

With finance for residential property purchases still hard to come by (in some less affluent areas 70% of bond applications are still being turned down), demand for rented property has improved greatly and buy-to-let investors are again evident throughout the Cape.

However, very few property investors are able or willing to find and manage their tenants themselves. They have, therefore, to rely on rental agents to do this for them – for better or for worse.

Rental agents like any other group, vary greatly in dedication and ability: some are excellent, others really should not be in this line of work.

This being the case, before an investor appoints a rental agent, he should make certain that that person has a track record of checking on and assessing tenants’ previous rental and credit history. Any tenant who has been blacklisted by credit bureaux should be suspect as should any who have fallen behind on previous rent payments or been disruptive in their communities.

In today’s rental market some buy-to-let investors favour gated communities and sectional title schemes because these maintain standards. They are (usually, not always) well managed by bodies corporate and managing agents, tend to be more secure and able to apply some control on residents’ behaviour.

If and when a tenant misbehaves some bodies corporate have the right to impose substantial fines and to double and treble these and charge compound interest if they are not immediately paid.

However, a tenant who is fined, say, for rowdiness late at night, or for blocking drains or for leaving broken windows or doors unrepaired, will often not pay the fines, and the landlord, seeing these fines mount up month by month, will be forced to pay them. It is, of course true that the tenant’s one or two months deposit can be seized to cover these outlays but with this type of tenant the full deposit – and more – will often be needed to rehabilitate the unit when his lease has expired.

It is far better, therefore, to leave a unit untenanted than to accept a tenant over whom there is a question mark – but lazy or greedy rental agents will often do this and will later make matters worse by not reporting problems to the landlord and by neglecting to submit detailed monthly report backs and accounts.

The moral of the story, therefore, is Yes, buy-to-let is a good field to be in right now but be very careful about the rental agent you choose – and if his or her principal is not a good administrator (many agencies’ principals loathe this side of their work), look elsewhere for your rental management service.

*Lanice Steward is the MD of Anne Porter Knight Frank, the Cape Peninsula estate agency

03 February 2012

Many don`t qualify for home loans

Many don`t qualify for home loans

At least 83% of nearly 14m households do not earn enough to qualify for bank home loans.

At least 83 percent of nearly 14 million households do not earn enough to qualify for bank home loans, according to the latest statistics released by the SA Institute of Race Relations (SAIRR).

"The income figures demonstrate the pressure on the state's housing delivery programmes with 60 percent of all households eligible for government-subsidised housing," said Kerwin Lebone from the institute's research department on Thursday.

In 2009, only 12 percent of households earned enough to qualify for an unassisted bank mortgage, the SAIRR said in a statement.

Only 700,000 households qualified for bank finance in the affordable housing sector.

These figures emanate from a 2011 report by the Financial and Fiscal Commission.

In 2009, at least 60 percent of households earned R3500 or less a month and qualified for a state housing grant.

Seven percent of households earned between R7000 and R10,500, which did not allow them to qualify for government housing programmes and not enough to get a bank mortgage.

It said the number of informal backyard dwellings rose by 83 percent between 1996 and 2010.

"People who were on the waiting list of government housing programmes, and the majority of those that do not qualify for such programmes, often migrated to backyard dwellings that offered cheaper rentals," the SAIRR said.

Capital Property Fund to become specialist fund

Capital Property Fund to become specialist fund

Plans to reduce its exposure to retail.

Capital Property Fund (JSE:CPL) says it is in the process of gradually reducing its retail exposure as part of its strategy to become a specialised office and industrial portfolio.

“If you look at the major listed sightings that are the most highly rated offshore, they are all specialist funds,” executive director Andrew Teixteira told Moneyweb. He added that by providing a specialised product, people know exactly what they are going to get. “If you buy Resilient shares, you’re buying into regional retail. If you buy Capital, you’re getting into office and industrial.”

Teixteira added that it had inherited a substantial retail portfolio after the acquisition of Pangbourne in 2011. “The strategy has always been to be a commercial and industrial fund with the sale of the retail.”

Asked if Capital was not concerned about the relatively high vacancy rate especially in office space, MD Barry Stuhler replied that the vacancy rate would probably deteriorate further before improving, but he believed it was part the ongoing cycle in the industry.

“We’re not building for today or tomorrow …at some point in time the vacancies are going to be taken up and we’ll be in a really good position. We will have lots of supply,” Stuhler said.

He was speaking after the release of Capital’s results in which it posted a 9.13% rise in distributions to 65.63c per unit for the year ended December.

Stanlib’s head of property funds, Keillen Ndlovu, says: “This is a good result achieved in a tough market, more so with the depressed office market, of which Capital has 30% exposure by rental income.”

On the vacancies, Ndlovu said the decline in both the office and industrial portfolios was to be expected and was a national trend, given the weak fundamentals currently in the sector.

Stuhler said historically Capital acquired properties rather than built but due to current “crazy prices” the company had decided to opt for building rather than buying. “It’s very simple, that’s the pipeline,” he added.

He said Capital had obtained quite a lot of land following its acquisition of Pangbourne, making it the third largest property group in the country. The fund had partnered with Improvon, which specialises in industrial and commercial facilities in developing land in Gauteng and the Western Cape.

The company is also currently looking at acquiring new land in Gauteng and in Durban, KwaZulu-Natal.

Teixeira says the company only builds on 50% of their sites allowing space for truck reticulation

The risk "less" investment option

The risk "less" investment option

Investments that allow an investor to manage and mitigate the risks involved.

While no investment is entirely without risk, there are investments that not only entail less risk than most, but also allow an investor to manage and mitigate - if not eliminate - the risks involved. A superb case in point is an investment in buy-to-let property.

Once an investor understands the very simple principles of buy-to-let property investment, it becomes clear that this is an investment alternative that poses far less risk than traditional investments. A brief overview of some of the main risks investors face when investing their hard-earned money will clearly reveal why a buy-to-let property investment is indeed a risk-"less" option, and will leave investors asking why they should ever invest in more risky investments to obtain far less impressive returns.

One of the greatest risks investors face is themselves, or "investor risk", as it is termed in financial circles. This risk refers to the fact that investors are often swayed by emotion - ranging from wild optimism to panic - which results in buying high, selling low, getting the timing wrong or abandoning long-term investment strategies in response to short-term market fluctuations.

"Property is an illiquid investment, which means it cannot be acquired or disposed of in a moment of panic of euphoria. When acquiring a property, the process of obtaining finance inherently requires financial scrutiny and bank valuations, which provides a built-in risk management mechanism. In addition, if investors take a professional approach to this type of investment, using proven step-by-step systems and custom-designed software, they can be absolutely certain that they acquire the right property every time," explains Dr Koos du Toit, CEO of P3 Investment Group. "A property is not simply sold on a whim, and obtaining valuations and offers prior to a sale provides the investor with some indication of whether selling is indeed the right option, or whether letting, subdividing, renovating or improving the property may yield a better return."

Of course, investor risk has been amplified by the extreme market volatility in recent times and there is little an investor can do to manage this risk. "Buy-to-let property investment, on the other hand, is far less susceptible to fickle investor sentiment and market volatility: property values and rentals don't simply plummet over night as share prices do. Although the economic conditions do impact the property market, people need a roof over their heads regardless of stock market movements or market crashes, and over the long term, rentals as well as property prices tend upwards regardless of economic conditions," notes Dr du Toit.

Related to the risk of market volatility is the risk of poor asset management. This is the risk that a salaried asset manager - to whom individual investors are no more than numbers - may make a poor judgement call and decimate their life savings. "The reality for investors is simply that no one will ever look after your hard-earned money as well as you do," comments Dr du Toit. "When you hand your money over to an unknown third party, you face a significant risk that you simply become a pawn in the big world of investment. A buy-to-let property puts the investor in control, able to conduct their own due diligence and to make their own decisions about where and how their money is invested: in brick-and-mortar, where they can see, touch and manage their investments.

"Of course, a buy-to-let property investor can also make poor judgement calls. However, this risk can be managed very effectively by tapping into a proven system, backed up by solid training and easy-to-use software, such as the P3 Investment System. It ensures every buy-to-let investment decision is thoroughly considered according to current variables and future performance, including cash flow projections and provision for vacancies, maintenance and other contingencies. Implementing such a system removes emotion from the investment decision and creates confidence that the investor has made the right decision."

The most prominent risk associated with buy-to-let investment is defaulting tenants. But this risk too can be managed effectively by appointing a professional and reputable rental management company for a reasonable monthly fee, to thoroughly screen tenants before placing them and to proactively manage the tenant. This, along with rental insurance, which will cover defaults and even evictions, providing excellent risk mitigation.

But perhaps the biggest risk any investor faces is inflation - the risk that the performance of the investment will not keep pace with inflation, eroding capital and leaving the investor with insufficient income to maintain his or her standard of living at retirement. "If an investment is not keeping pace with inflation, what is the point of investing?" asks Dr du Toit. "Buy-to-let property offers a built-in hedge against inflation, because the rental income produced by the property increases year by year, keeping pace with inflation. In addition to providing this ongoing, inflation-linked income, a buy-to-let investment property will also provide capital growth year after year."

For taking less risk, buy-to-let investors can expect an inflation-linked, passive annuity income for the rest of their lives, in addition to solid capital growth over the years. "It is these dual returns, produced despite the fact that property investment requires investors to risk less, which make buy-to-let property investment one of the best investment alternatives for South Africans who have been deeply disappointed by the performance of their traditional investment and retirement plans," concludes Dr du Toit.

* This report was prepared by P3 Investment Group

02 February 2012

SA`s richest person worth R61bn

SA`s richest person worth R61bn

SA's richest person worth R61bn

A list of South Africa's 10 richest men and woman.

What’s most inspiring about these local super-wealthy individuals is that almost all of them have increased their net worth from 2010 in the face of a challenging economic downturn. In addition, many of their names featured prominently on the 2011 global rich list. Further north on the continent, the richest man in Africa – for the first time - is Nigerian Aliko Dangote, whose fortune is estimated at almost R80 billion.

The Rich List, compiled by Intellidex, was determined by looking at the super-rich and their role in growing and owning companies. Specifically,  net worth information was gained from publicly traded companies, i.e. companies listed on the Johannesburg Stock Exchange.

Wealthy businessmen and women can now be found in Nigeria, Egypt and Kenya and they’re among the richest in the world.

To read more about how these moguls made their money download the digital editions from: http://www.destinyconnect.com/ or: http://www.destinyman.com/.

* This report was prepared by DESTINY

7 deadly sins of property investment

7 deadly sins of property investment

Avoid certain pitfalls that can impact on your return on investment.

Purchasing an investment property can be an intimidating and often risky business, but it is also a way to have a future free of financial worry for those who can master it, says Adrian Goslett, CEO of RE/MAX of Southern Africa.

Goslett says that while seasoned property investors will generally have a vast understanding of the property market, many first-time buyers or those relatively new to the property game will often make the wrong and sometimes very costly decisions. Although lucrative opportunities can be found in the current market, it is important for buyers to avoid certain pitfalls that can impact on their return on investment.

Goslett provides the seven deadly sins that property investors should avoid at all costs when purchasing property:

1. Have patience, don’t be in a hurry – Goslett notes that the first step to property investment is taking the time to do the necessary research. “Rushing into a property deal without having spent the time to complete the appropriate research could cost the buyer dearly in the long run,” he says. “As the mantra goes - knowledge is power. If a buyer has done the research they will have a greater understanding of the market and will be able to recognise an opportunity when it arises.” Don’t take the first deal on the market, but shop around. Take time to compare similar properties in an area and then see what other options are available on the market. Look at the price of the property and compare this to the value. Get an estate agent to provide a comparative market analysis of the area.

2. Location is everything – We have all heard it – location, location, location. Goslett says that the importance of buying in a prime location cannot be over emphasised. He says: “Simply put, a property in a bad location will never fetch a premium price, even in a boom period. Choosing the right location is essential when making a property purchase. Buyers should look for areas that are in proximity to a good range of amenities. Areas that consistently show steady growth in value are those that are near to business nodes, transport routes, good schools and shopping centres. While rental income is important, the primary goal should be capital growth.”

3. Don’t make assumptions - With the introduction of the Consumer Protection Act, buyers are generally quite well covered. However, it is always advisable to have a professional home inspector to take a look at the property. “A professional inspector will be able to spot any problems that may otherwise go unnoticed, such as the structural integrity of the property. It may cost money to hire an inspector, but this could save a lot more money for repairs in the long run,” says Goslett.

4. Seek help, don’t do this alone – Rather learn from other people’s mistakes than your own. Goslett says that new buyers should have an experienced property investor as their buying mentor. “A knowledgeable property investor that has been in the game for some time will be able to show a new buyer the ropes and guide them through the process,” says Goslett.

5. Keep an eye on the budget – Perhaps one of the deadliest sins is not keeping track of finances and debt. According to Goslett, investors should undertake an in-depth budget and cash flow analysis in order to ascertain their accurate financial position. “Know what you can afford and what you can’t, which can be measured by completing a personal cash flow statement.” says Goslett.

He adds that buyers should compare financing deals from various financial institutions before deciding to secure their home loan. Securing a loan will be an intricate part of the purchasing process. Buyers should also bear in mind that most banks still require a 10% to 30% deposit. This, coupled with the fact that a loan will increase the cost of purchasing property, makes choosing the right lender essential to ensuring a good return on investment.

6. Proper maintenance – A large element of purchasing a property is the ability to maintain the property to protect your investment. Whether the property is bought as a primary residence or as part of a rental portfolio, keeping the property in good order is a vital part to ensuring a good return on that investment. “Buyers should include maintenance costs as part of their budget and plan. They will also need to ensure they have the time or capacity to properly manage and maintain their property. With a rental property, a management agent can be hired to make sure that all repairs and general management are taken care of,” says Goslett.

7. Don’t put all your eggs in one basket - When buying property specifically for investment purposes, it is imperative to diversify your portfolio, says Goslett. This will largely minimise exposure to risk. Buyers should try to buy different kinds of properties in varies areas, rather than buying a few properties in one development.

“Property buyers should learn as much as possible about the environment they are trading in, consult various experts and make use of professional, reputable and knowledgeable estate agents to assist them in the sales process,” concludes Goslett.

* This report was prepared by RE/MAX

Auctions vs conventional selling

Auctions vs conventional selling

Which is the better option to sell your residential property?

One of the main topics currently being discussed in the property market is, "is it better to buy at auctions or through estate agents?"

The consensus of opinion among the prominent estate agents Moneyweb contacted was, commercial properties should be entrusted to auctioneers, but not residential properties.

The auctioneers contacted agree with them about commercial properties, all, however, feel they have a better chance of selling residential properties – and faster.

Some auctioneers feel auctioning is slowly gaining market share, although there aren’t any figures to prove their view.

All property transactions must be registered in the Deeds Registry, run by the Department of Rural Development and Land Reform. But all the Deeds Register web page states is:
"By September 2010 1.44m government-subsidised properties were formally registered on the Deeds Registry. This comprises about 24% of all formally registered residential properties."

That can be interpreted to mean just more than 4.3m properties were registered in that period.

Lew Geffen, chairman of Sotheby's International Realty, South Africa owns a conventional real estate business and a separate auction business, believes “the sale of residential property by auction cannot compete with sales by real estate companies.

“A property usually goes to auction when the seller is desperate. If the seller does not accept the offer it will be a failed auction.

“There is no stigma if a residential property has show day after show day.”

He describes the auction platform as “great for commercial properties. I believe commercial properties genuinely take less time to be sold by way of auction.

“In the present market, an average residential property takes about four months to sell. It is false to claim that auction properties take only 30 days to sell.”

Ronald Ennik, CEO of luxury homes marketer Ennik Estates, who helped grow the Pam Golding brand to one of the top positions at the luxury end of the Johannesburg homes market, agrees with Geffen: “the auction system is better suited to the commercial property sector, where it attracts less negative perception than in the residential sector.

“In the residential sector it is perceived as a last resort by a seller who has his back to the wall.”
Bill Hartard, a partner in Segoale Property Mart, who was chairman of the SA Institute of Auctioneers (Saia) for 14 years, and who now specialises in auctioning residential properties, takes a more holistic view.
He says it will take a long time before auctioneers can compete with estate agents on level terms, because "there are about 37 000 registered estate agents, and 160 auctioneers that are registered with Saia.
"If there is no urgency to sell it is in sellers’ interest to negotiate sales through estate agents who can include suspensive conditions, such as, 'subject to the buyer selling his own property,’ as well as arranging bond financing.

"Where the need to sell is urgent, sellers should take the auction route, where a sale can be achieved within about 21 days, with no suspensive conditions.

“This applies particularly to free standing mansions or luxury penthouses on the Atlantic Seaboard.
“Like pieces of art, they’re worth only what someone is prepared to pay for them. Which can be established only on auction."

As far as costs are concerned, estate agents pay for advertising properties, and sellers for advertising sales by auction, and the auction costs.

Rael Levitt, CEO of Auction Alliance, arguably the biggest auctioneers in SA, says: “real estate agencies may leave you waiting for prospective buyers to view your property and put in an offer to purchase.

“If a property takes a long time to generate interest when mandated to real estate agents the seller may, in desperation, be forced to accept the first offer - even if it's low.

“With auctions it can take between eight and ten weeks from the instruction to sell to the registered
transfer of a property or asset.

"The deal is done when the hammer falls: no protracted negotiations, no suspensive clauses or intermediaries."

“The seller sets a reserve price. There's no ceiling on the price, which often results in higher final prices than more traditional selling methods.

“Only serious buyers bid at auctions. If there's no sale, there's no charge, and the buyer, not the seller covers the auctioneer's commission.”

“Auctions also work for buyers. It takes three and four weeks to register the transfer of an auctioned property or asset.

"Auctions invariably secure realistic market price, and there's always the chance of a bargain."
Park Village Auctions’ director Roy Lazarus says, “auctions are less time consuming, there’s only one show day, where prospective buyers aren’t expected to make any offers.

Auctions create excitement. Buyers often pay more than they intended to.

“People often think the seller (by auction) is insolvent. That’s a complete misconception.”

R10bn facelift for Pretoria HQ

R10bn facelift for Pretoria HQ

The Tshwane municipality will finally relocate next week as its old Munitoria headquarters, damaged in a fire in 1997, is set to undergo a R10 billion revamp.

Munitoria is to make way for a R10 billion new headquarters in the city centre.

This was announced by executive mayor Kgosientso Ramokgopa during a press briefing yesterday, He said the old Munitoria would be demolished to make way for a new building called Tshwane House.

According to Ramokgopa, the move will be funded jointly by the municipality and private partners in what is said to be a first private-public partnership of its scale in the country. The entire staff currently based at Munitoria will move to a nearby building in Van der Walt Street, where it will be based for the next two to three years. According to Ramokgopa, the council will rent the building until the new headquarters built on the existing site is ready for occupation.

Tsela Tshweu Investments, a consortium made up of Standard Bank, Nedbank, Group Five and other smaller contractors, has been awarded the project.

City manager Jason Ngobeni said the new building would place the municipality in a central location instead of the current situation in which various departments were spread across the city.

"It will allow for the municipality to interact with the residents much more easily and we will be able to group various divisions accordingly. But it will also improve the entire node where it will be located," said Ngobeni.
He couldn't give an exact amount of what it would cost the city to rent the offices where the council would be located temporarily, saying only that it was "market-related". But he confirmed that the municipality would fork out approximately R3bn for the new headquarters while the rest would come from the private sector.

Pretoria News

Business rescue procedures and their impact on property leases

Business rescue procedures and their impact on property leases

The 'business rescue procedure' now made possible by the Companies Act for 'financially distressed' companies is likely to be used with increasing frequency in the next year or two, says Garth Watson, a director of Gunstons Attorneys.

Watson explained that a company can be placed under business rescue by its board of directors if they agree to this. However, the State has to believe that the company is indeed financially distressed and that there is a reasonable prospect of rescuing it. At the same time, any affected person may apply to court to place a business under business rescue.

The business rescue procedure, says Watson, cannot by law be implemented if the company's finances are in reasonable shape or there is no real prospect of it being rehabilitated. Furthermore, the procedure may be cancelled if the requirements set out in the Companies Act relating to such procedures are not strictly complied with.

The Act does, however, place considerable power in the hands of the company's directors regarding whether to place a company under business rescue. This decision, Watson points out, can have great financial repercussions for all those with contracts with the company – and these associated entities may have no choice but to accept non-payment or partial payment of the sums owing to them during the rehabilitation period (usually three to nine months).

A question which now arises, says Watson, is where do landlords stand should one of their tenants be placed under business rescue?

The relevant clause in the Companies Act is 134(1)(c), says Watson, states that "despite any agreement to the contrary no person may exercise any right in respect of any property in the lawful possession of the (rescue) company, irrespective of whether the property is owned by the company except to the extent that the practitioner consents to this in writing".

"Without careful review and amendment of lease agreements," says Watson, "this section may effectively leave landlords without the remedies of eviction or of suing for rent if a tenant is placed under business rescue."

Typically, he says, leases provide for landlords to be able to cancel leases if the tenant is liquidated but in a business rescue case such clauses would not suffice because during that period the tenant would be in lawful possession and s134 of the Act would prevent any rights being exercised over the property.

According to Watson, it is, therefore, imperative that the lease contains a "surgically drafted" clause that renders occupation unlawful from the date that a tenant company is placed under business rescue. This is necessary because s134 applies only to lawful possession. If, in terms of a lease agreement, the business rescue itself renders possession by a tenant unlawful, then landlords will be free to exercise their rights in respect of their properties. It is thus possible to mitigate powerfully the potentially prejudicial effect of s134 of the Companies Act, says Watson.

Gunston Attorneys Press Release

01 February 2012

Is the housing market 25% overvalued?

Is the housing market 25% overvalued?

FNB’s household and property sector strategist John Loos responds.

Is the housing market 25% over-valued? We don’t think it is possible to say, but nevertheless do expect some further real house price decline.

The January 2012 FNB House Price Index showed a slight acceleration entering the new year, rising from revised year-on-year growth rate of 4.7% in December to 5.6% in January. This is the highest year-on-year growth since August 2010.

In real terms, however, the recent growth rates imply that real house price decline continues. Consumer price inflation for December (January not yet available) was around 6.1%, and a 4.7% house price growth rate in that month translates into about -1.4% real decline.

This means that in real terms, the latest revised figures put the average house price in real terms (adjusted for consumer price inflation) at -15.5% lower than the peak of February 2008.

In recent times, the fluctuations in the house price index are probably not too dissimilar from those of certain key economic growth indicators.

After two very weak 2nd and 3rd quarters, South African economic growth is believed to have done slightly better in the final quarter of 2011. The Manufacturing Purchasing Managers’ Index made a mild come back out of contraction territory, while previously slowing real retail sales growth had also showed something of an unexpected strengthening late last year. Indeed, our own FNB Estate Agent Survey had also pointed to a surprising slight improvement in residential demand in the 3rd quarter of 2011, and this is believed to have been feeding through into house prices with a mild lag.

This FNB House Price Index release comes at a time when something of a mild storm appears to be raging in the residential industry as a result of the release of the recent Rode and Associates Report which claims the residential property market to be about 25% “overvalued”. This, we interpret to mean that it would require a very significant decline in house prices in real terms in order to get back to what Rode deems to be an “appropriately priced market” that would be in “balance” or “equilibrium. Needless to say, many industry players are, rightly or wrongly, seemingly unhappy with the statement. It has been the focal point of the past few days, and we have been questioned frequently about it.

Perhaps some people have over-reacted to the report a little, as Rode is not predicting a sudden downward price correction. Rather, he expects a gradual real price decline over some years. Nevertheless, the fact that it has grabbed the attention of the industry suggests that it is worth debating.

Our own opinion is that it would be extremely difficult to ascertain as to by how much the market is “over-valued” or unrealistically priced, and that in any case, the equilibrium price level (if one could determine it) is very much a moving target, fluctuating frequently as economic fundamentals change.

The Rode methodology. It is essentially what we would call a “technical analysis” as opposed to a fundamental analysis. A long term real house price time series is calculated using average house prices and average building costs.

In brief, the rationale behind the using building costs with which to adjust house prices into real terms has to do with the view that building costs drive property values over the long term. Assuming that supply of new homes can be added by developers “at will”, in other words, there are no constraints to supply due to urban planning requirements or land availability, then building costs determine house prices in the long term.

If existing house prices were above building costs, supply of newly-built homes would increase, bringing house prices back down into line with building costs, and if existing house prices move too far below building costs the new supply would slow until the demand-supply balance had been restored and house prices moved higher and closer to building costs.

Therefore, according to the theory as we understand it, real house prices, as calculated through deflating nominal house prices with building costs, should move in the broad sideways band over the long term. If the real price level is significantly above the long term trend line, as is currently the case when using 1966 as a starting point, the theory is that the market is “overvalued”, and the current Rode estimate that it is overvalued by 25.

We have some reservations about using this methodology.

Firstly, while the theory could indeed work under the assumption of totally elastic supply of new homes as required by the market, we are no longer convinced that such elasticity is a reality in South Africa any more.

Cape Town, for one, has a relative land scarcity for property development (especially around the mountain), which keeps its average property values above those of Joburg in spite of Joburg having higher average per capita income (and thus higher purchasing power).

As urbanization continues, one would expect land scarcity in our cities to increase. Theoretically the landlocked cities could continue to sprawl, but it would be the increasing urban congestion and infrastructure constraints that make this increasingly impractical.

Therefore, we believe it conceivable over the long term that real house prices can increase significantly, and that South African cities can and will become far more expensive places to live as time goes by, and indeed we believe that this is already taking place.

Our second, and key, reservation with the Rode approach, however, is that when using long term trend lines to determine whether a market is under or over-valued, one can literally pick your starting point to “prove” whatever theory you wish. A different starting point to determine the long term trend produces entirely different results. Start in 1966, as Rode does, and real house prices are indeed above the long term trend. Starting in 1995, and one could state according to this theory that the market is undervalued. If we had data for a few decades prior to 1966, who knows what the long term trend line would have looked like as a result of SA having come through an Anglo-Boer War, two world wars and a Great Depression?

The third and final consideration with regard to using a long term real average house price trend is that the average house of the mid-1960s is different to the average house of today. Real property values have risen significantly since the mid-1960s but will not necessarily wholly be seen in an index depicting the average house price. The market does not only adjust to real house price surges through a subsequent downward correction in real prices. Real per square metre existing property values can remain permanently higher if land scarcity remains permanently higher, with developers providing smaller homes on smaller stands (as opposed to flooding the market with the same sized units as in previous years).

Indeed, this has been the long term trend. As land scarcity has increased, so average stand size of new homes has diminished dramatically. Over the past decade, full title homes that our valuers have valued that were built between 1970-1974 had an average stand size of 1,063 square metres. By comparison, homes built from 2010 to date had seen their average stand size almost halve to 557 square metres. Over the same period, the average size of a home built had dropped from 203 square metres to 150 square metres. Less “frills” were also the order of the day. Whereas 69.3% of homes built from 1980-1984 had garages, this had declined to 53% by 2010. Percentage of homes with swimming pools had declined from 40.3% of those built between 1975-1979 to 7.3% by 2010+.

Therefore, when analyzing real house prices since 1966, one may well draw the conclusion that the long term real price trend line from that point is more-or-less flat, or has very little rise over time. However, if we could calculate a price index that adjusted for declining stand size/home size and level of luxuries, we would see more of a rising long term real price trend line. Because over the long term, as urban land becomes increasingly scarce, real prices are indeed rising. The real values are staying permanently higher over the very long term, and the development sector is adjusting by providing smaller and less luxurious homes as time goes by.


So are house prices overvalued by 25%? We can’t contradict the statement. All we can say is that we believe that it is not possible to say.

However, while we have stated the belief that urbanization in SA should bring about significant long term increases in real property values, we must distinguish between the long term, and the ‘shorter” term. The long term move to higher real property values doesn’t happen in a straight line, but rather in big cycles driven by shorter term fluctuations between supply and demand.

And indeed, in the near term we are also of the opinion that real house prices will decline further.

Our reasoning is somewhat different, however, and based on our perception that the market is unbalanced at present, and that the economy (and thus residential demand) looks likely to be weak in the near term, and that our own indicators of demand versus supply still point to an unrealistically priced market.

But how far the real house price decline will go is tough to call, and will depend very much on the world’s and South Africa’s ability to turn things around and get back to a respectable longer term economic growth path in the coming years.


Rode hits back at critics

Rode hits back at critics

Says the Rode Report is based on sound research.

Property economist Erwin Rode has hit out at his critics who have questioned his latest quarterly report saying house prices are overvalued by at least 25% and will take at about five years to recover.

Estate agents say their phones have been ringing off the hook from consumers seeking clarity since the release of the report on January 26 2012. Realtors Tony Clarke of Rawson Properties, Lew Geffen of Sothebys International Realty SA, and Samuel Seeff, the chairman of Seeff Property Services, say the report is misleading. Others in the industry say the information in it is unsubstantiated.

Rode has refuted this saying the information was gleaned from Absa Bank’s house price index and the Bureau for Economic Research.

Property analyst of Absa Home Loans, Jacques du Toit, has also questioned the 25% overvaluation after checking Absa data tracking house prices. He said house prices peaked in mid-August 2007. “If you compare the mid-August figure with our latest data point as at November last year, the real price of a house in the middle segment of the market was 14% below that peak in 2007,” Du Toit said.

Seeff has described the Rode report as one-dimensional sending the wrong message to the ordinary buyer.

On Rode’s view that renting is better than buying in the current market, Seeff said: “About 95 percent of buyers are not looking for investment returns or rental income, but want a foundation upon which to build a life. These are ordinary buyers looking to acquire their first home, expand or move closer to schools or jobs and cannot put their life on hold. No value can be put on owning the roof over your head; it is an investment in your own future and stability.”

Du Toit says there are instances where rentals are cheaper than a bond repayment as rentals have increased at a relatively slow pace. In some cases homeowners have kept rentals low to keep existing tenants as opposed to having an unoccupied building not generating any income.

Du Toit says incomes are likely to change due to variables like the economy, employment, household income, inflation and interest rates. It is up to a prospective homeowner to make provision for these when making the sums to buy.

Geffen says the current market suits especially first time buyers: “…We believe that with nominal prices and rates at their current historic lows, there could hardly be a more propitious time for potential buyers to enter the market. Opportunities like this generally only occur once or perhaps twice in a lifetime.”

Clarke says: “My prediction is no growth in real terms over the next year, two years, and thereafter slow growth starting at between two and four percent per annum.”

He adds there is going to be a slow uptake in new development property entering the market, which from a first time buyer’s perspective will retain its value. From an investor’s point of view “if you’re going to buy the property, you’re still getting rental on top of that return, then you need to calculate that in the equation.”

Clarke was also critical of Rode’s stance that prospective first time buyers would do better to rent for the next five years or so and invest the difference saved on a bond.

“Invest in what? What he [Rode] is not taking into consideration is the fact that a lot of properties are being sold at a distressed level which is rightsizing property values anyway because those properties are in competition with normal properties.

“From that perspective, yes, it’s going to be a while as these distressed properties are being emptied into the marketplace and it’s going to bring the real growth price down because they are in competition.”

However, Clarke says this should transpire over the next three years or so and not much longer as seen by Rode.

Geffen says Rode is “out of touch”. “For a start the banks continue to relax their lending criteria and are currently reducing their deposit requirements and granting more 100% loans as well as more loans overall.”

Geffen quotes figures from mortgage originator ooba that have shown a consistent month-on-month increase in home loan applications and approvals since the beginning of 2011.

Geffen says banks are willing more and more to provide 100% home loans. “Now we just don’t believe the banks would be doing this if they were concerned that home values were going to show a further serious decline – especially when one considers the losses they have faced just recently due to the over lending during the boom years…

“Demand is way up on 2009 levels in most large cities, and also in many smaller centres where a shortage of rental stock has pushed monthly rentals up to the point where it is now almost as costly to rent as to buy.”

Geffen points out that there has been little residential building activity in the past four years. “A really negligible amount of new stock has been added to the market during this time and with current supply steadily dwindling, we calculate that the momentum of price growth will pick up and that, short of a massive inflation shock, there will be a return to real growth within the next two years.”


Top estate agents disagree with the Rode Report

Top estate agents disagree with the Rode Report

Say the market is favouring the buyer, especially the first time buyer.

Realtors Tony Clarke of Rawson Properties and Lew Geffen of Sothebys International Realty SA have questioned the latest Rode Report that says house prices are overvalued by at least 25% and will take at least five years to recover.

Geffen says the current market suits especially first time buyers: “…We believe that with nominal prices and rates at their current historic lows, there could hardly be a more propitious time for potential buyers to enter the market. Opportunities like this generally only occur once or perhaps twice in a lifetime.”

Clarke says: “My prediction is no growth in real terms over the next year, two years, and thereafter slow growth starting at between two and four percent per annum.”

He adds there is going to be a slow uptake in new development property entering the market, which from a first time buyer’s perspective will retain its value. From an investor’s point of view “if you’re going to buy the property, you’re still getting rental on top of that return, then you need to calculate that in the equation.”

Clarke was also critical of property economist Erwin Rode’s stance that prospective first time buyers would do better to rent for the next five years or so and invest the difference saved on a bond.

“Invest in what? What he [Rode] is not taking into consideration is the fact that a lot of properties are being sold at a distressed level which is rightsizing property values anyway because those properties are in competition with normal properties.

“From that perspective, yes, it’s going to be a while as these distressed properties are being emptied into the marketplace and it’s going to bring the real growth price down because they are in competition.”

However, Clarke says this should transpire over the next three years or so and not much longer as seen by Rode.

Geffen says Rode is “out of touch”. “For a start the banks continue to relax their lending criteria and are currently reducing their deposit requirements and granting more 100% loans as well as more loans overall.”

Geffen quotes figures from mortgage originator ooba that have shown a consistent month-on-month increase in home loan applications and approvals since the beginning of 2011.

Geffen says banks are willing more and more to provide 100% home loans. “Now we just don’t believe the banks would be doing this if they were concerned that home values were going to show a further serious decline – especially when one considers the losses they have faced just recently due to the over lending during the boom years…

“Demand is way up on 2009 levels in most large cities, and also in many smaller centres where a shortage of rental stock has pushed monthly rentals up to the point where it is now almost as costly to rent as to buy.”

Geffen points out that there has been little residential building activity in the past four years. “A really negligible amount of new stock has been added to the market during this time and with current supply steadily dwindling, we calculate that the momentum of price growth will pick up and that, short of a massive inflation shock, there will be a return to real growth within the next two years.”


31 January 2012

Luxury house prices are falling fastest in Asia

Luxury house prices are falling fastest in Asia

Nairobi (up 25%) was the strongest performer during 2011, Cape Town sits somewhere in the middle.

The value of prime property in the world’s key cities rose by only 0.2% in the final quarter of 2011. Kate Everett-Allen examines the figures and looks at whether prime property is still the safe haven investors and the super-rich consider it to be.

Although the Knight Frank Prime Global Cities Index, which tracks the performance of the world’s leading luxury residential markets, rose by 3% during 2011, the second half of the year saw the pace of growth slow considerably.

The luxury housing market is now seeing the pace of price growth slip for the second time since the 2008/09 global financial crisis. In this latest cycle annual price growth peaked at 10% in Q2 2010 but has since slowed each quarter.

After the collapse of Lehman Brothers European and North American cities were largely responsible for the index’s slump. Since late 2010 it has been the Asian cities which have dampened price inflation. In Q2 2010 prices in Asia were rising at an average rate of 23.6% each year, the comparable figure now stands at -1%.
Anti-inflationary price cooling measures implemented by Asian governments, combined with worries that the Eurozone sovereign debt crisis will affect the global economy, have created a more cautionary climate.

The Q3 results show Nairobi, Miami and Jakarta experienced the strongest price growth in 2011. Economic growth drove demand and investment in Nairobi and Jakarta while foreign demand from Brazil and its South American neighbours fuelled price inflation in Miami.

But the real story is arguably further down the table. The overall slowdown in the luxury Asian markets has highlighted the extent to which the “old-world” cities of London, New York and Moscow are outperforming the overall index.

London and Moscow have ranked highly for several quarters but Manhattan’s recovery is gathering momentum. Foreign demand for New York’s luxury homes is not only strengthening, but is also starting to diversify with Chinese nationals increasingly evident, particularly in the $1-$3m sector.

Despite cooling price growth in the second half of 2011, the world’s prime markets continue to outperform their mainstream housing markets, providing some justification for their safe-haven reputations. The flight of capital towards the world’s luxury neighbourhoods increased in 2011 as geo-political events in the Middle East and North Africa took hold and the tumultuous global economy weakened the viability of a number of alternative asset classes.

Price growth in 2012 will continue to be underpinned by this flight of capital from troubled world regions. This, combined with a desire amongst wealthy investors to target property and other real assets over financial products, will reaffirm prime property’s safe-haven qualities in 2012.

* This report was prepared by Knight Frank

27 January 2012

House prices overvalued by at least 25%

House prices overvalued by at least 25% - Rode Report

Could take at least five years for the market to recover.

The latest Rode Report on the state of the property market says house prices are overvalued by at least 25% and will take five years or more to recover.

Property economist and publisher of the report, Erwin Rode, has attributed this partly to “irrational exuberance”. The phrase was used by American economist and former chairman of the Federal Reserve, Alan Greenspan, during the Dot-com bubble of the 1990s. It has been interpreted as a warning that the market might be overvalued.

Rode explains that over the past ten to 20 years people became so enamoured with property as an investment that they lost sight of the fundamentals. “In the end they were paying and are still paying prices that are above replacement value having taken into account ageing.”

“Irrational exuberance, you had it on the stock exchange, you had it in all asset classes over the ten to 20 years. Then every now and then a correction takes place and the bubble must burst sooner or later. No-one can forecast when the bubble will burst.”

As far as office demand and vacancies are concerned, the report says moderating economic activity, a drop in business confidence is having a weakening effect on office rentals. However, office and industrial buildings are still well below the replacement value and are fundamentally good value.

It says in the third quarter of 2011, national market rentals grew only by 4%. “This comes after having achieved an unsustainable growth rate of about 11% in the first quarter,” Rode says.

The report states that building cost inflation (the cost to construct buildings as measured by the Building Cost Index), has accelerated dramatically rising to 14%. This is mainly due to contractors no longer being able to absorb rising input costs.

Demand for industrial space has shown poor to moderate growth in market rentals. In the 2011 Q4 the best performance was seen in Durban and central Gauteng followed by the Cape Peninsula and Port Elizabeth.
The report says prospects for industrials rentals remain weak as a result of the domestic economy struggling to find its feet amidst uncertain global economic prospects.

On the residential front flat rentals are still outperforming both houses and townhouses with a 2% year-on-year growth. Houses and townhouses have a 1% year-on-year growth. Rode says these rates are still well below the rate of consumer inflation which stood at 5% in the third quarter of 2011.


Third party was behind secret Sharemax settlement

Third party was behind secret Sharemax settlement

A mystery buyer paved the way for court to sanction rescue scheme.

A mystery “investor” has paved the way for a court to sanction the Sharemax rescue scheme. The scheme, designed to save Sharemax-promoted syndication companies from liquidation, was sanctioned by the North Gauteng High Court on Friday.

It is also expected to be a formality for the Reserve Bank to withdraw its directives to repay investors. The Reserve Bank-appointed inspectors are also expected to be relieved of their duties at the various syndication schemes.

Last year Moneyweb reported that the Sharemax rescue had hit a speed bump. Clients of attorney Chris de Beer asked the court to delay sanction of the rescue scheme. This delay was granted. De Beer argued that proper process had not been followed, and that the rescue plan seeks to legalise an illegal scheme. The directors of the syndication companies were not impressed. They issued this media release at the time.

This year it was revealed that investors opposing the rescue, including De Beer’s clients, had received a secret settlement.

It has been speculated that this settlement may have been paid from investors’ funds. However, a source close to the rescue has confirmed that the settlement was made by a third party.

This means that the objecting parties sold their Sharemax investments to a third party for an undisclosed sum.

The identity of the mystery buyer will be open to some speculation. A cynic might believe it is a person or entity with strong vested interests in the rescue plan’s success.

In theory, the identity of the buyer ought to be public information. The syndication schemes are public companies, which opens their share transfer registers to public scrutiny. However, the directors of the Sharemax syndication schemes are not known for their disclosure. Moneyweb has previously been refused unrestricted access to financial statements. The directors also went to great lengths to keep the finer details of the rescue scheme out of the public eye.

Prior to publication a copy of this article was sent to Dominique Haese, director of the Sharemax syndication companies. We received this response:

Mr Cobbett,

Your email’s of 11h38 and 14h03 refer.

All the 311 Schemes of Arrangement have been sanctioned by Court and the relevant Court Orders have been registered.

I am unfortunately in no position to comment on the content of the rest of your emails and/or the “draft article”.

In not dealing with your “draft article”, please do not assume anything as to the correctness or not of anything stated or to be stated in such “draft article” or any subsequent actual article/publication of anything emanating from yourself.

All the rights of the Sharemax Syndication Companies, as re-structures, both prior to and post re-structuring, are reserved.

All press releases are and will be exactly that, press releases, and will be provided to the press in the normal course.


Dominique Haese

Managing Director

Frontier Asset Management (Pty) Ltd

25 January 2012

Propert survey shows High Net Worth segment is the weakling

Propert survey shows High Net Worth segment is the weakling

Propert survey shows High Net Worth segment is the weakling

The “lower priced” market segments looked the healthiest in 2011.

The FNB Estate Agent Survey suggests that the metro market segment that agents define as the Lower Income Segment showed the strongest demand-supply “fundamentals” of the 4 “suburban” income segments during 2011, while the so-called High Net Worth segment was the noticeable weakling.

The survey asks agents to place the areas that they serve into one of 4 categories, i.e. High Net Worth areas (average price = R3.7m average in 2011), Upper Income areas (average price = R2.2m), Middle Income areas (average price = R1.2m), and Lower Income areas (average price = R679,000).

One of the key questions asks agents to provide a subjective rating of demand in their area on a scale of 1 to 10. As one views the estimated demand levels in the different segments, one sees that the Lower Income segment was the only one to rise mildly in 2011, compared with average demand in 2010, thus becoming the segment with the strongest demand rating of 6.12 average for last year. The Middle Income segment follows closely with a rating of 6.04, which represents a slight weakening on 2010, while the Upper Income (5.64) and High Net Worth (5.42) segments were noticeably weaker.

Through 2010 and 2011, the High Net Worth segment’s demand rating has been significantly weaker than the other 3 segments, although the Upper Income Segment’s weakened demand rating narrowed the gap with the High Net Worth Segment in 2011.

A further question relates to estimates of the average time properties remain on the market prior to being sold. Using the average time of homes on the market prior to sale as a proxy for the balance (or imbalance) between demand and supply, the Lower Income segment once again outperformed the rest in 2011, keeping its average estimated time of homes on the market virtually unchanged at 13.8 weeks in 2011. By comparison, the 3 higher priced segments all showed a noticeable rise in average time on the market for 2011 as a whole, with the Middle Income Segment averaging 15.5 weeks (compared to 13.5 weeks in 2010), the Upper Income Segment 18.4 weeks (compared to 15.4 weeks in 2010), and the High Net Worth Segment 20.6 weeks (compared to 17.8 weeks in 2010).

It must be borne in mind that higher income areas normally do have a higher average time on the market than lower income ones, but more significant is that the Upper Income and High Net Worth segments appear to have shown a more significant increase in average time on the market in 2011 than the other two segments.

When it comes to financial strength, however, it would appear that the Middle Income Segment, with average price around R1.2m, took the honours when comparing the levels of selling in order to downscale due to financial pressure with selling in order to upgrade, between the different segments.

In terms of relative price performances, FNB has created its own area value band indices for residential-dominated areas in the 6 major metros, grouped according to average prices of areas, and using Deeds data for transactions by individuals in the 6 major metro regions with which to estimate these. These indices differ from the 4 estate agent income segment groupings, as they include the entire metro residential market, importantly what are known as former Black, Coloured and Indian Township regions. Since the “relief rally” (or mini-recovery) that we saw in 2010, estimated house price growth in all but one of our Major Metro area value band indices has shown a tapering off.

The area value band that appears to have narrowly “defied gravity” in 2011 has been the so-called Affordable Segment, which includes a group of lower-priced metro areas shoes average price was R375,460 in 2011. The Affordable Area Value Band saw estimated average price growth of 6.5% in 2011, mildly higher than the 6.1% recorded for 2010

The next 3 higher area value bands were all grouped in a very narrow price growth range in 2011, with the Lower Income Value Band (avg. price = R726,943) showing growth of 4.6% in 2011, what we deem to be “Middle Income Areas” (avg. price = R1.110m) growing by 4.8%, and our Upper End Metro Suburbs (avg. price = R1.87m) rising by 5%. Slightly higher price growth in the higher of the 3 value bands may appear contrary to what agents are saying about the Higher Income segment being fundamentally weaker. However, one should allow some room for statistical error when price growth differences are so small. In addition, the higher segments tend to lack more in terms of pricing realism, implying that while price growth may have been ever so slightly better for those properties transacting in the higher segments, much of the relative market weakness is seen in longer average times that properties stay on the market, i.e. in slower turnaround times rather than in weaker price growth.

However, at the other end of the spectrum to the “outperforming” Affordable Segment, an area of noticeable weakness is once again found in our Luxury Area Price Index (avg. price = R2.89m in 2011 with maximum price cut-off of R5m), which is similar in average price to the High Net Worth areas defined by estate agents. This index suggests a noticeable underperformance in this segment compared to the  lower priced value bands, declining on average by -7.6%, following an also underperforming  +2.9% rise in 2010.


The High Net Worth Segment appears to have been the underperformer in the major metro housing market. This is arguably not surprising. The High Net Worth segment is possibly less interest rate sensitive than the lower end of the market, being less credit-dependent than the lower end. One would thus expect the High Net Worth segment to have shown less of a mini-recovery in 2010, given that this recovery was largely driven by massive interest rate cuts. Our perception is that the High Net Worth segment is more “economy-dependent”, with high net worth households receiving greater portions of their overall incomes from business/investment income and discretionary remuneration, which perform weaker in tougher economic times such as those of the past 4 years.

Relatively tough financial times in the household sector as a whole should also be expected to drive demand towards the more affordable parts of the market, also benefiting the lower end more. On top of this, the astronomical increases in municipal rates and utilities tariffs bills is sure to be affecting the top end of the market far more severely.

The list of possible reasons for the High Net Worth segment’s apparent sub-par performance is therefore lengthy. As we look set to head into a year of slower economic growth in 2012, we would anticipate “more of the same”, i.e. for the lower-priced end of the residential market to show a better relative performance than the higher priced segments. However, we must emphasis that all segments are expected to see something of a slowdown in 2012. In addition, little in the way of further interest rate stimulus is anticipated in 2012, with the Reserve Bank having raised its consumer price inflation forecast to reflect an expectation that the consumer price inflation rate will remain above the 6% target limit for the entire 2012.

* This report was prepared by John Loos, Household and Property Sector Strategist, FNB

Residential property prices to trade sideways in 2012

Residential property prices to trade sideways in 2012

Impacted by the poor economic growth environment.

It is expected that residential property prices are likely to continue to drift sideways in 2012, impacted by poor economic growth. However, according to CEO of ooba, Saul Geffen, with interest rates remaining at historically low levels, which may drop further in 2012, home buyers and home owners will continue to benefit.

Geffen says it is expected that the South African residential property market will experience limited real growth in property prices in 2012, impacted by the poor economic growth environment.

He says that 2011’s third quarter economic growth figures have confirmed that South Africa has once again had little real economic growth, which should mean further pressure on the fragile labour market and negative real disposable income growth. “All of this will lead to limited purchasing power. Whilst possible interest rate easing is possible, interest rates are not likely to make a major difference to residential property demand in 2012.

“However, the reduction in interest rates of 650 basis points since 2008 has improved affordability and reduced the cost of servicing a bond significantly. The record low interest rates, coupled with subdued property price inflation, increased bank approval rates and lower deposit requirements, will continue to positively influence the property market.”

Geffen says that the current economic climate is the biggest challenge currently facing the property market. However, there has been consistent improvement in the bank lending criteria in 2011. “The ability to obtain financing is one of the biggest drivers in the property market, so the consistent improvements are a positive indicator for the property market going forward.

“In addition, ooba has recorded significant growth in the number of applications and approved loans in 2011 and this growth is expected to continue. The rise in applications and approvals are attributed to the continued relaxation in lending criteria by the major lenders as well as ooba’s market share growth.

“The company’s statistics reveal that the number of bond applications during November 2011 increased by 36% from November 2010. The statistics also revealed that November was a record month for the value of approved home loans, which increased by 33% in comparison to November 2010. The value of approved loans in November is the highest recorded since May 2008, over three years ago.”

He says that in today’s tough lending environment, the origination value proposition is stronger than ever. “A bond originator is able to shop the application to multiple lenders so that homebuyers are assured of a higher probability of approval and on competitive terms. According to the latest ooba statistics, nearly a quarter of applications that were initially declined by one lender were approved by another. These applications would remain declined if they were not submitted to other banks post the initial bank decline,” concludes Geffen.

* This report was prepared by ooba

Residential property industry faces another challenging year

Residential property industry faces another challenging year

Estate agencies are facing a challenging twelve months.

With another sluggish year likely for residential property in South Africa, estate agencies are facing a challenging twelve months.

“As with 2011, property prices are just holding their own which impacts on agents’ commissions,” says Herschel Jawitz, CE of Jawitz Properties. “Unlike other industries where professional fees are charged, our commission doesn’t go up with inflation each year. The only ways our earnings increase is if property prices increase, or we sell more properties.”

If property prices only go up by two or three percent in 2012 then, in real terms, commission earnings will decline. “Added to this, costs are increasing by at least 10%, and the equation becomes interesting. Normally, if you are sacrificing margins you can try to make up the numbers with higher volumes but the numbers of sales for the most part are going to be flat year-on-year and in some areas may even decline.”

The economics are simple – fewer sales, flat prices, and homes taking longer to sell equates to estate agencies spending more money with less return.

Because of these factors, 2012 will be another very competitive year for the industry, as growth will have to include taking market share from competitors. “The bigger brands should be better off by the end of the year,” he says.

The decline in the number of estate agents supports this view with the fall off in agents coming mostly from the smaller agencies that have not been able to sustain themselves in a challenging market. The number of estate agents has decreased by 60 percent since the height of the boom in 2006/7 to about 25000. Most of the bigger national franchised brands or the larger brands in the metro areas have fared significantly better in this period and while absolute market sales may not be increasing, relative market share will have grown.

In addition to market share growth, the larger franchised brands are also seeing the benefit of the smaller independent agencies realising that the support of a national brand may be key to not only growth but also survival - especially if the current market persists for a few years. Most of the franchised brands have experienced solid growth in the number of new offices opened. Jawitz Properties grew its franchise network by 35% in 2011 including opening franchised offices across the Eastern Cape and expanding into Kwa-Zulu Natal. “I expect this trend to continue this year,” he says.

Key success factors for 2012 will be similar to many industries – meeting clients’ service expectations, employing technology as a critical enabler and most importantly, upholding the integrity of the brand and the people that represent it.

* This report was prepared by Jawitz Properties

23 January 2012

'Top 10 property investor tips for 2012' : Property News from IOLProperty

'Top 10 property investor tips for 2012'

According to research conducted by Auction Alliance, more than 8% of all South African homeowners with mortgage bonds are still underwater with their loans (where balances are higher than values), hinting that there are more distressed sales still to come.

In effect, this will continue to restrain price growth in some areas, and create major constraints for certain sellers in 2012.

"So, if it's still a buyer's market here are 5 tips for 2012 that are aimed largely at the group that needs the most advice - South African home-sellers. In addition, there are also five tips to help buyers navigate the surplus of investment opportunities available" comments Rael Levitt.

1. Price your house right from day one

The old-school strategy of real estate crossing their fingers and hoping for a better offer, whilst starting at a higher mandate, will be brushed off by most home-buyers.

For an objective gauge, have your estate agent produce the latest comparable sales, including distressed sales and sales in execution in your area as well as a recent summary of sales prices versus original list prices.

However, be aware that this information doesn't reflect the homes that failed to sell.
Also, do not rely on a small sample of one or two homes.

2. Play nice

As a seller today, you need buyers far more than they need you. The days of the arrogant seller is well and truly over if you want to sell that is - you have to be ready to not only negotiate price but offer extras such as improvements (or a cash discount), appliances, a few months of bond payments or even seller financing which is a growing trend.

Home sellers who've been quietly sitting on the sidelines advising their agents to ignore low offers simply don't have that luxury now. Instruct your agent to listen intently to prospective homebuyers' misgivings about the home and seriously consider adjusting your price accordingly.

3. Don't fall for distressed seller schemes

Fraudsters are targeting distressed homeowners with "deals" that can sound perfectly legit.
Many of these fraudsters were the same ones getting buyers into the boom market. Some offer loan modifications for upfront fees while others offer fee-based "help" in navigating bank sales assistance programmes, sometimes claiming they're attorneys.

There are also con-artist "investors" compelling desperate owners to sign over their homes with empty promises that you can remain in the property indefinitely.
Others are telling former owners they can get their homes back for a lump sum. Be forewarned: never sign blank documents or documents with blank lines. If you're unsure of an offer, have independent attorneys look carefully at these offers.

4. Buyer financing

Realise that it's harder to qualify for home loans these days. Credit records are under greater scrutiny, and lenders are often demanding a minimum 10% down payment and some pricing flexibility from the sellers, especially if the bank valuation doesn't reach the selling price.

Consider cash offers, even if they're not the highest. Reject offers that are too-low, gently and with encouragement, telling them they're close. You don't want to give away your house but you don't want to give it back to the bank either. These days, meeting halfway usually means meeting buyers on their half.

5. Get involved with your agent

Estate Agents often advise sellers to retreat from view during show houses in case they disclose something unpleasant that could ruin the deal - that's now changed.

If you can control your ego and emotions and come off as a keen, realistic and flexible seller you are a far better spokesperson than your estate agent.

Be ready to answer would-be buyers' questions about the neighbourhood and schools in the area, but be careful about making verbal promises or getting into legal discussions.

Here's some advice on how best to operate in a buyer's market.

1. Widen your market

There is still an overabundance of well-priced housing inventory out there, which means you needn't immediately narrow your search to the first house you fancy.

That's especially the case with distressed sales, which can be a nightmare to close in a timely manner. There are some for-sale deals that need only a little polishing while others need substantially more. Therefore, it is best to shop around.

Don't dismiss insolvency sales or other bank properties, sales in execution, auction homes, for-sale-by-owner or lease-to-own homes. Pick at least three favourites and work from there.

2. Be wary of valuations

Are you perplexed by the home valuation your bank or agent did when they are both reputable organizations? Or are you puzzled how that bank valuation can be 25% or more above or below a very recent valuation you've had done?

Well, value estimates can vary widely, sometimes by hundreds of thousands of Rand, even by the admission of the companies themselves. There are way too many variables in the valuation game to give too much credence to estimates that are impersonally calculated. Nothing beats a nuanced up-to-date professional valuation done by three to four highly reputable companies.

3. Buyer's due diligence done properly

Due diligence on a potential property means so much more than going through the motions with the usual contracts, financial details and electrical compliance certificates. It is possible to negate substantial risk by doing a thorough inspection of the property, and if you feel unqualified or inexperienced, it is advisable to hire a property inspector to do this on your behalf. Ask them to check for;

  • Unpermitted work such as illegal room additions and garage conversions.
  • Consider the overall energy efficiency of the home with an energy audit (a growing trend with escalating Eskom costs)
  • Be sure property boundary lines are accurate. If there's any question, hire a land surveyor to research the original deed and to stake out the property's lines and your neighbours' property lines to avoid future disputes.

  • 4. Create a neighbourhood checklist

    Go to the Body Corporate or Homeowners Association and ask to see their financials. (There is no point buying into a distressed building management).
    Spend some time around the neighbourhood and briefly interview neighbours. Determine if there are noisy neighbours, signs of gang activity, nocturnal barking dogs, crime, frequent loud parties and/or suspicious night-time visits. Are there lots of rental homes? Is there a restrictive or difficult Homeowners Association?
    Determine what types of buildings can be constructed on vacant land adjacent to the neighbourhood. This helps avoid unpleasant future surprises. Also, check if there is constant noise from a nearby highway or busy street.

    5. Don't lose the right house because you are being too difficult

    Most buyers know that this is their market and timing is great to get into the market, but don't forget that not every seller is desperate and many will not want to deal with you if you are too arrogant or patronising with your offers.

    The ones, who don't have to sell, simply won't and you could land up being one of those people who never find a house because your offers have been too low. By all means negotiate, but there will come a point that sellers won't want to deal with you - so be smart about what you offer.

    Lastly, remember that real estate is a long-term investment, and what may a financial stretch now will, over time, become insignificant if you did your homework on the property.

    Auction Alliance Press Release

    20 January 2012

    China`s big 2012 bets: South Africa rocks - China perspectives | Moneyweb.com

    China`s big 2012 bets: South Africa rocks - China perspectives

    China's big 2012 bets: South Africa rocks

    Asian giant set to snap up more juicy assets in Africa, aiming for double-digit returns.

    Many investors are looking to Asia, in particular China, for returns as the world heads into yet another tough year. China, meanwhile, is foraging in Africa for opportunities to generate superior returns.

    Most visible on its list is South Africa. The China-South Africa burgeoning trade relationship is in the spotlight yet again, with news just before Christmas that China's sovereign fund has acquired a sizeable stake in Shanduka.

    China Investment Corporation has reportedly paid a staggering R2bn for 25% of the unlisted investment holding company with interests in coal mining and other industries. Shanduka is a familiar name in business circles in South Africa. Its charismatic chairman, Cyril Ramaphosa, was widely tipped to succeed Nelson Mandela as South African president.

    The Chinese fund manages about $410bn of China's $3trn in reserves and has investments in Chinese banks and French energy companies, among other entities. Clearly it expects Shanduka to deliver lucrative returns. The China fund earned just under 12% last year on its overseas portfolio investing mostly in high-risk assets, according to the Wall Street Journal.

    2012: Expect lots of China-Africa deals  

    We can expect big money deals involving the Chinese government and related financiers and South African companies to become increasingly common in 2012. Developed markets continue to look unattractive.
    South Africa has a relatively sound regulatory environment, developed business infrastructure and entrepreneurs who are enthusiastic about unlocking returns across Africa. China spotted the obvious opportunities in hooking up with South Africa in its African forays some time ago.

    China welcomed South Africa as the fifth member of its sexy Brics club along with Brazil, Russia and India this year. It has trumpeted the benefits of South Africa as an access point to a massive continental market of 1bn or so people.

    The man who coined the term Bric, asset management heavyweight Jim O'Neill of Goldman Sachs Asset Management, was less convinced. He said on broadcasts televised in China when Brics delegates met on the Chinese island of Sanya in April that South Africa is effectively an economic minnow compared to the Bric countries. (For more on that, read China's favourite African son can do no wrong.)

    But, criticism about South Africa gaining entry to the Bric clique this year failed to dampen China's enthusiasm for South Africa. Standard Bank (JSE: SBK), an adviser to Shanduka and a major deal-maker in Africa, recently declared that South Africa and the rest of Africa are "flavour of the month".

    China's appetite for African assets, for now, appears to be insatiable. Earlier this year, Standard Bank released a forecast that China's investments in Africa would leap 70% on 2009 levels, to US$50bn by 2015.

    There are no signs that this target won't be met. China is already Africa's largest trading partner, with China-Africa trade volumes for 2011 expected to come in at more than US$150bn (about $126bn in 2010). They are expected to double to US$300bn in four years.

    Standard Bank has the inside track on what investors, and the Chinese in particular, are up to in Africa. It has banking tentacles across Africa.

    It is also partly owned by the Industrial and Commercial Bank of China (ICBC) through a 20% stake acquired for US$5.5bn in 2008. Standard Bank has partnered with ICBC, the world's largest bank, to fund projects in Africa.

    Africa's investment returns tantalise

    There are many other signs that China is only just getting started with its investment programme on the continent. Ramaphosa said of Shanduka's latest deal, which saw China' s sovereign fund buying shares mainly from Old Mutual and Investec, that the plan is to explore future opportunities in South Africa and elsewhere in Africa.

    In November the Wanning Declaration emerged from a meeting of more than 400 diplomats, politicians, researchers and business representatives from about 40 African countries in Wanning in the Chinese province of Hainan. Encouraging Chinese investment in private enterprise in Africa is a major objective in the new agreement.

    Chinese and South African politicians are likely to get closer as a new parliamentary exchange mechanism is bedded down. A direct SAA flight from Johannesburg to Beijing, from January, will help oil the wheels of friendship.

    In the Seychelles the political relationship is now so cosy that China is even considering taking up the offer of what effectively would be its own port. China refuses to acknowledge that it would be getting its very own African naval base.

    Many of us will not like it that Chinese operators are likely to further entrench themselves across the continent. With a reputation for undercutting African firms and using their own cheap Chinese labour instead of creating jobs in communities, the jury is out on whether Chinese investment and loans in Africa are actually good for Africa in the long run.

    China also has a reputation for aiding and abetting the continent's evil-doers in business. China's controversial diamond mining activities in Zimbabwe - with two mines this month placed on the United States' sanctions list - are a prime example.

    But for some elite operators, like South Africa's Ramaphosa and Mugabe's diamond dealing pals, the opportunities on the horizon undoubtedly glitter as China explores the African continent for higher returns than it could expect elsewhere.