Residential market remains "over-valued"

Residential market remains "over-valued"

The residential market adjusts to affordability challenges in 2 ways...

INTRODUCTION –THE RESIDENTIAL MARKET ADJUSTS TO AFFORDABILITY CHALLENGES IN 2 WAYS – REAL PRICES FALL, OR CHARACTERISTICS OF PROPERTIES CHANGE.

Currently, as implied in recent reports, we remain of the opinion that the residential market remains unrealistically priced, or “over-valued”, but believe that it is not possible to ascertain by how much. We argue that it is unrealistically priced based on our current perception of a weak economy which is not fuelling strong demand, and signs emanating from both our estate agent and valuers’ surveys that supply is very strong relative to demand.

Indeed, since 2008, we have entered a period of real house price decline, and the FNB House Price Index is around 17% down since February 2008 in real terms (average house prices adjusted for consumer price inflation). This is a very normal part of the residential property cycle.

But contrary to the views of some, the market adjustment to real property values does not only take place through a decline in real home values. In our steadily urbanising country, accompanied by increased concentration of economic activity around key urban centres, and along with a slow pace of government infrastructure investment, “effective” land scarcity is mounting over the long term (looking past the property cycles that come and go). By “effective” land scarcity we mean that, while there is theoretically no shortage of land in SA (with a whole Karoo at our disposal), there is a mounting shortage of land located in reasonable proximity to where the economic activity takes place, land with the appropriate level of services and infrastructure required by its owners. Transport infrastructure is key in this regard.

The result of mounting effective land scarcity around urban centres is a long term rise in real property values (again, remember, this is looking longer term than the property cycles that come and go).

This long term rise in real property values will not fully be witnessed in the long term real price growth of an average house price index. This is because a house price index measures the value of the average house that gets transacted. And over time, the average house is steadily changing in size and characteristics.

Yes, the market adjusts in 2 ways to deteriorations in affordability. The first has been mentioned, i.e. through real price declines. The 2nd way is being seen in the long run decline in average stand size, in average home size, in a shift to more sectional title, and in less luxuries such as domestic workers’ quarters and swimming pools.

Indeed, if we could construct an average house price index for the past few decades, that could be adjusted for these changes to the “average home” over time, we believe that one would see more of a long term rising trend in real house prices, than is the case when measuring the average house price regardless of changing characteristics.

We now take our annual look at how these long term changes are unfolding.


HOW THE DEVELOPMENT MARKET HAS BEEN ADAPTING TO INCREASING “EFFECTIVE” LAND SCARCITY

We would contend that effective urban land scarcity began to increase noticeably as from the late-1970s onward, exerting upward long term pressure on real urban property values. This upward long term pressure on real prices would not necessarily be witnessed in the long term real average price trend, as reflected in the country’s major national house price indices. Rather, it would be reflected in the changing long term composition of such house price indices. This is because the residential development sector adapts in various ways to any mounting affordability challenge, which results in stand sizes, building sizes and building features being adapted as affordability fluctuates over time.

Key Macro-Economic factors causing increased urban land scarcity

At what stage of our country’s modern history did land scarcity begin to increase noticeably? We would contend that it was from a stage of the 1970s onward. Whilst urbanisation was already in progress at that stage, it may not have reached the pace that it did in the 1980s, when Apartheid-era “Influx Control” measures began to fail, and were eventually abolished. Rather, the noticeable change in the 1970s was the steady stagnation in general government fixed investment, importantly in the area of construction (civils) projects.

This was due to a general deterioration in the state of government finances as a worsening the political situation caused increasing allocations to defence and national security budgets, while an increasingly isolated economy saw government revenues steadily coming under pressure.

One of the expenditure items to suffer was general government fixed investment, and for our purposes notably in the area of construction projects.

So, while theoretically SA has no great land scarcity, and we could build new Joburg suburbs all the way to Bloemfontein, in reality this has become less practical in recent decades due to limited expansion in urban infrastructure, very importantly, (but not only) in the area of transport infrastructure. This has implied increasing urban congestion to, from, in and around key business nodes.

After a few decades of broad increase, General Government construction fixed investment peaked in 1971/72 at 4.9% of GDP (gross domestic product). Thereafter, the decline was very noticeable, with construction fixed investment bottoming at 1% of GDP in 1998. It has since seen some improvement, but only as far as around 2% of GDP, seemingly insufficient to address the level of backlogs created by years of infrastructure neglect, given that the real level of government and parastatal capital stock had moved almost sideways for about 2 decades.

The resultant pressures are visible, on electricity infrastructure and generation capacity, water and sewerage infrastructure, but notably on transport infrastructure.

During the period of government fixed investment stagnation, the pace of urbanisation picked up

While government infrastructure investment was stagnating, the urbanisation process was set to pick up speed in the 1980s, as Apartheid Era “Influx Controls” collapsed, contributing further to effective land scarcity in South Africa’s cities. Whereas at 1980, the percentage of SA’s population that was urbanised was estimated at 48%, by 2010 this was believed to have risen sharply to 62% (according to World Bank data), and the end is not yet in sight.

Residential Densification, through reducing stand sizes for newly built properties, commenced around the same period that general government throttled back construction fixed investment.

From our FNB valuations data, where valuers note the estimated building date of a property each time they value one, we can glean important information regarding the size and characteristics of homes built in certain periods.

A long term acceleration in government infrastructure investment through the 1950s and 1960s to early-70s (much of the urban infrastructure investment admittedly being in and around the highly-traded former “white” suburban areas) corresponded with an increase in the average size of full title residential stands to an average peak size of 1061 square metres for homes built from 1970-1974.

With the onset of steadily declining focus on infrastructure by general government, so too we went into a long term declining trend in the average stand size of a house. This did not even really halt during the respective property booms of the early-80s and 2000s, when purchasing power rose strongly, because the reality was that urban land was effectively becoming more scarce as a result of a lack of new services and important infrastructure, and the long term real value per hectare or per square metre was steadily rising as a result., we believe. In the latest period, i.e. 2010 to date, that average size of a full title stand was 524 square metres, around half the average stand size of homes built in the early-70s.

But the adjustment to land scarcity in more recent times has gone further than merely a reduction in average size of full title stands. Average building size has also declined significantly, from a 203 square metre peak for homes built from 1970-1974, to 146.7 square petres for buildings built from 2010 to the present.

For full title properties alone, the average size declined from 291 square metres to 166 square metres over the same period. However, the decline in full title building size has not quite kept pace with the decline in average stand size. It would appear that households are more happy to compromise on land than on house space. The result has been an increase in the full title land utilisation rate (building size/stand size) from a low of 20.3% for homes built from 1965-69, to 31.7% for the period 2010 to date.

But the adaptation to growing effective land scarcity does not stop there. Since the 1985-89 period, where 94.6% of homes valued were full title homes, there has been a shift to increased sectional title living, where land is far more highly utilised, with full title homes built from 2010 to date amounting to a lesser 75% of all homes built in the period.

Households are also reducing the luxuries in order to address the long term deterioration in home affordability.

A further noticeable way in which South African households are addressing the long term rising trend in real urban property values (if one could measure them on a per square metre basis instead on the basis of average home value), is via the dramatic reduction of certain “luxuries”. Domestic workers’ quarters, an Apartheid Era institution, peaked in buildings built from 1955 to 1959, with 51.5% of homes built in those years possessing this characteristic. For homes built from 2010 to date, the percentage is a far lower 11.5%.

The late-70s appears to have been the Golden Era of the swimming pool, with 40% of homes built from 1975-79 having pools (although admittedly some pools may have been built at a later stage). Thereafter, the long term declining trend set in, and a mere 9.1% of homes built from 2010 to date have such luxuries, according to the significant sample of homes valued by FNB.

Garages are an interesting home feature in that their inclusion or exclusion from homes appears more cyclical than the other features, with an increasing percentage of homes being built with garages in the booms and decreasing in financially tough times. From 2010 to date, only 51.6% of homes valued have garages, down from the 69.5% for the boom period 2000-2004.

Declining fertility rates, and resultant long term declines in average household size, are causing bedroom numbers to diminish

Urbanisation is not the only characteristic exerting pressure on urban land availability over the long term. Households breaking up and establishing new households at an earlier average age, amongst previously-disadvantaged sections of the population, imply that the number of households should be growing faster than population growth. This implies the need for a significantly greater number of smaller units in terms of bedroom number. This is also reflected in a rising percentage of two bedroom homes, and a decline in those that have 4 bedrooms or more.

Conclusion - So how are these long term trends influencing the make-up of the average house price index over time

It is important for users of house price indices to understand what they are dealing with when using such data for analytical purposes, and to appreciate that the composition of such an index changes over long periods of time. Therefore, the average house price in the 1960s or 1970s refers to a significantly different average house to the one that is reflected in the index at the present time.

Recent statements have been made to the effect that real house prices are “mean (average) reverting”, i.e. that they always revert to the long term mean. This implies that if they are currently above the long term mean they are over-valued, and the converse if they are currently below the mean.

Such statements are very much a case of “stating the obvious”, because current real prices influence the mean. So, even should real house prices never decline again, the mean would eventually converge with the average real price (unless we have an unlikely event of real house prices continually rising further).

But it is also important to understand that, when the market has become less affordable, as it did in the recent boom years, there are two mechanisms for market correction. The first is the obvious, i.e. that real prices must decline. This has indeed been taking place recently, and more decline is anticipated in the near term. But the second mechanism is the one that we have demonstrated above, i.e. through adjustments to the stand and home size, and home characteristics, of newly built homes.

The FNB House Price Index has an 11.5 year history, so it is not possible to determine the average characteristics of homes transacted back in the 1960s for instance. However, the changes in characteristics of buildings by building date suggests that the difference would be very significant. Long term urbanisation, along with growing infrastructure constraints are believed to have led to a growing urban land scarcity, in turn leading to this change.

Viewing the average size of stand for full title properties included in the FNB House Price Index, along with the average building size (Note: not by year built but by when the homes were transacted), we have seen a significant change over the relatively short period of just over a decade. Average stand size of full title homes transacted from 2000-2004 was 925 square metres, which declined to 737 square metres for the period 2010 to date. Average building size is more cyclical, and has increased slightly in the period 2010 to date on the preceding period, but at 139 square metres is still significantly less than the 159 square metres recorded for the period 2000 to 2004.

And looking past the current stage of the property cycle, where real property values are indeed in a declining phase for the time being, the long term home densification process is expected to continue as the long term effective scarcity of urban land mounts, and as real land values resume their longer term rise.

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

Wendy Machanik back in court for fraud

Wendy Machanik back in court for fraud

Wendy Machanik back in court for fraud

Machanik is currently out on bail of R25,000.

 

Former estate agent Wendy Machanik's criminal case is set to continue in the Johannesburg Specialised Commercial Crimes Court on Friday.

Machanik and the chief financial officer of Wendy Machanik Property Holdings, also its chief financial officer, Bruce Bernstein, had their case postponed in October last year.

This was to allow the defence counsel to submit representations to the National Director of Public Prosecutions.

The two face charges that include conspiracy to commit fraud, failing to keep accounting records and failing to reflect over 100 transfers between the trust account and business account.

Machanik is out on bail of R25,000 and Bernstein is out on R5000 bail.

The High Court in Johannesburg made a final order in May last year, prohibiting Wendy Machanik Property Holdings or Machanik herself from operating "trust, savings accounts or other interest-bearing accounts".

The high court ruled Machanik should not be granted a fidelity fund certificate for 2011, which would have allowed her to operate as an estate agent.

...

The Investment Case – Resilient Property Income Fund Ltd - 101: For beginners

The Investment Case – Resilient Property Income Fund Ltd - 101: For beginners

The Investment Case – Resilient Property Income Fund Ltd

Finding big returns in small towns

Over the last five years, the number of shopping malls in South Africa has risen sharply. Yet, for the most part, this rapid increase has not dented growth in rental incomes for the large property companies that own these centres.

This is an indication of the surge in demand there has been for retail space in the country. It is a situation that property group Resilient (JSE:RES) has taken advantage of in an innovative way. Its focus has been on investing in shopping centres outside of the major nodes, in places such as Klerksdorp, Ladysmith and Burgersfort.

“We really like the composition of Resilient's portfolio,” says Portfolio Manager at Sanlam Private Investments (SPI) Dr. Anton von Below. “The ability of the group's management to select good quality buildings and sites has been the primary factor in the success of their strategy.”

Resilient's property portfolio includes a 60% interest in the Highveld Mall in Emalahleni, 60% of the Mall of the North in Polokwane, the Tzaneng Mall in Tzaneen, the Diamond Pavilion in Kimberley, 70% of the I'langa Mall in Nelspruit, the Rustenburg Plaza and 55% of the Jabulani Mall in Soweto. It also holds 12.9% of the Capital Property Fund, 22.0% of the Fortress Income Fund – B and 18.6% of New Europe Property Investments plc. In addition, it owns Property Index Tracker Managers, the company that manages the Proptrax exchange traded funds.


History

Resilient was listed on the JSE in 2002, with an initial focus on industrial parks in transport nodes and non-metropolitan shopping malls. Over time, it divested from its industrial interests, to concentrate solely on its retail assets.

The group also acquired interests in other listed property funds, including Shops for Africa, Acucap Properties, Pangbourne Properties, Ambit Properties and Capital Property Fund. Pangbourne Properties was merged with Capital Property Fund in 2011, and Resilient's holdings in the other funds have all since been sold.

It promoted the listing of Diversified Property Fund in 2005, into which it placed its portfolio of industrial properties together with smaller rural retail properties. Diversified Property Fund was however re-absorbed into Resilient in 2008.

The group's entry into the Romanian market came in 2007 when it was involved in the establishment of New Europe Property Investments. The new fund was initially listed on the London Stock Exchange, before it obtained a secondary listing on the JSE two years later.

Resilient listed the Fortress Income Fund in 2009, with 103 B-grade properties assembled from within its existing stable.


Dividends

The total distribution (final plus interim distribution) paid by Resilient to unitholders for the 2011 financial year was 230.71 cents per unit. This followed the 211.83 cents per unit distributed in 2010, 194.13 cents per unit in 2009 and 169.98 cents  per unit distributed in 2008.
The fund offers a yield just over 6%.


Which funds hold this stock?

Outside of the leading listed property funds, Resilient is not widely held by the best performing South African unit trusts over the last three to five years. None of the six leading general equity funds include the stock in their portfolios.

It does however feature prominently in all three of the top listed property funds over that period. It is the fourth largest holding in the Stanlib Property Income Fund at 8.4%, while the Prudential Enhanced SA Property Tracker Fund gives it a weighting of 3.6%. The Investec Property Equity Fund has reduced Resilient's weighting from 11.6% two years ago to 6.1%, but it remains a top five holding in the fund.

To see which funds are buying and selling the counter, visit Moneyweb's Unit Trust Portfolio Tool.











Why would an individual consider investing in this company?

Resilient's strategy of managing shopping centres outside of the major centres in South Africa has been a very successful one. By focusing on under-serviced areas, the group has tapped into a growth story that has delivered excellent returns.

This is due to a combination of factors, including the limited competitive landscape in non-metropolitan areas and that consumers in these cities tend to be less indebted than their big city peers. This means that they enjoy healthy levels of disposable income to spend at Resilient's malls. Increased levels of government social spending have also given more buying power to rural dwellers.

“The strength of spending in non-metropolitan areas has been a result of the way the economic cycle has hit South Africa,” SPI's Dr. von Below. “Percentage-wise, there has not been such a draw down on spending in rural areas, due to the social grants. So rural dwellers were not as affected as those in cities who lost their jobs or had to forego pay rises, for instance.”

Although Resilient's portfolio is limited to retail properties, its holdings in the Capital Property Fund and Fortress Income Fund give it access to the commercial and industrial markets. Through its stake in New Europe Property Investments, Resilient also has exposure to the office, retail and industrial property markets in Central and Eastern Europe. The group is also able to use the sale of these holdings to finance new developments and extensions to its directly-held properties.

In addition, Resilient's management has an excellent reputation in the industry for their ability to get the most out of their assets. Every one of the properties in the fund has been a success, and its affiliated funds have also been strong performers.


What risks does this company face?

The rising cost of services in South Africa, particularly electricity and municipal rates and taxes, is pushing up occupancy costs for shopping centre tenants. This is making it more difficult for property owners to extract rental increases when leases come up for renewal and also raises the likelihood of vacancies.

“Resilient really faces the standard risks of any property fund in South Africa,” Dr. von Below believes. “Other than escalating costs, there is the threat of ongoing weakness in the South African economy that will weaken yields.”

Consumer debt in South Africa also remains stubbornly high, and this is likely to continue to impact on consumer spending. Although Resilient's properties are more shielded from this risk than those in metropolitan areas, the group is still dependent on the profitability of its tenants.


Where does this company’s growth potential lie?

Although Resilient believes that building new shopping centres in South Africa may not be as profitable as is has been over the last decade, it still has a strong pipeline of developments in the local market. It is in the process of building new malls in Burgersfort, Secunda and Sterkspruit, and is extending The Grove outside Pretoria, Mvusuludzo Mall in Thohoyandou, Circus Triangle in Mthatha, Village Mall in Kathu, Northam Plaza and the Highveld Mall in Emalahleni.

As Romania's retail property market is still fairly underdeveloped, New Europe Property Investments will also offer an interesting avenue of growth. The group has purchased a number of shopping centres with good potential for redevelopment, and there is still significant scope for it to expand as many international retailers see the country as a key growth market.

In another offshore move, Resilient is planning to enter Nigeria during 2012. The group believes that there is significant potential to develop a portfolio similar to the one it boasts in South Africa, particularly as it will be following local retailers moving into that market. It has already identified sites for ten new malls and has agreed in principle to invest up to R500m. As SPI's Dr. von Below notes, however, entering the Nigerian market is never easy.

“We've seen so many businesses, like retailers and banks, trying to get into that country and finding it difficult,” he notes. “But if anyone can make it work, it's probably the team at Resilient, particularly because they already have experience of getting involved in less-developed regions through what they've done in South Africa.”

For more, visit Moneyweb's click-a-company profile on Resilient Property Income Fund Ltd.

Intraday

 

 

...

House price growth strong in January

House price growth strong in January: ooba

Residential property prices rise 6.7%.

(I-Net Bridge) - Residential property prices rose 6.7% in January, compared with corresponding period last year, according to bond originator, ooba.

This growth is the highest annualised price increase since July 2010, when a year-on-year (y/y) price appreciation of 9.8% was recorded.

The January oobarometer price index reveals that the average house price rose to R850,589 from R797,011 a year earlier. The average purchase price among the first time buyers continues to show a significant y/y increase of 12.8% to R650,574, from R576,675 a year ago.

Chief executive Saul Geffen said the increased activity in the first time buyers' market was reflected in the consistent price growth recorded each month since May 2011. He said 50.92% of applications received in January comprised of first time buyers, up from 48.18% recorded previously.

Geffen said ooba's home loan application volumes were 41% higher in January in comparison with the same period last year, with the value of home loan approvals showing a y/y increase of 58%.

"ooba recorded consistent month-on-month increases in home loan applications in 2011 and we expect this growth to continue throughout 2012. The increase is attributable to a combination of market, organic and acquisitive growth."

Other indicators measured by ooba reveal that the average approved home loan size is showing a y/y increase of 6.3% in January to R722,900, up from R680 195 a year earlier.

The average deposit as a percentage of purchase price increased by 2.7% to R127 689 in the period under review compared with the previous corresponding period, equivalent to an average deposit of 15.0% of the purchase price.

The initial bank decline ratio has increased by 4.3% y/y to 50.3% and the effective approval ratio is showing a y/y decrease of 5.6% to 60%.

Geffen said the drop in the approval ratio was primarily as a result of the tightening of credit by one of the banks, and a higher proportion of lower deposit loans as a result of the relaxation in criteria by another bank. Lower deposit loan applications typically have higher decline rates as they are considered more risky.

What to do if I cannot pay my bond anymore? Know your options

What to do if I cannot pay my bond anymore? Know your options

With such tough financial times at present, more and more people are finding themselves in debt or financially strained.

Failure to pay home loan instalments can lead to the involuntary sale of one's home - but this last resort, and a lifetime filled with debt, can be avoided.

According to Richard Gray, CEO of Harcourts Real Estate South Africa, "It is so important for those individuals facing financial pressures to know the options that are available to them. Harcourts works in partnership with a number of banks which aim to assist such individuals and lead them out of debt."

Reaching the stage where an involuntary sale or sale of execution is mandatory can be devastating. It involves a legal process by which the Court grants the bank authorisation to sell their client's property in order to recover money that is in arrears. In this process, the owner will not only lose their home, but their name will be listed with the credit bureau for many years. This will severely affects their credit rating and will most definitely create problems with all future financing of home loans, cars, the approval of credit cards and the opening of accounts. It could also affect their eligibility for employment and the renting of property.

Instead of waiting until it is too late, a property owner can rather choose a voluntary sales option which will see a bank and selected real estate agents extending their professional help to the property owner. There are a number of benefits that banks offer to distressed clients, some include: discounted commission from estate agents, discounts of existing loan balances should the sale of the property not cover the debt, and 0% interest on shortfall repayments and extended repayment periods. "Essentially, when a home-owner is going through a difficult time, this really should be the only option," says Gray.

In many cases, distressed sales also offer potential buyers the opportunity to benefit in the purchase of the property. Some banks offer buyers up to 100% bonds on all distressed sale properties, as well as discounts off transfer costs and registration fees. These benefits, combined with a generally lower asking price are able to attract buyers and lead to the successful sale of the property - a win win situation for both buyer and seller.

Harcourts Press Release

'Banks not hard on bond defaulters'

'Banks not hard on bond defaulters'

Banks were not quick to foreclose on bond defaulters because they only recovered about 55 percent of the outstanding debt when properties were sold at auction.

"There is a misconception that banks adopt a hard-line approach in these matters," advocate Dees Ramdhani, acting for SA Home Loans, submitted in the Durban High Court last week.

His comments were in the wake of recent criticism levelled against financial institutions by Judge Rashid Vahed for adding legal costs to defaulter's bills without court sanction.

Before him was an application by Changing Tides 17, Pty Ltd - the trustee of SA Home Loans Guarantee Trust - which was suing Newlands West home owner S'thembiso Mbazana, asking for judgment and an order declaring his home specially executable.

Judge Vahed noted that Mbazana had been charged legal fees, before any court had made any costs order.

He said it was also evident that Mbazana had made some monthly payments "and if you take off the legal fees, there is very little left in arrears".

He suggested that SA Home Loans settle the matter.

When the same application came before Judge Kevin Swain last week, Ramdhani said the matter had been settled. He said he had been instructed to tell that the court that the banks always made a concerted effort to resolve the matter before heading to court, because they recovered very little at auction.

"There are various internal departments at SA Home Loans which make contact with the bond holder at various stages in an attempt to rehabilitate the account prior to the matter being handed over to attorneys. The attorneys, in turn, try to settle the matter without having to foreclose on the property."

Judge Swain suggested that in future matters, these endeavours should be set out in the bank's affidavit before the court.

The Mercury

Banks favour government property subsidies

Banks favour government property subsidies

The affordability gap in the housing market is expected to be narrowed by changes to government housing subsidies and the commencement of the R1 billion guarantee fund to promote access to home loans for lower-middle-income households.

President Jacob Zuma said last week in his State of the Nation address that the guarantee fund, managed by the National Housing Finance Corporation (NHFC), would start its operations in April.

From April, people earning between R3 500 and R15 000 would be able to obtain a subsidy of up to R83 000 from provinces to enable them to obtain housing finance from an accredited bank, he said.

The gap housing market comprises households that earn between R3 500 and R7 000 a month, which is too little for them to obtain a home loan, yet too much to qualify for state assistance.

Gap housing is the term used to describe the shortfall or gap in the market between residential units supplied free by the state that cost R100 000 and less and houses delivered by the private sector that cost in excess of R250 000. The R1bn guarantee fund was announced by the government in 2010.

Pierre Venter, the general manager for banking and financial services at the Banking Association SA, said last week that the revamped housing subsidy scheme and risk underpinning of the guarantee fund would work together to close the affordability gap in the housing market and was welcomed by the industry.

Venter said revamping the finance-linked subsidy programme to include households earning up to R15 000 should be sufficient for households to own a home.

He said the banking sector welcomed this initiative because about 20 percent of South Africa's working class fell into this market and were unable to afford a home.

Closing this affordability gap would help the banking sector to fulfil the role it would like to fulfil, he said. He said the start date of April 1 for the subsidy programme was not unrealistic as it was only being revamped.

However, the same commencement date for the guarantee fund was probably too optimistic.

Venter said the association's banking members had been engaging with the Human Settlements Department through the NHFC but no agreements had been signed yet between the department and individual member banks. He said a programme like the guarantee fund was voluntary and individual member banks had to sign up to the fund in their own capacity.

Venter said the demands that the fund would place on banks in terms of their processes and computer systems would remain unknown until the product had been finalised with member banks but would determine how quickly banks could implement the programme.

"System enhancements could delay implementation quite substantially," he said.

He said the guarantee fund would take risk out of the overall cost equation for banks, which determined the interest rate clients were charged on mortgage bond.

The cost reduction would vary from bank to bank and also depend on the loan size but would probably mean banks would be able to cut the interest rate they charged these clients by between 2 and 2.5 percentage points.

This would help to close the affordability gap but would not close it completely.

Venter said the success of this programme would also depend on the amount of money that provinces and municipalities put into the subsidy programme.

"If the provinces look to put money into pure subsidy housing and little into gap housing, the impact will be low (small)," he said.

Business Report

Zuma's house subsidy gift

Zuma's house subsidy gift

Thousands of South Africans could soon afford housing, following a key announcement by President Jacob Zuma.

The affordable housing is aimed at people who earn too much to qualify for RDP housing but not enough to persuade banks to grant home loans.

In his 2010 State of the Nation Address, Zuma announced that the government was planning to set up a R1 billion fund to "incentivise the private banking and housing sector" to put roofs over more heads by promoting access to loans.

In his speech yesterday, Zuma illustrated the plight of many by using the example of Mzukisi Mali, a public servant from the Fingo area in Grahamstown, who had written to Zuma, saying: "In 1994 my income was too high to get an RDP and too low to get a bond, this continued until to date. When I apply for an RDP I am told that I do not qualify and cannot get a bond because I am risky to the banks..."

Zuma announced: "Fortunately we have gone some way to address the problem facing Mr Mali and many others. We are pleased to report that this fund will start its operations in April, managed by the National Housing Finance Corporation."

He said that from April, "people earning between R3 500 and R15 000 will be able to obtain a subsidy of up to R83 000 from provinces, to enable them to obtain housing finance from an accredited bank".

Leading property company owner Bill Rawson said the subsidy was "great news".

"There is a huge chunk of people who want ownership, who want to get into the housing market, and who are looking for ways to afford to do so."

He said the R83 000 loans would essentially serve as deposits buyers could put down on properties, to help persuade banks to fund the balance through loans.

Rawson said the Parklands-sunningdale suburb on the West Coast had shown just how big this market was in greater Cape Town. Houses there that were now selling for far more than R500 000 had been introduced as affordable housing in the 1990s and had met a huge gap in the property market at the time.

Speaking for the City of Cape Town, mayoral committee member for human settlements Ernest Sonnenberg welcomed the initiative.

"The city is a major supporter of the GAP housing initiative as part of our suite of housing delivery options.

"The city already has agreements in place with Standard Bank and Nedbank in particular, where the city has made well-located land available specifically for the GAP housing market.

"While it is difficult to quantify the number of Capetonians who will benefit from this fund, we know that it will help many of the city's nurses, teachers and policemen, who are unable to access housing finance in the private bond market," said Sonnenberg.

A report would be submitted to the council soon to extend the possible GAP market beneficiaries from those earning R10 000 a month to those earning R15 000 to align the GAP policy with the new fund, he said.

MSP Developments, part of the Mevelaphanda Holdings group and widely regarded as the largest developer of affordable housing in greater Cape Town, is working on on more than 9 000 houses in three large developments - in Blue Downs, between Kraaifontein and Durbanville, and between Somerset West and Firgrove.

Commercial director Philip van der Berg said: "We're essentially building whole new towns, and this subsidy could offer great incentive for more such developments...

"The problem is that you will sometimes sell the same unit three times over because of the difficulty many people have with getting home loans. And of this, the biggest constraint has been in securing a deposit, with banks still being reluctant to grant 100 percent bonds in line with the National Credit Act."

But Rawson warned that there were several potential obstacles to the roll-out of more suburbs like these.

First, buyers would still have to prove exemplary payment profiles - that they had managed their debt responsibly in the past - because this was the key factor banks used to decide whether to grant loans.

Second, even if there was a proven market for houses priced up to about R500 000, aided by the new subsidies, property developers would still battle to access finance to fund such new developments.

Third, banks still categorised many poorer Cape Town suburbs as "red line" areas, where they remained extremely reluctant to grant housing bonds.

Cape Argus

Home loan plan targets civil service

Home loan plan targets civil service

The government's mortgage default insurance (MDI) scheme, aimed at helping lower-middle-income earners to own their own homes, would start operating in the new financial year, it emerged yesterday.

The R1 billion scheme would initially apply to police officers, nurses and teachers, Deputy Human Settlements Minister Zou Kota-Fredericks said in Parliament.

"We have not quantified in terms of numbers, but we know exactly what category (of people) we are talking of - police, nurses and teachers," she said.

"Professionals who (earn) between R3 500 and R15 000 (a month) - that is the area we are focusing on at the moment."

The MDI would allow people who earn between these amounts to "access a subsidy from the provinces of up to R83 000", enabling them to secure housing finance of up to R300 000 from an accredited bank. It would "mitigate the default risk" on mortgage loan repayments to the banks, Kota-Fredericks said.

Business Report

Housing MEC warns on property subsidies

Housing MEC warns on property subsidies


Human Settlements MEC Bonginkosi Madikizela says the national government should not raise "unrealistic expectations" among the public with the announcement of a R1 billion fund to help people secure home loans.

"I doubt that the programme will begin in April, because to implement (it) we need to be ready with the policy and administrative structures... and, as of yet, have received no clarity or guidance," he said.

During the State of the Nation address last week, President Jacob Zuma announced a R1bn gap housing guarantee fund for those who cannot access RDP housing or home loans from banks, but earn between R3 501 and R15 000 a month.

Those earning R3 501 would qualify for the full subsidy of R83 000, while those earning R15 000 would receive a R4 000 subsidy. The housing fund will be managed and implemented by the National Housing Fund Corporation.

"My view is that through stabilising the property market and transferring assets into the hands of more people who can pay for and maintain these assets, and lowering the costs of their mortgages, we will avoid a financial crisis brought on by the collapse of the middleincome property market, as was recently seen in the subprime mortgage crisis in the US," he said.

Yesterday, Madikizela said he would like to see a much greater amount made available for the fund, "so that the hundreds of thousands of earners in this category in our province can be assisted and people can be quickly empowered with asset ownership".

"The subsidy to help people earning between R3 501 and R15 000 a month will not benefit everyone, but only a limited few, and on a first come, first serve basis. I welcome the government's initiative to provide a housing subsidy of up to R83 000.

"However, the subsidy will need to be drawn from the Western Cape government's budget allocation, and we will not be given any extra funding for this. As such, the amount of subsidies we will be able to offer will be limited.

"I would welcome an increase in the Western Cape human settlements budget in order to better serve the gap market," he said.

He said the statement of R83 000 for everyone must be clarified because those earning R3 501 a month would qualify for the full subsidy of R83 000, which would be decreased on a sliding scale as the income of the applicant increased, which might result in those earning R15 000 receiving only around R4 000.

Last night, Madikizela held a public meeting at the Andile Msizi Hall in Khayelitsha to explain how housing allocations will take place for the Nuwe Begin Housing Project in Mfuleni.

About 900 RDP houses will be allocated to residents of Khayelitsha's TR Section out of a total of 1 900 houses.

The beneficiaries will be drawn from people living on the wetland and also those from surrounding areas, based on the City of Cape Town's housing list.

The rest of the housing will include 700 gap houses, and another 300 RDP houses will be allocated to people in Mfuleni.

He said the selection would prioritise those who had been waiting the longest - the elderly and the most deserving.

Cape Argus

Segments of property market to turn in 2012

Segments of property market to turn in 2012

Century Property and Paragon Lending Solutions believe certain areas could show growth.

CEO of Century Property Developments, Mark Corbett, says after a nearly four year slump following the 2008 global financial crisis, segments of the residential property market are likely to show signs of recovery in 2012.

Corbett says there were already early warnings signs of this recovery in 2011. “For example, the number and value of building plans approved towards the end of last year was well up on the previous year. So too was the number of new residential units completed,” Corbett said.

He said while the majority of these units were in the affordable segment of the market, there had also been signs of buyers seeking out the secure, lifestyle estates.

Corbett says plans approved for residential development went up by 2.2% in the third quarter of 2011 compared with the same quarter in 2010. He maintains the completion of new residential units countrywide increased by almost 7% in the 2011 Q3.

He also said the tightening in lending policies by banks as a result of the National Credit Act (NCA) had also contributed to the slump in the residential market.

“Many consumers still suffer from adverse credit ratings which throttles their access to the credit markets, but there are signs that the banks are relaxing their lending criteria (as well as loan to value requirements) which should allow for a modest increase in mortgage lending growth in 2012”, Corbett said.

He further stated that in recent months banks appeared to have shown greater willingness to extend mortgage finance and have relaxed their lending criteria.

“This was inevitable, as the banks are sitting on large cash holdings earning relatively small returns. Demand for mortgage lending is coming from new entrants to the property market, untainted by adverse credit ratings, and existing home owners seeking their ideal home,” Corbett said.

He says South Africa is also likely to see a return of foreign investment in 2012. “The weaker rand, coupled with cheaper local property prices, will attract foreign money in search of superior long term growth. Overseas property markets, from the US to Spain and China, have been pulverised by the unfolding international banking crisis, which is far from over,” Corbett says.

The CEO of Paragon Lending Solutions, Gary Palmer, has a different view. Palmer says the impact of the recession on the value of residential development and stringent legislation in the banking sector has made it almost impossible for South African property owners to secure a loan from the major banks. This is where the security for the loan is residential investment property such as secondary flats or houses rented out to third parties.

This is leading to property owners seeking finance in order to initiate or expand projects to turn to second-tier lenders for assistance.

“In the current environment, big banks are tending to rely on sustainable income to service their loans. As a result, while they are amenable to providing finance to commercial property owners with blue chip tenants where there are long leases in place, there is currently almost no appetite for financing residential investment properties or blocks of flats where the residential income will be used to service the loan,” Palmer said.

He says demand in rental residential property is strong in this country at the moment, driven by the rising cost of living and the relatively low approval rates on home loan applications

Jawitz trust storm brews

Jawitz trust storm brews

Criminal charge laid against franchise.

More than a year after property baroness Wendy Bernice Machanik was accused of "systemic misuse of trust moneys" Jawitz Properties has accused the owner of its Jeffreys Bay franchise, Renette Block, of theft and misappropriations of money believed to be in the region of between R200 000-R300 000.

A statement released on Friday said Jawitz is taking legal action against Block “amidst serious allegations of theft and misappropriations of moneys held in a trust and moneys paid to the franchise on behalf of their clients”.

Jawitz Properties CEO, Herschel Jawitz claims Block has admitted to having misappropriated the funds.

Despite saying “there are two sides to the story” Block refused to comment on the matter, however, when asked if she had admitted to the allegations she said “no I didn’t”.

“You must remember the image being sketched (by Jawitz Properties) is malicious, there is no proof of any financial audit having being done,” according Block’s attorney, Vian Charl Tee from Strauss Daly Attorneys in Port Elizabeth.

“It may be that there is a personal vendetta” being carried out against Block, he said.

“Other than that there is no comment,” he said.

Tee refused to comment when asked if Block had admitted to any form of maladministration and refused to comment when asked if his position was that Block was innocent of the allegations.

According to Jawitz, at the beginning of January, Jawitz Properties “started receiving some complaints from owners of properties we were managing … they were saying they hadn’t received rent despite the tenants saying they were adamant they had paid the rent.

“When these issue weren’t being resolved we realised there was something amiss, we confronted Block about it and she admitted that she had been taking money from the trust account and taking money from the transaction account which does not belong to her and should have been paid to owners”.

An independent audit contracted by Jawitz Properties to scrutinise the subsidiary, has found that there is a mismatch between funds going into and going out of the accounts, says Jawitz.

“These allegations still need to be proved in a court of law but as far as we are concerned there were funds that did not belong to Block that where misappropriated by her for her own use,” says Jawitz.

“Moneys are missing … we suspect it’s going to be in the region of two to three hundred thousand rand.”

Jawitz notes that some of the moneys have been repaid by Block and repaid to the affected clients.



A criminal charge has been laid against Block at the Jeffreys Bay police station. The Estate Agency Affairs Board (EAAB) has been notified and has thus far frozen the trust accounts affected by the fraud and misappropriation.



Jawitz is also pursuing an urgent High Court interdict to force the allegedly “uncooperative” Block to “hand over complete control over all the bank accounts to us so that we can better manage and ascertain exactly what is going on”.



The EAAB was unavailable for comment at the time of going to print.



“Like everyone else I guess she found herself in a very difficult financial situation and evidently believed that she would be able to put back the money as she took it but like all of these things, eventually it comes home to roost,” says Jawitz.

Do`s and don`ts of rental property

Do`s and don`ts of rental property

Guidelines for investors to ensure that they get the most out of their investment.

Property investors with access to finance will find many good opportunities to build their rental property portfolio in the current market. However, while there are value-for-money properties to be bought, there are still a few guidelines investors will need to follow to ensure that they get the most out of their investment, says Adrian Goslett, CEO of RE/MAX of Southern Africa.

Don’t – Be too hasty and forget the research

According to Goslett, regardless of whether buying a property as a primary residence or as a rental investment, buyers need to do the necessary homework and start the exercise with the goal of gaining as much information as they can get their hands on. With a vast mass of information at their fingertips, buyers can complete a large majority of their groundwork while sitting behind their computer. Internet property search portals are a great way to compare pricing and what different areas offer.

Do – Choose the type of rental market that suits you

Once the research has been concluded, an investor should consider the type of rental market they want to get into, as this will have a large impact on the return of investment. This decision will mostly be based on the location of the rental unit. The off-campus student accommodations are always in high demand and with the constant influx of students each year, it is likely that finding a tenant will be fairly easy. Units within walking distance of the campus that are in a secure complex are always popular among students and parents alike, and have shown consist healthy return on investment over the years. Another type of market is rental units in proximity to financial business hubs. These also generate a good return of investment with the high demand for properties within an easy distance for those who work in the business hub. Given that these units generally cater to business executives, a higher rental price can sometimes be asked.

Don’t – Charge over-priced rentals

Determining the rental price that can be charged for any rental property will be based on the area and average rental for units with similar offerings. Over-priced rentals will make the competition look better and make it a lot more difficult to find a tenant. A comparative analysis of the rental market in the particular area the rental unit is situated in, will give a good indication whether the rental amount is fair and market related. This comparison will also give the investor an idea what they can expect to earn and whether the investment is worth it.

Do – Consider other costs

Buying a rental property won’t just cost the investor the bond repayment, there are also levies, transfer costs, legal costs and of course the cost of maintaining the property. Unless covered by insurance, any defect that the property has will be for the owner’s pocket and even if nothing goes wrong, the property will still need to be painted and kept in good working order. It is vital for landlords to have an emergency fund that they can use for large unexpected expenses that may occur. Another cost for investors to weigh-up is their time and effort. If they are going to manage the property themselves then it will take time, alternatively if they decide to employ a management agent, it will be an additional expense.

Don’t – Forget to read the fine print

Make sure that the legalities of all agreements with tenants are correct. Goslett says that it is important for landlords to have a lawyer or property professional check their lease agreement to make sure that they are within the requirements of the law. It is also advisable for landlords to research and know the law and what it prescribes. There is no point in making a return on the rental investment, only to use the money to pay for legal disputes with tenants.

Do – Consider the following

•Apply risk management principles and have an agreement with regards to what is acceptable tenant behaviour, sign a legally valid lease agreement, secure a deposit and agree on breakage costs.

•Inspect the property on a regular basis at a time that suits the tenant. The timeous collection of rentals, levies, rates and taxes each month is also important.

•Consider appointing a professional rental management agent, which can be a cost-effective and efficient solution to managing a rental property. For a percentage of the rental income, the agent will screen potential tenants and conduct full credit check as well as tenant history and they will collect the rent each month.

“If the guidelines to buying a rental property are adhered to, a rental property investment can be an exciting way to realise returns on your property investments, but be warned it is not everyone’s cup of tea,” Goslett concludes.

* This report was prepared by RE/MAX

Top 10 steps to find your ideal home

Top 10 steps to find your ideal home

Current property market offers buyers a wide selection of homes to choose from.

Due to the fact that the current property market offers buyers a wide selection of homes to choose from, the selection process can sometimes be tough. Adrian Goslett, CEO of RE/MAX of Southern Africa, says that while most buyers probably have a good idea of what they are looking for in a home, there are a few steps they should follow to help with their final selection:

1. Make a wish list

Goslett advises buyers to write down everything they need and want in a property. The first aspect buyers should consider when making their list includes the type of property they prefer.

“Buyers need to decide if they are looking for a freestanding home, a cluster or a unit in a sectional-title complex or secure estate. Then they need to decide if they would like a home they can renovate or one they could just move right into without changing a thing. A property in need of attention should have a lower asking price than one that's fully renovated and a place that's two or three years old will be cheaper than one that's brand new,” says Goslett.

He says that buyers should also determine the details in terms of the number of bedrooms they require, the entertainment and garden space they would need, etc.

2. Differentiate between wants and needs

Once a wish list has been drawn up, Goslett recommends that buyers separate out items that fall into the wants category, which are the nice to haves but not essentials, from those that fall into the needs category, which are specifications that the buyer cannot compromise on. “Buyers need to determine whether or not they really need that swimming pool and a large stand, or if they could compromise by buying a smaller stand in an estate that has communal facilities, instead, for example.”

3. Work out affordability

“Determining a price range,” says Goslett, “is one of the most crucial steps in the selection process.” Buyers need to figure out how much they would be able to afford on monthly costs, including bond repayments, maintenance, levies and rates, etc. “Since this exercise will undoubtedly impact on the type and size of a property that a buyer can actually afford, many buyers may choose to revisit their wants and needs list after adding up the cost and change some items that impact most on the price.”

4. Pre-qualify for a bond

Buyers will just end up wasting everyone's time by looking at homes that they cannot afford to purchase. “By getting a pre-qualification on a bond, buyers will be able to determine whether or not they qualify for the necessary finance and will get an idea of the estimated amount that the financial institution would be willing to lend,” says Goslett. “This, along with the step above, will determine the price range in which buyers can begin searching for properties.”

5. Location

The emphasis on the importance of location remains as strong as ever. When looking at areas in which to purchase property, Goslett says that buyers should consider what locations they need to reach regularly, how they plan to travel there and how long the journey will take. Schools and other amenities will also play a large role in this step of the selection process for many buyers. “Buyer should make a list of their favourite or ideal neighbourhoods and then make sure that their budget matches what the homes cost in these areas, which will help to narrow the list down,” he says.

6. Start the search

The internet is the ideal starting place to begin a house hunt. There are numerous specialised websites that have easily-searchable property listings. “But,” says Goslett, “because property websites don't always cover everything that's for sale in every area, local newspapers are also a good research tool for buyers. Buyers should also visit their local estate agents to ask what’s coming onto the market, or drive around their favourite areas to spot any for sale boards going up. Most estate agents will also take note of a buyer’s specific requirements and will cross reference this with properties the company has on their books,” he says.

7. Choose a good estate agent

It is essential for a buyer to find an expert to work with, according to Goslett. “Ask for referrals and interview various candidates in order to ensure you select an agent that is professional, experienced and ethical. It is also best to select an agent that has good knowledge of the areas in which you are thinking of buying a property.”

8. Learn the real estate market

The more knowledge a buyer has about the property market in which they are thinking of buying, says Goslett, the more equipped they will be to make an informed decision. He suggests that buyers ask their agent to send them a list of homes that have recently sold in the area within their price range as well as a comparative market analysis of the area to help determine where the best value lies.

9. Find out what is for sale

Aside from making a shortlist of the properties found on the internet, through the local newspaper, from driving around or from an agent, buyers need to match the list with all of their criteria including their accommodation requirements, price range and location. The next step is to set up appointments to view the properties on the shortlist and begin comparing them.

10. Practice your patience

Goslett warns that for some buyers, depending on their requirements, it may take time to find the ideal home. “Buyers may look at everything for sale and not fall in love with anything. In cases like this, buyers should ask their estate agent to add them to their email list to receive notification of suitable listings as they come on the market. Patience here is key,” Goslett concludes.

* This report was prepared by RE/MAX