South Africa: Road to recovery

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The real estate sector in South Africa is showing early signs of upward movement after more than three years of underperforming, though any improvement in sales and buyer interest is still thin and analysts are wary of predicting an end to the slump amidst uncertainty over the local and global economies.

According to the results of First National Bank’s (FNB) first-quarter 2012 Estate Agent Survey, issued in mid-April, the first three months of the year saw a marginal increase in demand and some improvement in the balance between demand and supply, suggesting a more realistic pricing level was being reached. Though results differed somewhat across the country, there was an overall improvement in demand for residential properties.

The survey also showed that the average amount of time a property is on the market has decreased, dropping from 17 weeks and six days from the last quarter of 2011 to 15 weeks and six days. However, this is still almost twice the average of eight weeks in 2008, before the global economic crisis undermined sales and confidence. There was also a slight improvement in the numbers of properties that sold for less than asking price, the study found.

One factor that still points to a less-than-healthy real estate market is the high level of properties being put up for sale due to financial pressures. A full 20% of properties being sold were put on the block because owners were forced to “downscale”, local media reported.

RE/MAX of Southern Africa, for example, has sold more than 100 distressed properties in the first two months of 2012, marginally down on the same term in 2011. However, this should not yet indicate the development of a trend, according to Peter Gilmour, the chairman of RE/MAX of Southern Africa.

“While the number of distressed properties listed in the first two months this year is a slight decrease from the same period last year, it is by no means an indication that the numbers of distressed properties entering the market are slowing down,” Gilmour said in a statement issued on April 12.

Indeed, there has been no shortage of capital holding back potential buyers. Data issued by the South Africa Reserve Bank (SARB) at the end of March showed a 7.92% increase year-on-year in private sector credit extension (PSCE) as of the end of February, up from the 7.33% registered the month before.

However, while general lending was well up, the figures showed there was little increased appetite for home loans, with demand for mortgage funding remaining flat for the last three months of the period covered by the bank’s report. Mortgages, which pre-crisis made up the majority of private household credit, have dropped to around 18% of the total.

The property market has seen some improvement recently, however, with the average housing price up 6% in March, compared to 3.2% in 2011. Samuel Seeff, the chairman of Seeff Properties, said he is unsure if the rebound can be sustained.

“More people are buying homes as prices are slowly increasing. We find that more buyers are prepared to pay close to asking prices. Several agents also said sellers have recently become more realistic with their asking prices,” Seeff told the Cape Times in early April, adding that this upward momentum may not last. “Now that things are looking up for our industry, people have been hit with increases in petrol prices, electricity, higher municipal rates and the increase in food costs.”

These rising costs, together with increased administered costs, could flow directly into the consumer price index (CPI), although estimates from the SARB state that the rand is currently overvalued by some 5%. Still, as of February, consumer inflation was running at 6.1%, just above the upper limit of the SARB’s 3-6% target range. Anything in excess of the top of the bracket could see the bank move on interest rates.

While the SARB has kept its key rate at 5.5% since November 2010, should inflation continue to edge up, the central bank may be forced to take action to curb higher consumer demand. Many analysts expect the reserve to increase its interest rate by at least 25 basis points before the end of the year.

If the SARB is forced to raise interest rates, this could take some of the momentum out of any rebound by the real estate sector, at least in the short term. As well, a worsening of the global economy due to a spread of the European debt crisis could further slow South Africa’s economic recovery and that of its property market, though it will be some months before the industry will be impacted by any movements in inflation, rates and a potential international downturn.

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