South Africa’s insatiable property appetite

Small rental apartments for up to R2400 a month are being snapped up like hotcakes, but larger family units with two bedrooms or more at rentals from R3500 are testing affordability levels, says Soula Proxenos, Managing Partner of International Housing Solutions (IHS).

When one takes a bird's eye view of the affordable property market, a supply and demand mismatch is evident with levels of consumer interest hampered above the R3000 per month mark.

Overall the demand for housing in the affordable property sector is huge, but access to finance and associated costs are driving consumers to rent rather than buy.

There are clear bands of affordability in terms of monthly rental or bond repayment levels.  There are no current vacancies for the small and cheaper units, but the larger units priced on average from R2800 to R3200, depending on their size and whether furnished or not, are not getting rented as fast as the cheaper smaller units. These units are also renting well but the cheaper units are flying off the shelf like hot cakes.

There is huge interest from potential buyers in inner city Johannesburg.

Unit prices average R350 000 in downtown areas, but accessing end user finance is still a challenge for this market. Affordability becomes a problem for units priced above R450 000 and our research shows unit sales above R500 000 are very slow.

I H S partners with developers in the provision of affordable housing by injecting equity capital in return for a shareholding. It is already a partner in numerous projects, having invested about R500-million of its much larger South African Workforce Housing Fund.  This investment has financed the creation of 17 000 units of new or renovated units.  IHS expects to have doubled its investment levels to around R1-billion by next year.

Among its current projects are a partnership with AFHCO to convert the old Greatermans building in downtown Johannesburg into over 400 rental units. Another project is with the Brian Falconer Property Group to develop 2 400 new homes near Carnival City, a third with Calgro M3 Holdings to develop some 6 400 homes in Fleurhof south of Johannesburg and a forth with the Aengus Group to refurbish 1 700 homes in the inner city Johannesburg area.  And there are a number of additional projects in the pipeline including a large public private sector partnership in Soweto.

Defaults in rental payments are relatively low across the board and rental housing demand and rental inflation have not been negatively impacted despite the worldwide recession. But, unemployment and the fear of unemployment was dampening the enthusiasm of both prospective buyers and mortgage financers. 

We remain very positive about South Africa. The 2010 FIFA World Cup exuberance and the worldwide recovery - which will hopefully be more apparent in the new year - is fuelling the bounce back in the overall property market.

But, in the affordable sector, there is an important balancing act that needs to be managed. On the one hand we have a massive opportunity in terms of the demand for homes and on the other we have the threat of banks' funding drying up for both end-user  and development finance. 

And although interest rates are at historic lows, only limited stock in the affordable price band is currently being constructed.

Pent-up demand coupled with current low interest rate levels have made existing unit stocks more affordable and attractive, but the lack of new stock is driving up the price.

The constraining factor all round remains that of end-user finance.

Mortgage providers have made their credit criteria more exacting and have, until very recently, required large deposits from households that conventionally have little or no savings. In recent weeks the mortgage supply appears to have loosened up a bit, but it is still constrained.

The time has come for government to encourage financial institutions to introduce fixed rate mortgages for families that qualify at current low interest rates.

These borrowers might not be able to sustain a 3% or larger increase when interest rates start climbing again and this is preventing them from taking the plunge now while rates are relatively low.

Fixed rates or a cap on how high interest rates can go are critical for households with less disposable income. These households are most negatively impacted on when interest rates increase and this inevitably leads to foreclosure and bank lending being withdrawn and in return impacts on the ability of developers to produce stock.

This will make affordable housing remain in a boom-bust cycle instead of a more robust sustainable pattern.

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Comments

 

responses to this article

Good article, lots of info Cheers, well written. by Pete on December 14 2009, 08:27 Find this comment inappropriate? Report it

For once, an article that matches my experience I concur with the observations made in the article. It matches my expereince perfectly. I busted my balls finding even a teeny cement dog box studio for under R3000 while being forced to ignore page after page of R3-3500 offers because they were simply . .more out of my price range. It's a sign of the times that I was seriously considering moving in with my girlfriend and living in sin simply to have a decent place to live. Clearly landlords in the middle-upper market brackets can afford to sit around with empty flats while they wait for their meal tickets to arrive. F*** the South African property market. It's an abortion that serves no-one as it should, (except maybe the usual suspects but don't get me started). . .less by Benny on December 14 2009, 13:15 Find this comment inappropriate? Report it

@Benny Ag Benny, no need to swear. Don't be bitter cause you're too poor to pay decent rent. Just you continue to pay me my R2 500 rent for the 19 m2 batchelor apartment currently leased to you :-) The rich will get richer and the poor will get ... more like my . .more tenant Benny.. ha ha hie hie . .less by Benny's Landlord on December 14 2009, 17:35 Find this comment inappropriate? Report it

@ My "landlord" FYI I earn a perfectly decent salary, pay my rent on time and have never damaged a place I have been renting or bothered other tennants with anti-social behaviour. I'm not a communist and I have nothing against the rental market in principle And . .more yet, it's abundantly clear that the property renting types in this country have nothing but utter contempt for the people making them rich. Let's wait a little while until after the 2010 WC and this bubble boosterism gets too hollow to be believed, when rates go back up and negative equity really says howzit. When I'm driving past you as you're trying to sell black bags by the robots, then we'll see who's going ha ha hie hie. . .less by Benny on December 15 2009, 08:00 Find this comment inappropriate? Report it

@Benny's Landlord You are an insufferably arrogant person who seems to think that you are in some way superior to Benny because you consider him to be poor. As such you represent everything bad about the standards we use here in SA to judge things. I hope you get to change . .more your estimation soon. . .less by Renter on December 15 2009, 13:02 Find this comment inappropriate? Report it

@Renter If Benny's landlord was really making money he would be keeping very quiet about it. Any bets he's getting R2500 a month on some property he paid R600k for at the height of the bubble? Schmuck probably has another 3 years to go before his monthly . .more cashflow even turns positive. All the really agro bulls here are taking a bath. . .less by Vulcan logic on December 16 2009, 08:21 Find this comment inappropriate? Report it

@Benny "Let's wait a little while until after the 2010 WC and this bubble boosterism gets too hollow to be believed, when rates go back up and negative equity really says howzit." Benny, a word of advice: It is precisely your thinking that property . .more prices will somehow decline further after 2010 that has made you a tenant. Do nut bluff yourself. If you wait for property to become more affordable, you may very well be waiting all your life. But don't take my word for it. You keep on renting from me, I'm not complaining buddy !!! . .less by Benny's Landlord on December 21 2009, 10:24 Find this comment inappropriate? Report it

@renter Dear Renter, I sincerely apologize if I made you angry. I cannot begin to express my eternal gratitude to you and other renters. We, the landlords, buy the property and you, the tenants, pay for it. Without you we simply cannot acquire the wealth desired . .more for comfortable retirement. Thank you my friend. . .less by Benny's Landlord on December 21 2009, 15:15 Find this comment inappropriate? Report it

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