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Monday May 28, 2018

Affordability key in Cape Town CBD

Property developers looking to secure a stake in Cape Town CBD's lucrative residential market are warned of its impending saturation point and advised to keep affordability levels in mind if they intend bringing new units onto the market.

This does not mean the city centre is not still a strong option for property investors, but developers need to take note of the market's slowing down, especially in the area's upper price ranges.

According to The State of Cape Town Central City Report: 2017 - A Year in Review, 205 residential units in the CBD were transferred last year. Of that number, only 40 were sold for more than R50 000/m2.

However, Rob Kane, chairman of the Cape Town Central City Improvement District ( CCID), which publishes the annual report, says 102 units (exactly half) sold for between R20 000/m2 and R39 000/m2.

"This speaks to where demand still lies, versus where overheating may be occurring," he says.

"Developers bringing new units on to the market now and going forward and investors who bought in the hope of making a strong return, must understand where the central city's market saturation point is, and where the need lies."

Kane says developers thinking of entering this market must remember that a downtown thrives on having a residential community of both owners and rental tenants who can afford to live there.

Developers should, therefore, keep affordability in mind when bringing new units onto the market, says Carola Koblitz, CCID communications manager and editor of the report.

The report, which is a guide to the CBD's economic climate, says the average unit price of those sold last year was just under R2.77 million, an increase from 2016's average of about R2.34m. This translates to an average cost of R41 287/m2, up from R33 921/m2 in 2016.

And while the average cost of units is going up, their average size is coming down, Kane says.

"The average size sold in 2016, was 71m2, but this has decreased to 52m2 across the units transferred last year. Obviously this is indicative of what one finds in CBDs across the globe as these destinations gain in popularity with residents seeking a downtown lifestyle."

Although this is also indicative of the strong central city property market over the past few years, Koblitz says one needs to remember such prices came off of a low base, particularly following the global bubble which burst in the late 2000s, and which "stagnated the residential market place for a number of years".

Koblitz says developers must be "realistic and responsible" with the return on investment expectations they create and promise investors who are looking to buy units off plan now and then possibly flip when they are transferred.

She says often prices in traditionally more expensive areas directly surrounding the city centre, such as the V&A Waterfront and along the Atlantic seaboard, are quoted as being related to the CBD.

"A quick glance at sales figures of units transferred overall in the Atlantic seaboard during 2017 shows the average rand per square metre to be R54 752, while the V&A Waterfront averages out at over R100 000/m2 for the same period.

"The central city, at an average R41 287/m2, is far off those marks, and we urge anyone involved in developing or selling residential property here to be responsible when establishing the potential selling price of existing units, or in quoting future numbers on returns to potential buyers or media."

Future opportunities will lie in well-priced units affordable to professionals across the broad economic base who work in and desire to live in the city centre.

What this means, Kane says, is developers and others looking to invest in the CBD should consoli- date, reassess and "carefully con- sider where the future residential l demand will really lie and how to o supply that demand".

They should also analyse data a gathered by the CCID over the past t six years, which indicates the market slowing down and levelling, particularly in the resale of units above a certain price range.

Koblitz says: "The CCID has advocated for more affordable options for a number of years. We believe it's a matter of time before the City of Cape Town places policy on the e table that will affect all developers s in terms of inclusionary housing." THE TREND globally towards micro unit living could be the answer to rising affordability challenges in Cape Town's CBD, but this potential has not been realised.

This is because local developers are selling these as sectional title investment properties instead of developing rental complexes.

Analysing the residential micro unit trend in terms of its ability to address affordability in popular downtown areas, The State of Cape Town Central City Report: 2017 - A Year in Review notes the micro unit concept gained traction overseas after living "downtown" increasingly became a luxury few could afford. The report said that a 2013 study commissioned by the US-based Urban Land Institute on the market performance of small or "micro" units found the rising cost of land and construction costs resulted in developers seeking ways to offset costs while maintaining a relatively affordable rental for those wanting to live close to where they worked.

"Fast forward five years from the study, and the Cape Town city centre is only now beginning to experience the micro unit trend, with the first units advertised during last year," says Carola Koblitz, editor of the 2017 report.

"What does differ, however, from the original rise of the concept in cities across the globe, is that instead of the development of entire complexes as rental units, units are being developed for the sectional title market and sold at prices that will have to bring in high rentals if investors hope to see a return on their investment."

The US study explained micro units there were being leased at a higher rent per square metre, yet rentals were still about 20% to 30% below standard rentals for conventional-sized units. While no precise definition of a micro unit's size was determined, it was deemed that such a unit would also typically be 20% to 30% smaller than a conventional studio apartment.

Using this formula, Koblitz says a micro unit in the Cape Town CBD would then measure about 28m2 to 32m2, and attract a monthly rental of between R8 530 and R9 749.

But because these units in the city are being sold to investors, who then rent them out, the rental amount to make the investment worthwhile will have to be higher, and this is where the problem lay.

"In terms of the rental per square metre asked for these units and rentals that will need to be achieved to satisfy investors, it seems the potential of the micro unit to enable young professionals to live and work in the CBD has not yet been fully realised."

Bonnie Fourie
Weekend Argus (Saturday Edition)


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