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Monday Oct 15, 2012

Lack of loans lead to lower property prices and rising rents

In the past few years there have been dramatic changes in global property trends, and SA has not been unaffected.

In relatively stable and sought after areas such as the Durban suburbs of Durban North and La Lucia, the property market has plummeted to a low then gradually recovered to a stable but slow pace, according to Carol Reynolds, Pam Golding Properties' area principal for these suburbs.

"The US housing crisis is finally coming to an end, as economists note a small but positive rise in house prices and general, renewed buyer confidence. South Africa's residential market has been through some troughs, but on the whole, we have managed to buffer ourselves somewhat from much of the travesty on the global front."

Reynolds says sentiment is a key driver in market activity and the outlook this year has been more positive than that last year. However, conservatism is the "new normal" and buyers and developers are adopting a conservative approach to purchasing property. The banks are tightening their lending criteria when it comes to developments, and there is still an air of caution concerning risk assessment.

"Perhaps the most notable trend is the increased activity in rental housing. Although house prices have stagnated with very little yearon-year growth, rental returns on residential property have risen notably. In 2008, returns were sitting at 4 to 5 percent, whereas we are now seeing an increase in demand for rental stock, and a consequent rise in rental income.

"Landlords can expect returns of about 6 percent, and depending on the area, some nodes will generate returns of 7 or 8 percent. However, with new municipal regulations on utilities landlords are responsible for outstanding municipal debts, so they are opting for managed leases rather than procurement leases because the administration involved is becoming so onerous.

"We have noted an increase in the installation of meters for utilities as landlords try to alleviate the burden of liability for their municipal accounts. Indeed, we are recommending that investors who have a portfolio of rental properties equip each unit with an electricity meter.

"Companies have also started offering water meters, and we expect these will become the norm."

Reynolds says units in complexes and security estates offer the best returns on investment. Security continues to play a substantial role in influencing price trends.

Most corporate tenants won't even consider freestanding houses - and prefer to sign leases in secure estates and complexes. Investors would do well to buy homes in estates and complexes that offer solid prospects from a rental income perspective.

Reynolds says that although the banks have relaxed their lending criteria this year, there are still many unqualified buyers who are unable to secure home loans and are obliged to rent. This drives house prices down and rental income up.

"The reduction in the lending rate has certainly been welcomed and we hope it will facilitate more property buying. We are certainly starting to see signs of renewed activity. Whether this is driven by ... low interest rates, or by a seasonal shift into the summer months, the spirit of optimism is noticeable.

"In the perennially popular suburbs of Durban North and La Lucia, buyers are active in the R1.5 million to R3m market. This sector is buoyant and there are stock shortages in certain nodes. However, finance is the Achilles heel in this sector.

"An encouraging sign is that for the first time in two years, the upper end of the market is also beginning to recover. Homes priced at over the R5m mark are attracting interest at last, and this is a very positive indicator... It's interesting to note that this price range is driven by cash sales or sales with smaller bonds, so finance is not an issue.

"The big issue in this tier of the market is unrealistic pricing. Sellers are still expecting high prices for their homes, and buyers at this level are extremely... knowledgeable about market trends, so only homes that are correctly priced are being sold.

"To summarise, although house prices have remained relatively flat this year, the rental market has shown noticeable growth.

"We expect more activity in the last few months of the year across the board, particularly for rental properties."

Weekend Argus (Sunday Edition)


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