Is South Africa a Buy?
South Africa is a BIG country! More than 2500km of
coastline; a total land area of 1.2 million square miles; a distance
from north to south of 2000km; 1600km from east to west and a population
of under 50 million! There are seven distinct geographic regions, each
with its own individual climate - everything from the extreme temperature
fluctuations of the arid central Karoo to the Mediterranean climate
of the Southern Cape and the sub-tropical climate of KwaZulu-Natal.
Given the physical distances and climatic differences between urban
centers it's hardly surprising that the SA property scene has become
extremely diverse.
Almost 14 years after the birth of democracy the nation remains deeply
divided between first and third world economies. Some 85% of the country's
population still cannot afford a conventional home costing R200, 000
and there remains a huge, and growing, gulf between the housing aspirations
of rich and poor.
Prior to 1994 the indigenous population was either confined to rural
areas or housed in townships well away from the cities where, because
the white population was relatively small, land could be generously
apportioned. "Whites only" housing development was, with the exception
of the inner cities and some beach front development, both low density
and low rise. Homes were built on plots of 1,000m² or more and even
today many fine old homes can still be found standing in grounds of
up to five acres close to major city centers. Only recently, as the
urban population has grown exponentially and a large black middle class
has entered the market in increasing numbers, has sufficient pressure
built up on development land to drive prices dramatically upwards and
the size of individual plots down. Today's trend is for even the most
expensive houses to be constructed on plots of 500m² or less, preferably
in securely walled and gated communities.
Unlike many developing countries South Africa still places no restriction
on foreign purchase of freehold property. The countrywide average house
price is around R850, 000 while properties held under mortgage average
just under R1 million. Construction cost for a well finished residential
property is still around R6, 000 per m² although luxury finishes will
obviously push costs considerably higher. That having been said, there
are still many pleasant little towns in South Africa where a three bedroom
home of around 200m² can be bought for R500, 000. South Africa's generously
sized and well constructed properties are still extremely cheap in international
terms!
At the luxury end of the market prices of R25 million and above are
no longer remarkable. Cape Town, unquestionably South Africa's primary
attraction, has seen prices for ocean-front and other desirable properties
achieving international price levels in a remarkably short space of
time. The dramatic scenery, Mediterranean climate and vibrant cultural
and social buzz continue to draw large numbers of European investors,
many of whom opt to reside in the Cape on a permanent basis.
The major realtors are offering select properties at prices from around
$5 up to $15 million and above but at the upper end of the range a buyer
might expect to acquire an income producing asset such as an established
winery or boutique hotel as part of the deal. The Cape's unique ambience
continues to attract discerning investors from all over the world including
Eastern Europe and more recently China whose growing interest in Africa
is beginning to generate enquiries for the Cape's landmark properties
- a trend that looks set to grow. Currently the most popular areas for
wealthy buyers are the Southern Cape, Knysna, Plettenberg Bay, Gauteng
and more recently, KwaZulu-Natal.
When the FBI asked notorious bank robber Willie Sutton why he persisted
in robbing bank, where he was almost certain to be caught, he said,
"Banks is where the money is!" Well, Johannesburg, the dynamo that drives
Gauteng province, (and the SA economy), is also where the money is.
Still not too far removed from its origins as a rough and ready mining
town Johannesburg is a magnate for entrepreneurs addicted to the big
deal and the fast buck. A new class of influential and affluent black
politicians, bureaucrats and businessmen is moving into the city's wooded
northern suburbs, formerly the preserve of mining magnates and the white
elite. As Black Empowerment strategies benefit an increasing number,
newer areas such as Mid-Rand, an increasingly up-market 60km long commercial
and residential buffer zone between Pretoria and Johannesburg, has proved
popular with upwardly mobile black buyers who now account for as much
as 50% of all purchases.
Older blue-chip areas such as Sandhurst, Dunkeld and Hyde Park continue
to attract wealthy local and overseas buyers prepared to pay upwards
of R5 million for a comfortable family home on a ½ to 1 acre plot, often
with pool and tennis court. Meanwhile the market in Game Lodges, Boating,
Fishing and Golfing Estates continues to remain buoyant. Given this
growing demand, particularly from overseas corporate clients, the prices
of such trophy properties don't look like falling any time soon.
Durban, in KwaZulu-Natal, has long been the preserve of wealthy trading
families and conversely a popular holiday destination for blue collar
workers from the Gauteng industrial complex. The city also has the unique
distinction of being home to the largest Indian urban population outside
the sub-continent. This ethnic mix works well and Durban is a cosmopolitan
city on the move. Although slow to start, prices for city center properties
are rising steadily. Following Cape Town's lead, new luxury developments
are revitalizing the old Durban Port area and young professionals are
being attracted back to the city's new waterfront where apartments sell
for upwards of R2.5 million.
Durban has seen remarkable growth in recent years, particularly in recreational
waterfront properties. Since 2000 development at the luxury end of the
market has been driven by demand for second homes and luxury apartments
on KwaZulu-Natal's North Coast. The growth of what were formerly quiet
little holiday villages has been accelerated by demand from executives
employed in a growing number of up-market retail, commercial and light
industrial garden estates. Umhlanga, Ballito and Salt Rock are being
rapidly transformed into fashionable addresses where spectacular beach-front
villas and high-rise developments increasingly rival those of the Cape
in quality and design sophistication. Rising prices are serving to increase
the popularity of the more scenic South Coast where excellent value
for money is currently being offered in both older homes and new developments.
Zimbali, winner of many international design awards and home to many
of SA's wealthy sports personalities, is unquestionably the North Coast's
premier development. Following a well tried South African formula this
carefully planned eco-complex offers a secure gated environment of magnificent
golf courses, nature reserves, low density luxury homes, boutique hotels,
spas and intimate restaurants all nestled in a semi tropical paradise
overlooking the warm blue Indian Ocean. Desirable? Definitely!
South Africans are nothing if not innovative. As the costs of maintaining
second or third properties soar, fractional ownership schemes have become
popular. Developers at the luxury end of this market such as Socoro,
specialize in syndicated ownership of secure luxury villa complexes
and boutique hotels associated with marinas, golf courses, fishing and
game lodges. The company has recently turned its attention to London's
Canary Wharf and Turkey where you can buy fractional ownership of a
quay-side villa with SA built and crewed luxury catamaran thrown in!
The attraction of owning a share of the freehold, with the promise of
capital appreciation and guaranteed annual occupancy without the problems
of maintenance, has proved highly popular with overseas investors.
But is this a good time to buy South African property? Well, timing
is everything and current market conditions certainly favour the buyer.
The SA economy, fuelled by strong demand for strategic minerals, has
had a good run allowing interest rates to fall to 8%, the lowest figure
for many years. Easy credit, at least in SA terms, (the last 25 years
has seen mortgage interest rates twice top 24%), fuelled a property
boom accompanied by a consumer spending spree which pushed domestic
debt to over 75% of average disposable income. The party had to end.
The SA Reserve Bank, reacting to a consumer credit crisis, rising inflation
and a runaway oil price, imposed a sharp series of rate hikes which
has driven the prime mortgage rate to a current, but certainly not final,
15.5%!
For the first time in many years the SA housing market is in serious
decline. That property prices could actually fall is a novel concept
for younger South African home owners, many of whom, mortgaged to over
100% of the value of their homes, are now looking at negative equity
and being forced to trade down or sell. The owners of luxury homes and
up-market developments are not immune, witness the increasing number
of luxury, often second, homes being offered at auction, a last resort
previously almost unthinkable in SA. The rising fuel price, steeply
increased municipal rates and the on/off power crisis offer little comfort
to these sellers in the foreseeable future.
With demand and prices falling, the market will provide some interesting
opportunities for investors in 2008/9. Overseas cash buyers prepared
to take advantage of what are comparatively bargain prices and a very
favourable exchange rate should be well placed to profit when the inevitable
cost and inflation driven upswing occurs.
Allen Denton-Miller
Denton-Miller Estates
Denton.miller@mweb.co.za
Tel: +27 (039) 695 0203
Cell: +27 072 717 7771
www.natal-south-coast-estates.co.za
© denton-miller estates 2001
