Everyone who buys a residential property is a dreamer. You dream of owning your own home; a place where you can settle down and raise a family and have your friends over for a braai to watch the rugby or soccer on a glorious summer day.
It’s the ultimate middle-class dream: to become a property owner, owning an asset, that over time — using the magic of gearing — will build your wealth and provide you with enough capital for the next step up the property ladder into something bigger and better.
And if you really want to dream big, you buy additional properties, again using gearing, to rent out to someone less fortunate than you who will then pay off your mortgage bond(s) over ten or 20 years, and presto: you are a rent-collecting landlord.
It looks so easy on paper. You even attended one of those buy-to-rent investment seminars where some guru with an American accent comes to tell you how easy it is. Or possibly one of the locally-grown copy cats who got onto the band wagon. What could possibly go wrong?
How different reality is right now. Every morning thousands upon thousands of SA property owners and speculators, with the exception of the Western Cape, wake up with a scream from a nightmare. A nightmare that does not seem to go away. And it’s always the same one….
Property prices are plunging, tenants are not paying their rent and the debt collectors from the banks, municipalities and home owners’ association are knocking on your door, eager to collect what is due from you.
One slip up and your credit record is impaired, a stain on your credit worthiness which is very difficult to erase, like sitting under a mulberry tree with a pure white dress.
And for those still trying to sell up in the North in order to join the Great Trek to the South, the news just seems to get worse. Many have simply given up as (a) they cannot sell and (b) prices in the South just don’t seem to lose any momentum. But it will, dear reader, it will. The cure to high prices is high prices. Not everyone can sell up and move to the Atlantic Seaboard where new building prices seem to start at R70 000 per square metre!
Looking at the raw numbers
Every now and then someone tries to talk up the property market in a desperate attempt to flog this dead and dying horse.
I spend a lot of time reading the regular property reports prepared by FNB, Absa, Standard Bank and Lightstone. They make for some very depressing reading.
It now takes almost six months, says FNB, for a house in the price bracket above R2 million to be sold, and then at a substantial discount to asking prices.
Turnover levels in this category have also plummeted.
On average property prices in real terms are now down 23% from its peak at end 2007 and prices in certain areas are starting to show declines in nominal terms as well. Our banks must be watching this development with great foreboding.
Rental collections also tell a story of a market slowly imploding. According to the fourth quarter 2016 survey (the latest available) done by Tenant Profile Network, both vacancies and non-payers are still rising. In this quarter, which therefore does not reflect the impact of the credit downgrades in April, national vacancies are 6.62% which, when added to the non-paying number, reflected no income for property owners equivalent to 12.4% of all property owners in this market. For the upper-end (R12 000 to R25 000 per month) this combined number rises to 15%!
Again, it needs to be added, the Western Cape is the exception. Tenants pay mostly on time and rentals are still rising as a result of very few vacancies.
Over the past four years or so I have written several articles on Moneyweb highlighting the slow but relentless implosion of the residential property market in SA. At first the decline was only noticeable in the smaller towns of the country’s northern provinces, North West, Mpumalanga and Limpopo in particular, but this has since spread out to the Free State, Northern and Eastern Cape and lately KwaZulu-Natal.
On several occasions I opined that it has become almost impossible to measure the performance of the residential property market in large swathes of the country, for one simple reason: if it doesn’t move you cannot measure it.
I tend to travel a lot by car, for various reasons, sometimes to meet with clients, other times to cycle some obscure cycling route in the Karoo or wherever. These travels often take me to small towns and dorpies where, I would suggest, the average Moneyweb reader does not venture too often: Bloemhof, Wolmeransstad, Lichtenburg, Schweizer-Reyneke, Parys, Hennenman, Colesburg and so forth. Even a large town/small city like Kimberley is starting to show signs of this implosion.
I’m sure Moneyweb readers will add their own experiences from other towns and even cities that I might not have visited recently.
In its latest commentary on the residential property market Standard Bank more or less makes the same comment, the first admission from one of our large lenders. It basically says that in most small towns and in several smaller mid-sized towns the property market has essentially ceased to exist.
These towns – and the people who own properties in them – seem to have been caught up in a vicious cycle. It started, in my view, with the election/appointment in 1994 of ANC-cadres to take over and run these municipalities. Many did not have the necessary qualifications to run a modern-day town or city. What we are witnessing today at our much larger but equally poorly-run state-owned enterprises (SOEs) started at municipal level two decades or so ago.
The coffers of these towns and cities have been looted; money has been diverted from essential infrastructure spending to inflated salaries, luxury cars or unnecessary overseas travel. Author FW Johnson recently wrote about the Moretele municipality in the North West province which diverted R85 million from the infrastructure budget towards burials for councillors! And there has been nothing the rates and tax-paying property owners could do about it, apart from selling up (while they still could) or shutting up and living with the chaos.
Today only 19 municipalities outside of the Western Cape do not have a qualified audit report.
Who wants to own a stand in Africa?
Don’t think your humble columnist has been spared this nightmare. I too, wake up the middle of the night with a scream that will put Eduard Munch to shame.
Ten years ago, when the property market bubble was at its zenith, I was persuaded by an over-eager family member to buy a stand at the Falcon View Estate on the slopes of the Magalies mountain. All it took was one quick and too-easy signature on a piece of paper. Today, a decade later the stand is empty — as is most of the other ones — as the developer absconded without finishing the clubhouse, pools and tennis courts. Last month an extra levy was raised to pay the legal expenses of the Home Owners’ Association (HOA) to claw back these costs against an insolvent estate. Total payment so far for this worthless investment has been well over R1 million, almost, but not quite, wiping out the profits I made on my biotechnology shares.
Can there ever be a more worthless investment than a stand/empty plot? I have made it my life’s work to warn investors, particularly young ones, against the absolute folly of buying empty plots for speculative purposes. You will never, ever make money buying an empty plot of land from a developer, even in the Western Cape.
First, you will be competing against the developer when it comes to resales. Second, you will be competing against other speculators who also are likely to put their stand on the market at the same time as you, very much like speculators in buffalo are finding out today. Third, your exit strategy is costly (high commissions) and time consuming (weeks, if not months) and you are likely to be hit with a CGT bill if you happen to make a profit. In the meantime you are on the line for bond repayments, rates and taxes, levies and possibly extra-levies for not building on time.
So remember Uncle Mag’s number one rule when it comes to buying an empty stand/plot for speculative purposes: DON’T DO IT!
PS. Anyone want to buy a stand overlooking the Hartbeespoort dam? Going cheaply… very cheaply.
Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached at firstname.lastname@example.org for ideas and suggestions.