On the surface, the picture is looking rosy in SA's residential property market. Buyers are back and the banks are lending. But eliminate the early post-recession bounce and the summer market upswing, and the next few years look less exciting.
Experts offer little comfort for developers, who will need quick sales to make money, and for buyers aiming at capital profits.
Property economists are unusually ready to offer a long view of property prices. The road ahead is clear - some corrugations on a very small incline for the next three or four years. Absa property strategist Jacques du Toit and his FNB peer John Loos predict prices will rise between 5% and 8% next year.
Jacques du Toit
"Prices will go up perhaps less in 2011 and may only touch 10% in 2012," says Loos. "It might just reach 10% in 2013," adds Du Toit, with Nedbank economist Nicky Weimar noting: "It's going to be a slow crawl from here on."And that's the good news. "Sales volumes will remain under pressure for the next six months," says Weimar, "b ecause there are no big pay rises or bonuses ahead. There might be a World Cup bounce but it will be short." Weimar adds that we cannot ignore the fact that "we are part of a world economy with very, many problems. Growth will be structurally lower."
Three strong reasons for a local drag on demand are a heavy household debt burden, around 76% of annual household income; rising unemployment; and unenthusiastic lending by banks. "I imagine household debt would have to fall into the mid 50s before demand is strong," says Loos. "And we face the threat of price deflation when government financial support comes to an end in 2011 - as the lack of local demand and bank home loan supply produce a possible double dip global recession."
This will have a dire effect on the property development market. "I expect a few experienced and well-run developers to remain," says Investec Property Group's (IPG ) residential property expert Darryl Mayers. "Large numbers of fair-weather developers who relied on artificial pricing are unlikely to survive."
Hundreds, perhaps thousands, of people who made money since 2003 buying properties off-plan for R500 000 and selling them for R800 000 a few months later are already trying to work out where they can continue making money for nothing. There are still some upfront profits to be made buying distressed properties. But they are disappearing fast, says YDI CEO Anton de Leeuw who has lately done good business sourcing these properties for their clients.
"The challenge for us is to persuade our clients to become true investors and concentrate on income for their profit," he adds. Doing that means putting cash into their properties as long-term equity to make sure they have a positive cash flow. That in turn means that investors will demand better annual net returns than the 6% they're getting in Sandton or the 3,5% they get in Cape Town's Claremont. Traditionally, purchase yields have been closer to 8%. That will put pressure on investment property prices.
WHAT IT MEANS
 Single digit price inflation
There's a golden age for clever investors
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This makes a fruitful market for experienced investors who know the best long-term property returns come from compounding rental growth over 20 or 30 years. Institutional investors expect to get 80% of their return on commercial property over that time from income. But with no trading transaction costs over the decade and only capital gains tax at the end, the capital profit isn't bad either.
Another advantage in this market is that low buyer demand for residential property means higher demand for rental property. Rental growth will be limited over the next couple of years as households reduce debt and adjust to higher than inflation electricity price hikes. But after that, rental increase should steadily beat inflation for the next decade.
Albert Einstein is said to have called compound interest "the eighth wonder of the world". Compound rents will do the same for property investors, creating a steady predictable golden decade or more for them.
Ranking the Analysts 2009
