JLL SSA’s Research & Strategy Associate Director, Zandile Makhoba recently spoke about buying and selling property during a recession, and understanding the supply and demand factors that drive this particular space with SAfm/MoneyWeb listeners in an open-line radio interview.
SIKI MGABADELI: As you know, and as we’ve just discussed with Wayne McCurrie, on Tuesday Stats SA released GDP data that showed that South Africa slipped into a recession. It’s for the first time since 2009 and we still don’t know just how deep the recession is and how long it’s going to last. A lot of that is going to depend on 2017’s second quarter. We’ve already seen discouraging – if I can use that term – data from the mining and manufacturing industries this week. That doesn’t bode well for GDP growth.
So today we are looking at you and your property – what does that mean for you? Some people may be looking to sell, some looking to buy, some wondering if they should just stay a bit longer in the rental market.
We are in conversation with Zandile Makhoba, who is head of head of research at JLL SA. Thank you so much, Zandile, for your time today.
ZANDILE MAKHOBA: Pleasure to be here.
SIKI MGABADELI: It’s been such a hectic week. Every economist that I’ve spoken to ahead of the release of that data expected an improvement, and then there was this shock.
ZANDILE MAKHOBA: Yes. I think we always expect consumer activity to boost our economy. It’s one of the major drivers of GDP and when trade then hits so badly, especially after a weak quarter for 2016, it really says how weak the consumer is feeling, and that impacts on your durable goods. So your furniture sales and so forth will be most affected.
But then of course your property sector, your expensive items, are the most affected when consumers are less willing to spend.
SIKI MGABADELI: I suppose the trend in the property sector over the past few years, as we’ve seen consumers under pressure. has not really been very strong.
ZANDILE MAKHOBA: It’s definitely not been at the best level. If you look at the South African Reserve Bank’s mortgage loan figures, they’ve really not done very well over the past few year. The last time we saw decent growth was around 2011 after the 2010 Fifa World Cup. Since then your mortgage growth has been very low and the most recent figure is about 4% on a year-on-year basis.
So you really are seeing lower mortgage debt, which speaks to lower demand in the household sector, which of course speaks to a struggling household market.
SIKI MGABADELI: So for consumers right now who are trying to get a bond, who are applying, what’s happening to them?
ZANDILE MAKHOBA: There are pros and cons. If you are a buyer in this market, you are kind of entering at a favourable time. Prices are not growing as strongly as they used to. There is a lot of stock in the market which is both from developments and just people moving out of their homes. So you’ve got certain powers of negotiation, based on the fact that there is some level of high supply as a buyer.
The cons of course are that now we are in a situation where interest rates are at their highest; economists are expecting interest rates to decrease. We are probably at the peak of our cycle now, but you are looking at bond levels which are higher than they would have been a few years ago. Earnings are also not growing very well, so there’s that factor.
And then there is just consumer sentiment. If you are not really optimistic about the future you are less likely to take on a big cost… [overtalking].
So it really plays with a person’s mind as to how they are going to balance things out. Those are just some of the things that people need to be conscious of.
SIKI MGABADELI: Let’s say you are in the market, and you’ve decided okay, I’m going to enter this now. I am armed with at least a bank that says it may lend me – maybe not a 100% bond, because those days have gone – maybe an 80, 85% bond. But I have the power to negotiate. What are those questions that a buyer must be asking now of a seller?
ZANDILE MAKHOBA: You need to really consider the different markets that you are operating in. So, as much as it’s a buyer’s market, there are segments and there are areas that will do better than others. You need to firstly understand the area that you are looking at, and the supply and demand factors that drive that particular space.
You also need to then be able to position yourself in comparison to other buyers in the same space. If you are coming in, for example, as a cash buyer, that’s going to be a huge advantage in certain spaces. You can always then negotiate. It’s a bit more difficult in areas that are experiencing high demand and there are lots of buyers where a cash buyer will have not that that much–
SIKI MGABADELI: It’s interesting, because it will be region-specific. For example, Cape Town and the Western Cape had a boom, whereas everybody else has found themselves static or even moving backwards.
ZANDILE MAKHOBA: Definitely. One of those key drivers of the Cape Town market is foreign buyers, for example, who come in with foreign currency and have that advantage in comparison to South Africans. So even as a cash buyer in the South African market, once you get to the Cape Town market you are playing a different game.
But there are always ways around it. There are advantages to looking at different areas. Look at your needs, look at the neighbourhood that you are moving into and what it offers you as a buyer. Those are the things that you consider. It’s a long-term stay once you are looking at a home, so consider the long-term factor at play.
SIKI MGABADELI: And if you are selling in this kind of market?
ZANDILE MAKHOBA: If you are selling in this market there is probably going to be low demand. What are the things that make your property better than the rest? Is it the area that you are in? That’s always a good advantage. You must remember that you are competing with developers that have brought on new supply, and those properties are coming in to face a buyer that is at a certain level. So what you are looking at now is that stand-alone houses are not performing as well as smaller flats and townhouses.
SIKI MGABADELI: The lock-up-and-go.
ZANDILE MAKHOBA: Exactly. Your buyers nowadays are new entrants in the market. They are not buying for complete families. They are buying for single or couple use. So are you going to compete in the market with the kind of asset that you are offering and, if not, can you hold back a little longer until the market recovers, or are you that confident that your asset is exactly what somebody else will buy?
SIKI MGABADELI: It’s interesting – there is this new trend. I was at a conference about a month ago where we were talking about how entrenched the shared economy is among millennials. They are not like our parents, who wanted to own a house with a big yard and three-and-a-half bedrooms. They are happy to stay here if it’s closest to work, and then they switch and they go elsewhere.
ZANDILE MAKHOBA: There’s definitely a shift in the way life is moving towards everything needs to be central. People want to be able to walk or cycle or get on a quick train to work. From work you should be able to do other activities – for example, go to gym and be within a grid. Being close to a Gautrain station is a big advantage in the Johannesburg region. And being close to major business districts is a huge advantage, because those are the kind of buyers that you are going to face.
SIKI MGABADELI: We are going to take a call from Lethu in Johannesburg. Hi, Lethu.
LETHU: Hi. A quick question. I understand the conversation. You are going on about residential property and the trends around it at this point. I Just want to find out from a commercial property perspective, where you are an investor preferably, would you say it’s advisable to get into a commercial property investment or residential, and what are the factors surrounding that?
SIKI MGABADELI: Zandile will answer that in a moment. I’m going to take another call from Morake in the Western Cape, and then we’ll respond. Hi, Morake.
MORAKE: Hi, Siki. I’ve just been discouraged from entering the market. I want your expert to clarify for me: is it fair for a financial institute to say: “If you don’t have a degree you are paying more interest. If you have it, provide us with proof so that we can see if we can reduce your interest”? Isn’t that really unethical?
SIKI MGABADELI: Is that something that’s happened to you?
MORAKE: It’s happening to me right now. I got a call today. I’m looking at buying a property for a value close to R2.7 million. They are saying to me “We will give you prime-plus-0.7. But you know what, if you can tell us if you have a degree or you are qualified, then it will be reduced.” Look, I don’t mind, I am degreed, I will provide them with it, but I’m just thinking about the bigger picture. People who don’t have degrees – they are the ones who will be paying a higher interest. I just need clarity on that. Thank you very much.
SIKI MGABADELI: Thanks, Morake. Let’s get a response from Zandile. I haven’t heard that before.
ZANDILE MAKHOBA: It’s interesting, a good question. I’ve never heard of anything like that. I wouldn’t understand why they’d ask for the degree as proof of a person with the ability to pay, because the bank is really interested in whether you are able to pay back. I think people who’ve owned spaza shops for many years are also able to apply for mortgage loans. You just need to show your ability to generate a decent income, and therefore meet your obligations with a bank.
SIKI MGABADELI: What I’m going to do is I’m going to follow up on this, because I think it’s important to ask those questions. Obviously there are criteria we aren’t aware of.
ZANDILE MAKHOBA: Is it ethical to profile clients on their educational level? I wouldn’t think so.
SIKI MGABADELI: Commercial property?
ZANDILE MAKHOBA: Commercial property is an interesting space. To keep it short, the office market is kind of in an oversupply. It’s again a question of where you are located and what are you offering an occupier? So be careful going into that space. There are also a lot of large players, so if you are a small player in this space, you are going to be competing with some proper sharks who’ve been in this space for a long time and who know how the streets work. That’s the conversation around commercial.
SIKI MGABADELI: Thanks for your time today. From JLL SA that was Zandile Makhoba. We are back on Monday. Bye-bye.
Listen to the full podcast here: http://www.ornico.co.za/editorialstream/BroadcastMedia/2017_06_09_Safm_Marketupdate_JLL_18H16.mp3