Has the ship sailed?
Everyone would like to “buy at the bottom and sell at the top” but it’s very seldom that property buyers and sellers can time the market this way. “The truth is that you simply can’t time a property decision like a share buying or selling decision on the stock market,” says Realty 1 International Property Group CEO Hano Jacobs.
While the property market in 2008 and 2009 was widely described as a buyers’ market, with sales activity slow and a few buyers with cash or access to finance having their pick of an oversupply of properties, including many distressed sales, at the half-year mark of 2010, it seems that things are turning. According to bond originator, Betterbond, the steady rise in mortgage loans granted since December last year indicates that property purchasers are taking advantage of the buyers’ market. Sotheby’s International Realty also confirms that property buyers are firmly back in the market.
Sales volumes in our offices are up 30% for the second quarter over the same period of 2009
“Sales volumes in our offices are up 30% for the second quarter over the same period of 2009, and our strike rate has risen from less than 10% during the depths of the recession to around 20%,” says Lew Geffen, chairman of Sotheby’s International Realty in SA. Several other estate agents report a similar uptick in activity.
Have we missed the boat?
Given the fact that the master investors act counter-cyclically and buy when the market reaches the lowest point, the question is whether the investors who have not yet taken advantage of the buyers’ market, have missed the boat?
One can only be certain of having reached the bottom of the cycle after it has passed and it is on the way up,” says Laurie Wener, MD for Pam Golding Properties in the Western Cape.
The best one can hope for is to buy when prices have declined sufficiently from the high base to indicate that the cycle is near the lowest point. There are plenty of distressed sellers around in some areas due to many economic factors and the difficulties in obtaining mortgage finance.”
Peter Gilmour, Chairman of RE/MAX of Southern Africa, agrees. “There is a wide range of distressed properties available. We currently have a selection of distressed properties on our books that range in price from R700 000 to around R3.8 million.”
Gerhard Kotze, CEO of the ERA South Africa property group, also believes buyers can still find ample stock, wide choice and value in recently completed sectional title and cluster developments. Nor is the situation likely to change in the short term as the supply of cluster and sectional title units is likely to remain in surplus for the immediate future, despite a lack of plans passed and new building activity. “There is therefore a brief window of opportunity for buyers to acquire such properties, probably at good prices, before supply moves into general equilibrium across the board once more.”
Remember that rental returns usually decrease as the value of the property increases.
How long do we have?
According to RE/MAX of Southern Africa, some estate agencies are reporting a shortage of stock in well-priced properties in certain areas. “Even though this may well indicate that buyers wanting to invest and see a good return should contemplate doing so within the next month or so, we strongly believe that there will only be a slow turn towards a seller’s market late-2010 or early-2011, depending on macro-economic factors such as inflation and interest rates, of course,” says Adrian Goslett, CEO of RE/MAX of Southern Africa. Gilmour adds that some banks are only now starting to work with estate agencies on the sale of their distressed properties.
“It is expected that distressed property sales will be a reality for the next three to five years. Currently RE/MAX is in partnership with First National Bank, Standard Bank and Nedbank in terms of distressed property sales, and currently receives over 200 leads per month.” The constant flow of distressed properties into the market should keep the lid on dramatic house price escalation for now.
Uncovering the value
Despite the buyers’ market and the number of distressed properties still available, investors need to do their homework to uncover those properties that offer good value.
Just because sellers are distressed, does not mean they won’t sell for a market-related price, cautions Gilmour
“All distressed properties are put up for sale at their current market value. The majority of distressed properties we have sold have been for at least 80% of the asking price. Thus, as with any property purchase, doing your homework is essential. This includes finding out what price other similar properties in the area have sold for. The estate agent should be able to provide you with a comparative market analysis which will provide all this kind of information, alternatively, there are other options available to the public such as Evaluate, which will sms you relevant deeds office data on a particular property upon your request.”
“Market value is what a willing buyer is prepared to pay for a property at any given time. Therefore the term ‘undervalued’ is a bit of a misnomer – it really refers only to the current market value relative to the previous higher market value,” explains Wener. “Market value is established by the comparison of recent similar properties sold. Agents do this comparison all the time to establish current market value. A good agent will be able to furnish a buyer with accurate information of recent comparable sales so that the buyer can assess the market value of various properties viewed. Buyers quickly become well-informed and can establish market value by what they are prepared to pay for a property. This, in turn, will also be affected by supply and demand.”
The finance issue
Betterbond’s Dealmaker Dashboard shows a 51% increase in the number of applications processed by the group for the period September 2009 to March 2010 with the banks’ decline ratio on home loan applications currently at 40%. Given the banks’ current stringent lending criteria, would a distressed property have a better chance of qualifying for finance?
“Distressed or not is not the going to make a difference,” says Marcel Deacon, CEO of Susan Deacon Properties. “It would all be up to the buyers’ credit record and score on the credit ratings. However, if the property is overpriced, it will substantially influence the finance decision.”
“In our experience banks will generally provide finance for qualified purchasers of distressed properties on the same basis as they do for any other property, unless they are already highly exposed in area where there is a high percentage of distressed sellers,” comments Wener.
The outlook
The FNB Estate Agent Survey for the 2nd quarter of 2010 points to weaker demand than that of the previous quarter, which may indicate that despite the recent improvements in activity and price inflation, residential property has entered a weakening trend on a “mini-cycle” on, which is expected to last well into 2011.
Some of the survey findings:
Demand activity slid to 5.96 in the 2nd quarter survey, from a level of 6.35 in the 1st quarter of 2010, which was the highest level since early-2007.
- A sharp up-tick in the estimated average time of a property on the market was recorded, from a previous quarter’s 12 weeks and 4 days to 17 weeks and 1 day, suggesting the necessity for some possible price “correction”.
- The estimated percentage of sellers being required to drop their asking price rose from 76% in the 1st quarter to 81% in the 2nd quarter- a far cry from the boom years where levels nearer to 30% and 40% were seen.
So what can property investors expect?
FNB’s John Loos believes it would not take much in terms of an economic slowdown or interest rate hiking to shift the residential market back to either low house price inflation or even another bout of deflation.
We believe that price growth is likely to come under pressure even in the absence of a recession.
We therefore project house price inflation to slow back to 3% for 2011, which would reflect another bout of house price deflation in real terms, adjusted for CPI.”
Property investors may have a few more months to take advantage of the buyers’ market, and distressed property sales seem likely to remain a feature of the market in the short to medium-term. Of course, an interest rate increase or a change in the global economy could change the situation almost overnight.
While investors should be cautious not to miss the boat in terms of the current deals in the market, any property purchase – now or later – should be based on achieving good value. As Collin Wright, CEO of the International Resource Centre (IRC), aptly reminds us: “One of the golden rules of direct property investment is to avoid buying overpriced properties. Property investment during market cool down periods could be beneficial as the real value of property always increases notwithstanding short-term fluctuations. Distressed properties could offer substantial discounts and create the opportunity for real returns in the future on property acquisitions.”
Resources:
FNB www.fnb.co.za
Pam Golding Properties www.pamgolding.co.za
Text by Monique Metcalf. Article taken from the September-October 2010 edition of Real Estate Investor magazine.
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