Real Estate Investor Magazine South Africa March 2014 | Page 32

SMART MOVES

BY KOOS DU TOIT

Why invest in property?
Solid past performance, secure future

T

he property market in South Africa
has delivered a solid performance
over the long term, but, as with all
economic variables, this long-term trend is
often obscured by short-term volatility that
dominates media headlines.

Past performance
In fact, historically property values in South
Africa over the past 20 years have risen 10.5%
on average a year. Even over the last 10 years,
during which the local property market has
been subject to some dizzying highs and
depressing lows, solid long-term growth has
been achieved.
Around 2004, the average annual house
price inflation boomed reaching an astounding
29.4%, driven by easy credit, low interest rates
and bubbling optimism among homebuyers and
property investors alike. By 2007, the world was
reeling from the impact of the global financial
crisis and the economic turmoil and credit
crunch that ensued. The impact on the local
property market reached a devastating low in
2009, when house prices were deflating during
a painful, sobering market correction following
the 2004 boom. This was followed by a five-year
period of consolidation, during which house
price inflation improved slowly but steadily, as
the global economy stumbled along.
Beyond these short-term developments
that created significant volatility, the longterm picture is encouraging. According to the
latest FNB Property Barometer, the average
house price is now 145.2% higher than the
2003 average, in nominal terms. This means
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March 2014 SA Real Estate Investor

that property prices increased by an average
of 14.52% every year over the last 10 years. In
real terms, the average price was 42.6% above
the real average price of 2003. This means
that property prices increased by an average of
4.26% above inflation every year over the last
10 years.

Secure future
Of course, historical performance is not a
foolproof indicator of future performance.
But there is a solid fundamental reason why
we expect that property in South Africa will
continue to perform well: supply and demand.
The reality is that property – whether homes
for people to live in or premises for business
– is a necessity. Regardless of the economic
conditions, people need a place to live and
business need premises from which to operate.
In South Africa, the demand for housing
continues to exceed supply. The country has an
enormous housing backlog that government
has been trying to address for decades and the
population continues to grow. Furthermore, a
rapidly growing middle class is driving demand,
with tens of thousands of people moving out of
the townships and into suburbs each year.
The supply of this demand has been curtailed
quite severely by the economic downturn
and the inability tens of thousands of South
Africans to obtain mortgage loans. As a result
of this, as well as the tenuous electricity supply
situation and the corruption in the local
governments, property development activity in
South Africa has ground to a near-standstill,
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further curtailing the supply of properties in
the country.
The relaxing of the banks’ lending criteria,
which is already becoming more evident,
along with historically low interest rates, will
certainly unleash this pent up demand for
property and the supply constraints will soon
be very evident. And as the demand outstrips
the supply, property prices will continue to rise.
Fireworks are not expected, especially
following the surprise interest rate hike
announced by the Reserve Bank in January,
which may signal that the interest rates have
entered a rising phase and this will again
negatively impact the affordability of property
and the ability of the market to supply the
demand for housing.
What is expected, however, is that - as in the
past - property will continue to produce steady,
solid long-term growth producing excellent
returns that few other asset classes can match.
In fact, we believe that average house price
inflation will be around 9% this year, not far off
the 20-year long-term average of 10.5%.
But, of course, that is just in terms of capital
growth on the value of the property and before
considering the ongoing, passive, inf lationlinked monthly income that is also generated
by a buy-to-let property investment, which
ensures that buy-to-let property generates truly
spectacular returns for investors with a longerterm perspective.

RESOURCES

P3 PROPERTY
www.reimag.co.za