Property & Wealth

How will the Gordhan fracas impact on property market?

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The controversy that exploded around the position of Minister of Finance Pravin Gordhan dumped the country’s financial markets in uncertainty and turmoil. The property sector will not be spared.

It is curious how, after its poor showing in the municipal elections, the African National Congress under the leadership of President Jacob Zuma immediately turned the spotlight back on his hard-working Minister of Finance, almost as if to create a distraction from what happened in those elections.

We take a look at the significance of both local and international political volatility on the current state of the national property market.

What is at stake?

According to the Property Sector Charter Council (PSCC), the country can be proud of the performance of its booming private property market – a market that is present in every metro, township and village across the country.

Everywhere someone is dealing in some aspect of market, be it buying, investing, letting, renting or selling ...

According to the PSCC the South African property market has grown at an astronomical rate and is swelled by a trillion rand from a base value of R4 900 000 000 000 (R4.9 trillion) in 2010. In 2012 property contributed R191.4 billion to the country’s GDP and paid R46.5 billion in taxes.

The PSCC conducts regular research to update the statistics and to measure the effect of property cycles on this industry’s value.

Commercial property represents the biggest slice of the cake which, according to figures from the 2014/ 2015 financial year, is presently valued at R1.3 trillion, up from R780 billion in 2010.

Of this, SA’s corporates hold almost R790 billion on their balance sheets. The Real Estate Investment Trusts (Reits) hold R300 billion, unlisted funds manage R130 billion in value and R50 billion is held as assets by the life and pension funds.

The retail property sub-sector (malls and shopping centres) represents the highest holding at R534 billion, followed by office space at R357 billion and industrial properties at R281 billion (up by almost R100 billion since 2012).

Nevertheless, a big positive is that the residential property sector accounts for nearly three quarters of all property owned in SA and has grown to R3.9 trillion since the end of 2010.

Growth in this market is very much on the cards as government is now extremely active in addressing the housing backlog, with the Public Investment Corporation already committing an additional R500 million to set up the Affordable Housing Development Company, aimed at redressing the stark ownership imbalances of the past.

Impact of political volatility

The effects on this market of the instability and volatility triggered by the Gordhan affair, the recent decision of United Kingdom to exit the European Union, following on the so-called Brexit referendum, offer an excellent case study.

Aside from the fact that the shares of property companies with UK investments have been aggressively sold down since Brexit, SA property companies with exposure to other offshore property investments have not been spared either.

For instance, the shares of two rand-hedge property investment companies, Counties and Capital & Regional, were heavily punished ... by the end of July the shares in these companies had shed 33% and 27% of their value, respectively.  

But all is not lost. There is still a strong case for holding offshore property investments.

The local Vukile Property Fund, which has a 26% stake in Atlantic Leaf Properties (owners of mostly retail warehouses and distribution centres in the UK), initially lost about 4% in value. But it has since recovered along sector heavyweight Redefine Properties that has recovered well since the June rout.

The point is, where the UK by definition was a bastion of property stability, it has since been the subject of extreme market instability and commentators warn that speculation and market volatility are expected to be present in both the UK and EU markets for years to come.

Industry commentators are forecasting that the UK’s exit from the EU should be carefully monitored. It poses both risks and opportunities, which will abound for the keen investor community.

In the meantime, it appears that the UK property market has stabilised and remains a darling of the international investment community. There have also been whispers that the Bank of England has suggested that interest rates may need to be cut further to support their domestic consumer spending, which in turn will benefit property values.

South Africa

Likewise, it is clear that while the South African economy has shown almost full recovery since Nenegate, the market will not hesitate to punish a country’s asset-classes when so-called democratic leaders cannot avoid the compulsion to act despotically.

Our own president should be aware of the consequences of reckless cronyism after what happened when he suddenly and unexpectedly fired Mr Nene as Finance Minister in December last year.  

We can only hope and pray that the lessons learnt at the time will prevail in the very challenging times that lie ahead.

by Eve van Basten

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