Who Owns Whom

This blog is written at a time when the Real estate sector in South Africa is facing another big knock caused by the massive unrest and looting taking place at major shopping centres and warehouses.

This is happening, just as a slight recovery was taking shape from the effects of Covid-19 related lock downs whereby especially small businesses, restaurants and gyms closed down as they could not continue paying rent whilst their business were closed. That imposed tremendous pressure on the property sector. Reading the trends on corporate actions and plans in the WoW report, the instrumental word that overwhelmingly shows up is: SELL. The wealth of information in the Real Estate Activity report provides an insight into how many economic activities are part and parcel of the Real Estate sector. Often the value of the sector is underestimated by the broader public as they do not grasp the entire scope of the sector.

Recent figures show the South African property sector contributes as much as R191-billion to the country’s gross domestic product (GDP) and R46-billion to the fiscus. The sector is worth about R5.8 trillion, Property Sector Charter Council CEO Portia Tau-Sekati said. However, the COVID pandemic with 1.4 million jobs lost and an emerging hybrid working model caused reduced demand for office and commercial space and suppressed pricing levels.

These developments caused quite a strain on the property sector with significantly increased vacancies and rental delinquencies. Also this happened in a very short span; most projects under way have to be completed and would add capacity to a market where demand for space will be very subdued for some time. South Africa’s economic growth forecasts are insufficient to clear the gap any time soon. Yet, the sector is not without creativity and ingenuity. It had to re-invent and transform itself quite rapidly particularly in terms of digitisation or technology advancements. We reflect on some of the disruptions and challenges but also opportunities this sector is confronted with.

Challenges
WoW reports that overall in the property sector, operating costs grew by 10.8% while gross income declined by 1.6% in H2 2020. The residential property cost to income ratio is as high as 45.1%. This is exacerbated by a host of additional taxes and levies being imposed by Treasury and local governments to fill up ever-depleting coffers, e.g. a new land development tax. All this has a severe detrimental effect of the value of property. (Magnus Heystek estimated the property value loss in the trillions nationally.) It is further recognised as the main cause of the rental levels stagnation over the last 5 to 7 years. It also complicates raising funding as the loan to value ratio deteriorated.

Combined with low economic growth, the upswing in the property cycle, as we saw from 2000 to 2007 with tremendous value growth, does not seem to be on the immediate horizon. Government is grappling with a number of socio-economic challenges and is designing policies to put out fires at the expense of long term sustainable growth which the property sector could do with right now.

Constraints
Jobs of the future are more flexible, agile, networked and connected. Entrepreneurs in the Real estate can create their own jobs given adequate regulatory support. The sector as a whole has to invest in new skills to respond to the new way of doing business driven by new technologies. The real estate profession, has started embracing new technologies, in some instances utilising drones and virtual viewing. This has turned out to play a value adding role and the professionalising of the service offered by Estate agents, a positive disruption I might add.

Opportunities
The sharing economy such as Air BnB and the Shared Office Space models are gaining momentum and proffers a real opportunity. The conversion of office space into affordable residential units, for which there is still a high demand remain an opportunity. For the latter we do have to present a word of caution. Emerging entrepreneurs do face challenges in inner city developments like criminality, bribery and lack of efficient, municipal services.

We can add the new or unexplored funding methods as opportunities to be tapped into. Crowdfunding, stokvels and a combination thereof with much broader ownership models can benefit activity in the property sector. Lastly, new technologies and big data analytics can bring profitable niche markets and projects to realisation by tuning into the right designs and improving customer experiences.

In conclusion
WoW’s research shines an interesting light on several growing and profitable niche markets in the Real Estate sector. The overall picture is however not only positive, and as with regulations, fingers the government for its slow action and disregard for economic realities. The excessive growth over many years of administered prices propelled municipal charges as the highest cost component by far at just under 40% of operating costs in 2020. For 2021, the charges again increased way over inflation.

All in all a very mixed landscape is emerging and the Government has its work cut out for it.

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