It’s known as the richest square mile in Africa but what return does buying or renting a property in Sandton offer investors? And while the economic fundamentals of South Africa may be under a dark cloud, Biznews community member James Ausa, believes there’s still a case to nibble on Sandton property. It’s a short look at an investment decision that does require a lot more research but the basics are there. And if Sandton is not your cup of tea, then James reckons you should open a bank account in Australia, buy some dollars and sit back and relax. – Stuart Lowman
By James Ausa*
If we take a look at the macro fundamentals in South Africa today it is easy to be pessimistic.
- We are facing our worst drought in decades.
- Resource prices are severely depressed with no signs of recovery.
- The Rand depreciated by more than 25% to the USD in 2015.
- Inflation is expected to be 6.8% in 2016 and 7% in 2017 well above the target range.
- A 45% chance of the economy slipping into recession (according to the median estimate of 9 economists surveyed by Bloomberg).
- And lastly we are, more than ever since 1994, facing major political uncertainty.
With all that said, why on earth would you want to invest in illiquid assets that are Rand denominated?
The thinking is as follows:
As a result of severe rand depreciation, the cost of residential building is estimated to be up approximately 15% on a year ago. With most developers considering projects that achieve a net margin of around 20% this will drastically undermine the feasibility of any projects that have not yet fixed prices and procured finishes. For this reason, it is likely that many developments that have not yet begun construction will be moth balled until selling prices rise high enough to allow the developer the requisite margin.
Secondly, as a result of higher interest rates, there are fewer buyers and more renters. Also, in rising interest rate environments and poor economic climates the banks generally tighten up their lending criteria which further increases the number of renters relative to buyers.
In addition to there being more renters, high inflation as a result of imported costs, and food shortages is likely to push rentals higher in time. There are of course concerns that the above-mentioned variables result in less disposable income and these concerns are not unfounded but as wages catch up with inflation (even if not completely) the upward pressure on rentals will be felt.
Additional demand will be coming from the new tenants arriving in Sandton. A lot of the major developments are for tenants that are moving within the Sandton area so that is not likely to have a significant impact on residential demand but my prediction is that with the amount of vacant office space coming online as a result of new buildings done on spec or as a result of businesses moving out of existing buildings into newer ones (Werksmans, Discovery, Sasol, Webber Wentzel, Bowman Gilfillan etc.) will mean commercial rentals in Sandton will fall sharply to attract tenants and this will have severe consequences for areas on the periphery of Sandton (Woodmead, Sunninghill, Parktown). In other words, there is likely to be a massive influx of people and cars into the Sandton CBD over the next few years and this is also likely to put some pressure on residential rentals in Sandton.
According to www.numbeo.com the price-to-income ratio of the only 9 African countries for which they have data ranks South Africa as having the most affordable property prices with a price-to-income ratio of 3.34. Ghana was the most unaffordable with a ratio of 29.93.
Why apartments and not houses?
As security concerns heighten, there is likely to be more of a trend towards gated communities for those that can afford it or to lock-up-and-go apartments with strong security features.
For all of these reasons, I believe that although price growth is likely to remain subdued over the next 1-3 years, rental prices are likely to outpace inflation over that same period. I would not suggest gearing these assets more than 60% though and if you cannot afford the 40% equity then I suggest sticking to safer alternatives as the ride is likely to be bumpy over the next few years and you need to make sure that wherever you put your money that you can survive the volatility until calm is restored.
An alternative strategy, which I think holds a lot of water: Open a bank account in Australia, buy dollars and then sit back and relax.
- James has a BSc in Mathematics and Economics and invests, in his personal capacity, in real estate, shares and private businesses. He has a passion for science and big ideas and is rumoured to be referred to as “having had a lot of potential” by his parents.
