It’s no secret that the SA housing market is not in great shape. House prices are down, sales are few and far between, and there are many lovely homes standing empty in good suburbs in Joburg and Cape Town. But the picture may not be quite as dire as it seems. Alec Hogg is currently looking for a home, and his perspective on the housing market is worth hearing. In this episode, we talk about Alec’s experience with house shopping and what it tells us about how South Africans are feeling about their homes. We also talk about the Naspers’ Amsterdam listing and what ordinary South African shareholders should do about Prosus. We wrap up with a discussion of the ongoing troubles in the auditing profession. – Felicity Duncan
Hello and welcome to this week’s episode of The Editor’s Desk here on Biznews Radio. I’m Felicity Duncan and with me as always, Alec Hogg.
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We’re going to kick off this week, Alec, by talking about a big decision that a lot of South Africans are facing right now related to Naspers and the Prosus listing in Amsterdam. So, you know, a lot of South Africans are sitting with a number of existing Naspers shareholdings. And they have a choice to make now, as this new listing happens, which could have very serious tax implications for them and could be a bit of a cash flow knock. Â
But I know you’ve been talking to a lot of people about this. And I’d love to hear your insights and what you think that people should do. Because there’s plenty of people – my mom is one of them – just ordinary people who have a few Naspers shares and need to make what amounts to a fairly substantial choice.
Yeah. Just by way of background, everybody who owns a Naspers share is going to get a share in Prosus, which is going to be listed in Amsterdam. Naspers – the existing company – will continue to hold three quarters of the equity in Prosus.
But if you are invested in Naspers through a pension fund or a retirement annuity or a unit trust, there’s no decision to be made, because they’ll just take up the Prosus shares and they’re untaxed.
But as an individual, when you take up your Prosus shares, you have to pay tax on the capital gain that you’ve made. Now, Naspers has been a spectacular investment, so many people will be looking at this and blanching, thinking that, well they might have bought the shares at one fiftieth, even, of what they’re sitting at at the moment and now they have to put a lot of money into paying off the tax or just sticking with the Naspers shares themselves. In other words, getting extra Naspers shares, rather than a holding in the Amsterdam company.
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Having spoken to quite a few people on this, I think it really is – obviously, it’s a personal decision – but the best approach, I would suggest, is that you actually take up the Prosus shares and pay the tax. The way you do that is by – well, the way you fund the tax, for most people who don’t have the ready cash just sitting there – is by selling a percentage, probably a quarter, of the Prosus shares that you’re going to be taking up to generate the capital gains tax.
And why I say that is, when you have a look at South Africa’s financial position, when you have a look at Treasury, and you consider the priorities of this country. The number one priority in South Africa right now – and again it came through this week in Tito Mboweni’s budget vote in fact on Friday, where he explained that we have to keep Eskom going. And actually, on the upside you don’t have to buy yourself a generator and an inverter anymore, because government has made this number one priority into the future, keep the lights on, keep Eskom going. Because there is an understanding that, without electricity, you don’t have a modern economy.
So, as a consequence of that, that’s our number one priority. The lights are only going to be kept on, though, by a huge injection of cash by taxpayers. We’re talking about R250bn that Eskom needs in the medium term, not even the long term.
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So, where they’re going to get the R250bn from – which is about a quarter of total spending of the government in a year at the moment, so, it’s a big, big number – well, it’s higher taxes. Where is the most obvious place where you’re going to hit the public for more money? They already went up last year 1 percentage point in VAT. So, they don’t really have the option, I don’t think, given the union’s resistance to this, to put too much more pressure there – maybe a 1 percentage point increase, but that’s only about R25bn a year. So it’s a long, long way short of what the country needs.
They’ll be looking all over the place. And the most popular tax, always, is taxing the rich and the most popular tax among those who want to tax the rich is capital gains. So, from wherever you sit, you have to understand that capital gains tax is almost certainly going to go up in future in South Africa. So, rather pay the tax now, when it is relatively low – it’s not low in a global sense, but it’s kind of in line – but indeed, into the future, it’s probably going to be higher.
So, get your Prosus share, pay the capital gains tax now, because tax is always an event that you could defer. Why, also, Prosus? Because it’s almost certain that Prosus is going to outperform Naspers. And the reason for that is Naspers is a holding company of Prosus, which is itself a holding company of Tencent and other assets. So, whenever you have a holding company of another one, you have a discount that is attached to it.
So, all round, if you look at it in that very rational approach: taxes are likely to go up, you’d rather be an investment which is a holding company, rather than a holding company of a holding company. So, that would be my suggestion.
That’s good advice there for people who are… who hold a few Naspers shares and are trying to decide what to do with those holdings.
Now, something that you’ve been busy with, and we’ve been talking about on and off on a personal level for the last few weeks, is that you’re looking for a house. So, you know, you’re up in Jo’burg, and you’re driving around looking for the “For Sale” signs out there and trying to find something that you are comfortable investing in and that you have a willing seller.
And you’ve had some interesting experiences with the housing market in Johannesburg, which obviously is one of the two most important housing markets in South Africa. And I wondered if you could tell us a little bit about what you’ve been experiencing as you shop for a house, and what you think that says about people’s attitudes towards the economic future of the country.
It has been an eye opener, Felicity.
In one instance, you get people who have emigrated. Most people who emigrate try to sell their house before they leave, but others get discouraged and they see that they’re unable to get the price that they perceive they should be getting for the house. And so the houses are sitting there and these houses are at bargains.
We saw one recently that was a R6m house that the agents said they would probably accept R4m. So, it’s that kind of – if you’re looking for bargains and you’re looking for houses that have been left by emigres from South Africa who, once they get abroad, have to keep reaffirming their decisions, those houses are available and very cheap, but unfortunately they are not always suitable.
Then you get the houses that we are looking at, houses that are just in the normal context, where people are moving out of Johannesburg, the commercial centre, and perhaps to a smaller area – they might be moving, down scaling. Because we work from home, we need a little more space than most people, but they might be down-scaling to complexes, and even in complexes themselves, you find people who then try to find something else.
But what I’ve noticed is that there is a reluctance, almost like a rationality that comes into the mind of the sellers, in that they are not prepared to drop too far. They know the housing market is under pressure and they know they’re going to have to accept less. But I’ve noticed people taking houses off the market when they realise that the current market value of their asset is significantly lower.
So, they’ll either rent it out to somebody – which has its own dangers, but that is a decision some of the people that we’ve seen have made – or they will actually stay in the house themselves and then upgrade and do a little bit of do-it-yourself. And we’ve seen quite a lot of that, particular in the area that we stay in, where there’s a lot of do-it-yourself bakkie builders around helping to upgrade the value of those homes.
The gap between the buyers and the sellers, at the moment, is still quite significant. And that’s kind of where we’ve been coming in as a buyer, looking at a very prescribed financial area, and in the area that we’re looking at, we are noticing this all the time.
So, I guess you could sit back and say, let’s wait for a desperate seller – and a desperate seller would almost always be somebody who is emigrating or has emigrated. And those do exist, but the houses are not always suitable for what we’re looking for. Or you need to, for what you want, you almost need to almost pay up a little bit more than what you expected. Otherwise the seller will just take it off the market.
So, it’s a very, very interesting period that the South African housing market is going through now. We hear research about it being soggy, and certainly there is no doubt that prices have come down. But on the other hand, the prices have come down on average because you have these isolated instances of bargains, where people have just given up because they’ve emigrated. For the most part though, we’re noticing that people would take…  sellers would take a different approach. They’re not going to accept – sellers who are staying in South Africa, anyway – are not going to accept pennies for their properties.
I think that what’s really happened is that many South Africans are now postponing their decisions to go to the coast or downgrade in the understanding or the belief that the market will pick up in time.
So, whether that happens, whether we have a permanent reduction in the price of houses in South Africa, only time will tell us. I don’t think so. I think that, if you consider what’s happened in the last 10 years, we’ve been through the worst. As you well know, I’m very excited about the future, but that’s when I talk about a five to 10 year future.
The other thing, of course, is as a South African right now, you can, in global standards, get an amazing property at an incredible price. We looked around the UK at the housing market, obviously when we were renting there, and the home that we stayed in sold for ÂŁ1.3m. Now, that same house in South Africa would probably go for less than ÂŁ200,000. So, it gives you an idea of the huge extent of difference or the chasm between value for money that you would get in this housing market at the moment and elsewhere.
It’s a good lesson for people and I think it’s really interesting that you’ve encountered a number of sellers who, when you make a firm offer, will say no, that’s below the price that we want to accept.
Because to me that says that these people, most people, many people at least, are still optimistic. They’re still saying, no, you know, the worst hasn’t come. My property still has more value than what is being offered here and I’m going to hold out. I’m going to rather take it off the market than sell it at what I perceive to be a too-low price. And to me, that’s a real sign of optimism – a small one but an important one.
And, as you say, interesting to think that perhaps the reason, in aggregate, that the housing market is soggy is not necessarily that there’s no buyers. It’s just that there’s not necessarily sellers willing to accept what the prices are that would close the market. And to me, that’s a more optimistic reading of a soggy housing market, than the idea that there’s just no one out there to buy.
Now, as we come to the end of the show here, Alec, I wanted to briefly pick up on some news that came out of the UK this week. The regulator there did a big review, an annual review on audits and found that, on average, one in four audits that were performed in the UK were not reliable – they were problematic, they did not meet the standards, essentially, that the regulator laid down.
And now, for some firms it was more than that – Grant Thornton, I believe it was one in three, so it varied across firms. Ernst and Young did pretty well. I think it was one in six or something for them.
But, overall, a real indictment of the audit market and it made me think a lot about South Africa, where investors have been badly burned by bad audits over the last few years. Steinhoff is a big one that you think about here, and many subsequent examples – Tongaat Hulett, for example, Hulamin. There’s something rotten in the state of auditing.
No doubt. And in the UK, Lord Donald Brydon has a committee that’s looking into audit standards. And it’s very likely that South Africa will cut and paste whatever comes out in the UK. And already they’re saying that you need to get the chief executive and the chief financial officer to sign off on the accounts, to make sure that they are fair and reasonable. Otherwise, if not, they go to jail.
So, starting to bring skin in the game for the executives who, up to this point, have sometimes just been in a position where they’ve twisted the arms of the auditors to do what the executives themselves wanted. And the skin in the game that the executives have is, of course, share options and in getting the share price higher. So, there’s going to be lots of changes in this and the auditing profession themselves need to look at it.
We had a great interview with David Woollam on Rational Radio this past week, looking at audit standards and what needs to be changed. And I’d recommend anybody to go and listen to that, particularly the second half of the interview.
But to encapsulate it, he’s saying that the whole process has now become overly complex and complicated and that has made it easy for somebody who has an intimate knowledge of auditing – and he uses the example of the SAICA audit standards booklet being 2,000 pages long, so before you can audit a public company you are supposed to know every one of those 2,000 pages, you are meant to know all that information. And, of course, when you get a Markus Jooste or others who have a good inside knowledge, they can use that to bully the auditors and to browbeat them in putting stuff in the accounts that aren’t really reflective of the underlying position.
So, lots is changing in auditing. The auditors themselves want or appreciate that it needs to change. And it can only be good in the long term for an economy, because if investors have confidence, then they’ll put money into equities, and that will reduce the cost of capital.
