At the beginning of this year, a few green shoots of activity signalled a tiny bit of hope in what was always going to be a tough economy and property market.
Just three months into the year, Covid-19 and the Moody’s downgrade stomped that optimism back into the ground. “Activity is probably going to be quite close to zero for the next two months, if not longer, in the residential property sector,” says David Sedgwick, managing director of Horizon Capital Residential.
Small levels of activity will undoubtedly be driven by distressed sales and other opportunities in such a market, but for most people, it is a case of cash preservation, liquidity management, and delayed discretionary purchasing. With forecasts ranging from -1.8% to -7%, he says no one really knows the full extent of the contraction.
“This will have a devastating impact on businesses of all sizes, especially medium and small businesses, job losses and pay freezes, if not reductions.” How quickly the economy can be fired up will determine what will be seen in the property market, Sedgwick says.
“One’s hope and the silver lining to the Moody’s downgrade is that the government is forced into swift action to push through major economic reform that has long been called for.”
On top of the recent interest rate cut to 8.75%, further cuts of 0.5% to 0.75% are expected this year, which will assist affordability levels for new buyers and current bond holders.
This, coupled with the Reserve Bank lowering banks’ capital adequacy requirements, thus making it easier for them to lend, should be supportive of lending for the property industry in the medium term. That is, once Covid-19 is over and some level of confidence returns.
“The timing of the Moody’s downgrade couldn’t have been worse but it was somewhat overdue and not unexpected. It will take us a long time to get back to investment grade, but life will go on,” Sedgwick says.
“I wouldn’t be surprised to see a noticeable fall in the volume of transactions and a general real drop in prices, but it is possible certain segments may buck this outlook.” A general drop in real estate transactions is the most obvious expectation for the market in a Covid-19 world, says Schalk van der Merwe, franchisee at the Rawson Properties Helderberg Group.
Data from China, South Korea and Italy, and historical data from the 2003 Sars outbreak in Hong Kong, confirms a drastic drop is “highly likely”. However, there is always a rebound once the crisis is over.
“In all recorded cases to date, once the epidemic, or pandemic in this case, was over, real estate snapped back to normal.” Entering this pandemic in a buyers’ and tenants’ market with an oversupply in both sectors will put additional strain on the South African market, he says. “Property price growth is already under pressure, and the 114-day time on market is a concern for urgent sellers.”
Van der Merwe says the effects of the stock market crash could also be positive for the property market. “During times of economic turmoil, a lot of investors tend to seek ‘safe harbour’ in brick-and-mortar assets. “With interest rates as low as they are, the net yield on properties has increased, making this more attractive. We’re hopeful this trend will help the market rebound.”
A return to normality, low interest rates, eager lenders and the flood of properties expected to hit the market, will be favourable for most buyers.