Friday, June 22

Cape Town property bubble finally bursts

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Locals must adjust expectations as properties for sale or to let at 2017 prices just don’t move

A significant shift in the Cape Town property market is shaking up pricing of homes for sale and to let, leaving owners with little choice but to adjust their prices or face the risk of properties sitting on the market or staying vacant.

This is the case throughout the country, but particularly here where the market is clearly undergoing correction following years of unparalleled price growth. Although it has been predicted that improved sentiment will see a stronger property market in 2018, it is not there yet.

Sales market

Data indicates the upward cycle in the market which may have peaked in October last year, has since plateaued, and is gradually normalising, says Mike Greeff, chief executive of Greeff Christie’s International Real Estate.

In the first quarter of this year, the market has seen a significant drop after the lengthy boom period, and what used to be a seller’s market has now gradually become a buyer’s market. This means that buyers now have more power to dictate the prices they will pay for homes. Greeff says this has resulted in a real estate landscape peppered with homes that are overpriced and waiting several months on the market.

“Incorrect pricing could occur as a result of sellers and agencies sticking to their initial prices without taking into account the nuances of what is happening in the market. “Overpricing also occurs when an agent is not successful in counselling their sellers about the importance of correct pricing.”

Read: How your home’s value changed over a decade

Echoing this, Lew Geffen Sotheby’s International Realty sectional title agents in Rondebosch, Newlands, Rosebank, Claremont Lower, Kenilworth Lower and Mowbray say the southern suburbs, for example, is still an active market for sectional title properties, but accurate pricing is essential or even the best apartment in the area could end up on the market for months.

Greeff says: “So if you want to sell in the current market, you cannot push the envelope too far in terms of your asking price.” Already homes are sitting on the market for longer, he says, with the Constantia market a prime example. From October to November last year, the average listing period for properties in Constantia was 42 days. However, between March and April this year, this figure skyrocketed to an average of 116 days. “The first six weeks that a property is listed are the most critical in terms of getting a home sold, so finding a happy balance between buyer and seller is imperative.”

Rental market

A happy balance needs to be sought by owners trying to let their properties. The latest TPN Vacancy Survey shows that rental property vacancies rose nationally during the first quarter of this year, from 5.4% to 5.8%.

One may have expected slightly less pressure on landlords following the lowering of the repo rate in March, but TPN managing director Michelle Dickens says the impact of the VAT hike on landlords and tenants needs to be considered.

“Landlords will be paying more for maintenance, upkeep and levies, while tenants will be under increased financial pressure all round, making it more difficult to absorb an escalation in rental payments,” she says.

Seven Miles South in Claremont is a popular complex for students and professionals where the rental rate for a two-bed flat has dropped from R15 000 to R11 000 a month. Picture: Seeff

Although the sub-R3 000 a month rental category is the most volatile, and has the largest increase in vacancies – from 4.7% in the fourth quarter of last year to 9.6% in the first quarter of this year – it is the R12 000-plus rental category that has the highest average vacancy rate of 12.3% nationally. The Western Cape, however, has the lowest vacancy rate at 3.6%. It also tops the market strength index at 71%.

“This does, however, come off a high base of 86% in the first quarter of 2016. The apparent slide in the market strength index for the Western Cape is somewhat due to a declining demand rating, although this figure is still high at 71%,” Dickens says. PayProp reports that nationally, there has been an increase in the percentage of tenants in arrears with their rent, from 18.5% in April last year to 23.2% in March.

“This means only 76.8% of tenants pay their rent in full every month,” says PayProp head of data Johette Smuts. She adds the average arrears percentage relative to rent is also rising. “In April 2017, the average tenant in arrears was just over 80% in arrears. “In March, this number was 96.4%, meaning the average tenant in arrears is almost one full month behind with their rent.”

The southern suburbs sectional title rental market has already “softened notably” over the past few months, with average rates declining by up to 36%, says Imtiaz Adam, an achiever agent with Seeff.

Read: Rentals are not a risky business

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Some landlords have noted the market deterioration and adjusted their rents accordingly to avoid rising vacancies, but many, he says, are still unaware of the market shift. “We are still finding landlords coming to us from other agencies hoping we can find them a tenant willing to pay high rental rates.”

While there is some expectation that the property market will bgin to recover, he says the mixed economic outlook and lag in the effects of the economic decline are only now being felt in the rental market. Tenants are unable to pay as much in rent as they used to.

For example, a furnished two-bedroomed apartment in Claremont which was let for R15 000 a month last year, can now only achieve R11 000 to R12 000 a month, says Adam. “Even the lower end of the market is feeling the decline. In Plumstead, a one-bedroomed apartment could be let at R7 500 per month last year, but will now only achieve R6 500.”

He says smart landlords understand the current market and have reduced rents to accommodate the market shift and tenants. So rather than sitting with empty properties, they are still earning a return on their investment.

Ben Shaw, chief executive and founder of HouseME – a digital platform connecting landlord and tenants – says a number of its clients have opted for inflation-linked renewals to avoid vacancies and keep good tenants happily placed.

“The market is adjusting to the newfound tenant centricity, and as a result some landlords have had to drop their prices by up to 10%. While the economy is in recovery mode, this will be necessary in certain areas.”

Furthermore, an abundance of new residential supply has put tenants in a strong bargaining position, and already, the platform’s PlaceME tool is being used by rental applicants to make offers below landlords’ asking prices. “This pricing mechanisms allows for offers below and above the listed price, and we’ve seen offers made both ways over the past two months, which indicates there are still a number of high-demand, low-supply nodes which are priced too low,” Shaw says.

Uptick in the housing market 

House price growth acceleration last month is an early sign that the improved sentiment in the country early this year is beginning to impact positively on the housing market and price growth.

Year-on-year growth slowed from an 8.6% high in May 2014 to 2.8% by February 2018, according to the FNB House Price Index. But a positive sentiment shift early this year, in conjunction with mild acceleration in year-on-year economic growth rates and an interest rate cut, is expected to translate into some sort of strengthening in the housing market, says FNB’s property economist John Loos.

“We have started to see something of an uptick in year-on-year house price growth, from that low of 2.8% in February to 4.6% in May.” Loos says other FNB indicators also point to signs of strengthening.

“We believe that average house price growth will be mildly faster in 2018 as a whole compared to 2017… (We) expect average house price growth to be in the 5% to 6% range, which would imply some mildly positive real house price growth…” As long as sellers are realistic about their pricing and understand that the market will take some time to recover, this year should be “a lot better” in terms of sales volumes, says Lew Geffen of Lew Geffen Sotheby’s International Realty.

Comfort is key to securing high-end rents 

While owners need to reconsider the affordability levels of their rental markets, owners of higher-end rental properties in Cape Town may need to take additional measures to ensure comfortable and streamlined stays for their tenants.

Cathy Cockcroft, an SAProperty.com agent who deals with many rental properties in the R30 000 a month-up range, particularly in the City Bowl to Atlantic Seaboard areas, says it has become “slightly more difficult” over the past few months to find higher-paying tenants due to discomfort or inconvenience caused by the drought.

Read: ‘New aristocracy’ leads the luxury market

Landlords in upper bracket rental homes have often taken care to ensure that the properties they let have superior finishes, good security, or are slightly above average, but they might now also have to consider installing wellpoints or boreholes, rain water tanks and grey water systems, so that tenants don’t risk of running out of water or have the inconvenience of heaving buckets around the home, she says.

“Tenants in the R30 000 and upwards price range do not want the inconvenience of having to manually pump water, nor do they want to go without certain ‘normal’ day-to-day conveniences, so they would rather reconsider their stay while Cape Town is in this situation.”

 

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