When a neighbourhood starts showing signs of a turn for the worse, it is time for homeowners to consider moving. By Bonny Fourie
When a residential area begins to show signs of degradation, property owners should consider selling, and as soon as possible. Once a neighbourhood has succumbed to neglect, values and demand for property in that area could be negatively impacted.
For owners who do not want to sell, the only possible option is to get the municipality to create a Special Rating Area, also known as a City Improvement District, says Erwin Rode of Rode and Associates.
“The extra levy payable in such a district is well worth it, given the improvement in grime and crime.” Other than this an individual owner can do “little to nothing” to stop the rot and should consider selling “as soon as possible”.
“Turning a neighbourhood into a slum is a process that starts slowly, then, when it reaches a tipping point, the area collapses quickly,” he says. Although it is “really difficult” to time the market when it comes to urban decay, Herschel Jawitz, chief executive of Jawitz Properties, says it may be too late to sell and expect a premium price for a home once the decay, or commercial encroachment, has begun.
“Safety is always a key issue. If you don’t feel safe in your home because of what is happening in your suburb it’s time to move, if you can afford to.”
Whether an owner can afford to sell depends on if they can clear their mortgage and buy another property, taking transfer duty into account. Part of the decision-making process is for an owner not only to ask if they can afford to sell, but, in some cases, if they can afford not to sell, he says.
As crime and over-crowding in residential areas and complexes can lead to loss of property value, Mark Lewis, of Just Property Constantiaberg, advises property owners to “react quickly” in these situations. They can take action through body corporates or homeowner associations, or even involve the police.
“The police welcome a pro-active approach by owners and are more willing to act if they see a commitment to a solution.” When the decay is not adequately addressed, property values do drop and this can force homeowners to sell for less.
“This, of course, affects overall values in an area, with a domino effect taking place as more and more properties are sold at lower and lower figures,” he says.
While Ross Levin, managing director for Seeff Atlantic Seaboard and City Bowl, acknowledges it is “very difficult” to advise whether people should stay in degenerating areas or sell and move, they should consider selling. “Obviously, if you can, it is best to look to protect your asset into which you have been investing substantial money.”
Sometimes, people simply cannot afford to move, says JP Ricketts, a sectional title specialist with Seeff CBD and City Bowl. Unfortunately, they face risks.
“An area might not recover. If you wait too long, you may not be in a position to sell at all because, for example, you may owe more to the bank than you could get if you sold, in which case you would be forced to stay.” Even though Rode says the decision to sell or stay depends on property owners’ individual circumstances, generally it is better to sell too early than too late.
“To grow old in a neighbourhood infested with crime and grime is not pleasant. Old people feel more vulnerable.”
Many factors put damper on prices
Increased urbanisation and the scarcity of inner-city land either keeps residential property values stable or pushes them up, so it is “very rare” for home values to decrease, says Just Property’s Mark Lewis.
That said, homeowners do sometimes sell their properties for less than they are worth or what they paid for them.
“This happens primarily where an informal squatter situation arises adjacent to a residential area. Failure to properly address squatter situations leads to a decrease in neighbouring properties over time. There are numerous examples in every city in South Africa.”
A property’s value can also fall below the purchase price for economic reasons, says Jawitz Properties’s Herschel Jawitz. South Africa is experiencing both this and suburb decline.
“In addition to suburbs that are in decline for reasons such as high crime rates and the slowing economy, weak consumer confidence is taking its toll on property prices. Across many parts of the country, sellers who purchased their homes in the past three to five years may not get what they paid for them.”
Other factors that put a damper on property prices are shoddy renovations and run-down properties, says Seeff’s Craig Algie.
Sellers who have overextended on renovations and extensions might be forced to accept lower prices. Some circumstances can also see sellers willingly accepting lower prices for their homes, says Jawitz.
“Sellers who are emigrating, for example, are more likely to accept a loss on their home… Those who may be upgrading to a bigger home or better area may gain more on the swings than they lose on the roundabouts.”
Seeff’s JP Ricketts says sellers could also accept less if they are financially distressed or going through a divorce. Rode and Associates’ Erwin Rode says homeowners sell at a loss only if they are forced to, perhaps through being laid off. Price bubble bursts could also see them lose money.
“House prices are less volatile than share prices. However, once in 15 to 20 years, prices explode during a period of irrational exuberance. Prices then start to exceed replacement costs – in other words, a price bubble develops. The event that pricks the bubble is always a sharp decline in the economy. The result is declining prices.”
This could result in those who bought near the peak of the bubble, owing more on their home than its market value. “If the owner has to sell during this period, the financial damage could be devastating,” Rode says.
Hang in there and you may profit
Just as neighbourhood degeneration forces property demand and values down, regeneration pushes them up. For owners unwilling or unable to move out of decaying areas, this turnaround is just reward.
Area metamorphosis works in cycles, and often areas that have degraded become popular again as developers and investors look for opportunities, says Just Property’s Mark Lewis.
“This occurs mostly closer to city centres. Lower Wynberg in Cape Town is a prime example of this. It was previously run down and is now experiencing rejuvenation. Action against crime by residents and the police, and new investor interest by the Muslim community, have seen vast improvement here.”
Muizenberg is another good example of a previously run-down area that is now drawing investment, says Bonita Lee, a master property practitioner at Seeff Muizenberg. The beachfront redevelopment saw properties just off of it recording “sharp increases” in value. The Muizenberg Improvement District has played a major role in making the area more attractive while the demand for holiday accommodation, especially Airbnb, has also made beach flats popular.
“The risk of staying in a degenerating area is that your investment will continue to devalue, but the risk of selling if the neighbourhood turns is that you may sell and then regret not keeping the property.”
Owners who choose to stay in improving areas should actively participate in changing the circumstances. Parts of the City Bowl are also prime examples of areas that may have been considered run down, but are now seeing “phenomenal” property prices and capital value growth, says Seeff’s Ross Levin.
Lewis says investors buy in run-down areas and then “bank” or rezone properties until there is potential to renovate. “Large-scale action like this has happened in Woodstock and Salt River, which is now experiencing rebirth and growth again. Gentrification and higher density rezoning allows for improvement.”
High land values make bad areas attractive because of scarcity. Often a “bad” building will be demolished and result in higher land value as a development site.
Seeff agent Craig Algie says Woodstock, Salt River and Observatory were also regarded as no-go areas recently, but their proximity to the CBD have seen them become popular with buyers and developers.
“The result has been a rise in gentrification/regeneration, making these some of the trendiest areas in the country.”
But while property owners who stayed in degenerated areas may eventually benefit, Rode and Associate’s Erwin Rode says there are risks: “If you live in an area where prices have skyrocketed, you become asset rich, but if you are income poor, the rates and taxes could force you to sell and move to a less expensive neighbourhood. The Atlantic Seaboard and Bo-Kaap come to mind.”
Resurgence: New life for CBD
Signs of neighbourhood decay are easy to spot, but many buyers are undeterred by them. After all, in any market and suburb there is a buyer for any property listed at the right price.
Jawitz Properties’s Herschel Jawitz says buyers might choose to buy into these suburbs because the properties are not only affordable, but offer “really good value” in terms of size and accommodation, compared to similar properties in better areas.
Buyers and investors who have an eye for a potential bargain can also benefit from buying properties in run-down areas. In fact, the Cape Town CBD is a prime example of an area which became rundown, says Seeff chairman Samuel Seeff.
“It can be argued the Cape Town property story is very much that of regeneration and what that can do for the demand for property and, consequently, property prices and value growth,” he says.
“In the early 2000s, led by Irish investors with vision, the regeneration of the Cape Town CBD started. This spurred the redevelopment of many apartment blocks and the creation of trendy living spaces. Corporates started moving back and the CBD is today regarded as a trendy area in which to live or work.”
Suburbs revived: Property prices are up
Regeneration can have a positive impact on property demand and values, with some Cape Town suburbs perfect examples of this.
Seeff’s Bonita Lee says average full title property prices in the Muizenberg Village area have grown from about R800 000 in 2009 to upwards of R2.5 million for a semi-detached property and R3.5m for a house.
Following regeneration, Seeff’s Ross Levin says average apartment prices have grown substantially in the following areas from 2009 to the present:
- Cape Town CBD: R900 000 to R2.2m.
- Sea Point: R1.2m to R2.3m.
- Green Point: R1m to R2.8m.
- Mouille Point: R1.7m to R4.2m.
He says: “You can also see this reflected in other upper-end suburbs where older houses have been bought up and redeveloped or often demolished and completely rebuilt.” Between 2009 and this year, the average house prices grew from R6.6m to R13.5m in Camps Bay and from R13m to R30m in Clifton.
In Woodstock, Seeff’s Craig Algie says full title prices grew from R825 000 to R1.5m in Lower Woodstock and R2.9m in Upper Woodstock during this 10-year period. In Observatory and Salt River, the respective increases were R930 000 to R2.6m and R400 000 to R1.3m