Paul Haselau, Team Leader of Structured Lending: Nedbank Private Wealth, KwaZulu-Natal looks at the future of the South African property sector in a world changed by Covid-19.
The Covid-19 pandemic and subsequent lockdowns have had a significant impact on South Africa’s property market. But as vaccination rollouts promise ongoing easing in personal restrictions and bring hope of an improving economic situation, what does it mean for property sector stakeholders? A recent webinar hosted by Nedbank Private Wealth brought together a panel of property experts to explore the impact of Covid-19 on property in South Africa, and the emerging trends and opportunities.
The panellists agreed that property was arguably one of the worst hit sectors by Covid-19 and the national lockdown response. But while the gradual lifting of restrictions, coupled with the vaccine rollout, should equate to better economic fundamentals that may catalyse a property recovery, the impact of the pandemic is fairly different across the various property sectors.
Dr Andrew Golding, Chief Executive of Pam Golding Property Group, pointed out that the residential market was already quite subdued before Covid-19, with volumes and prices trending down. 'There was an expectation that, after lockdown, there would be some pent-up demand,' he says, 'but it soon became clear that the market had actually benefitted somewhat from the restrictions. And to everyone’s surprise – and largely due to the low interest rates – the market has remained buoyant until now.'
Dr Golding points to significant structural trends underpinning this residential property market strength. 'Volumes are up significantly, and despite a slow start, prices are now beginning to move up as well,' and this upward trend has predominantly been fuelled by the lower end of the market, where those who previously would have been renting now see an opportunity to own their homes. This has pushed the entire market up in terms of sales volumes and values', he adds.
Another significant trend is remote working, and the emergence of so-called ‘Zoom towns’ that allow people to live and work from wherever they choose. This has resulted in material changes to the perceived value of many towns, particularly on the coast, and there is opportunity in these areas, especially for homes that offer the flexibility and space for working from home.
On the commercial and industrial front, the picture is somewhat less rosy. Panel member Norman Raad CEO of Broll Auctions, explains that these sectors had also been struggling before Covid-19, with a decline of roughly 20% in values already in place across the board, primarily due to economic challenges. As a result, participants in these sectors were hit extremely hard and values have been driven down even more. 'Rentals have had to be renegotiated, with some reverting back to levels last seen many years before the pandemic,' Raab explains, 'creating massive and widespread devaluation of commercial, industrial and retail property.'
He emphasises that the main opportunity in the commercial segment now lies in finding creative ways of rethinking and reengineering existing properties, particularly given that the shift towards working from home appears to be a permanent one, which means many office spaces are likely to become liabilities rather than assets, unless their owners can repurpose them effectively.
And according to webinar participant, Shala Ramokolo, listed property equity analyst at Nedbank Private Wealth, the 2021 outlook for listed property is also not overly positive. She explains that the focus for most listed property funds is likely to be on repairing their balance sheets in the short- to medium term. 'Feedback from many participants in this sector is that they are still struggling to sell assets,' she says, 'which means that the only option they have to pay down debt and achieve the desired balance sheet equilibrium is to limit dividend payments and hold onto their cash reserves.'
On the more positive side, according to Robin Lockhart-Ross, non-executive chairman of Fortress REIT, while new commercial mortgage bonds registered at the deeds office were down nearly two thirds, year-on-year 2020, this doesn’t necessarily mean that bank appetite for property finance has declined, but just that their appetite has changed. 'New lending is vital for the sustainability of any bank, so we are likely to see property finance transactions picking up as demand improves,' he says, 'but lending has definitely become more nuanced, as banks pay more attention to the serviceability of the loan and the sustainability of the client’s cashflow.'
Other trends and opportunities highlighted by the panellists include ongoing digitisation of the industry with something of a ‘hybrid’ property transaction environment emerging, effectively giving realtors, brokers and banks an opportunity to focus less on the minutiae of processes and instead add more value to clients through their market knowledge and experience.
The lower interest rate environment is also a continuing trend, with panellists agreeing that low short-term rates shielded the property markets during Covid-19, but are not enough to sustain the property market going forward – that requires robust long-term economic growth.
While property has a long road to recovery ahead of it, the panellists agreed that there are still opportunities in the market. Property has proven itself to be very resilient historically, and the infrastructure and innovation is in place to get the sector through its current challenges. So, a well-designed, well-located and well-managed property, in the hands of a patient investor or smart owner, who has the balance sheet and cashflow strength to weather the current economic storm, will almost certainly remain a highly attractive investment over time.
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