Property prices are going down in South Africa, and I like it
Let me please rephrase that; RELATIVE property prices are going down in South Africa. According to the FNB House Price Index residential property prices have declined relative to inflation for the second year running.
Let me paint a quick picture of the South African property market: Consumer Price Index (Inflation) sits at 4,5% while property prices have only increased by 3,3%. So in real terms, the property prices have decreased by 1,2%. This decline has continued for the past 2 – 3 years. Prior to this we had 2 – 3 years of real property price increases of 1 – 2 %, and so it has fluctuated for the past 9 years. Prior to this we had 11 years of chaos with real increases peaking at 35% (2004) and real decreases peaking at 20% (2009). The last 10 years have been relatively stable, and as a part time property investor, I like the stability and therefore I like it.
The media in South Africa are reporting on this decrease in real property prices with typical hyperbole. Again, this allows a savvy property investor to pick up a few bargains. The media seems to magnify their headlines, as the media do, and the average property owner does not know any better. Again allowing the investor to pick up some great deals. I like it.
In addition we spice up the property market with some political and economic uncertainties in South Africa, and I am all fired up for this “buy cycle”.
That's great - how are cash flows doing? Is this a pure appreciation play or are you netting positive each month?
I have friends in South Africa. They are breaking their necks to get out. Political uncertainty is an understatement I think. I know people who erect cages inside their houses in secure neighborhoods so that when (not if), criminals break in, their family are safely behind the cages.
I'm sure there's opportunity there for you. Good luck.
Hi Taylor,
If you had asked me this question last year I would have had to say all property investment in SA was an appreciation play... and then my education began.
The three biggest factors that are playing a role in my current and future investment, and allowing me to see any cash flow is firstly buying right. By this I mean that estate agents in SA simply don't get it. I apologise to all estate agents for the generalisation and I realise that I am a sample of one. I have now recently embarked on "knock and drops" in my farm area to remove estate agents from the equation.
The second factor I would have to credit Brandon Turner with and the phrase he regularly uses about tools in the toolbox. With my education I'm slowly adding tools to my repotoire which allows me to be more creative as demonstrated in my purchase of my 11 single family home security estate.
The third factor is realising the different returns based on the area in which you are farming. In the past I would only have looked at A type areas which gives one approximately 0,6% rule. B type properties around 0,8% and C type properties 1% +. D types could give the 2% rule plus considerable risk. The me last year did not grasp this concept, while the me today chooses the risk profile of the potential tenants and farms the appropriate area.
So in summary I have a small positive cash flow, and although I don't bargain on any appreciation, it would not be uncommon. I have however forced appreciation through increased rents, increased occupancy and reduced expenses in my multifamily. Whoohoo
Johann
Hi Michael,
Your friends are unfortunately spot on. The situation in SA is dire and it is easy to become very negative. An indicator of the severity of the situation:
- There are more private security guards in SA than police and armed forces combined
- The number of private security guards in SA (50 million population) is larger than the USA.
This being said SA remains a beautiful country which I proudly call home... oh and there are many opportunities for the savy property investor ;-)
Johann
Hi @Johann Jacobs,
I am based in Cape Town and am looking into let-to-lets in this market. Do you have any thoughts on this worth sharing? So far in the research I have done talking to local investors, it seems that only let-to-lets as well as student accommodation seems to be feasible in this rather expensive market.
David
Hi David,
I'm afraid that I have no experience in this area, short of when I was studying myself. But that was many moons ago.
I think it could be lucrative, but it could also be risky:
- Lucrative because you need little capital
- Risky because of the type of tenant and possible recourse available to you.
I believe it will be a far more active form of generating cash flow.
Good luck and please keep me posted.
Johann