Property Investment Case Study: South Africa (TPI-SF-001)
Introduction:
Eastern Cape
The Eastern Cape is currently the most sought after area in South Africa, not only for its beautiful beaches and abundant game reserves, but the investment return is excellent. This province, South Africa’s second largest, with an 800km coastline along the warm Indian Ocean, offers some of the country’s best scenic spots, mild weather conditions, a low crime rate, an affordable lifestyle with lower traffic volumes and less major players, allowing small investors a slice of quality property.
Overall the South African property market is booming and although last year South Africa topped its house price index for the year to end-September, surpassing even Hong Kong, upmarket properties here are still considered by international investors to be good value for money. The R/$ exchange rate (around R6 to $1) weighs heavily in favour of those investors seeking to acquire secure assets in good locations, with good growth prospects.
The growth in house prices has been attributed to improved economic fundamentals and uninterrupted economic growth since the third quarter of 1998.
And in the Eastern Cape, property price increases rose by 41% in the 4th quarter last year – the highest percentage rise in the country. The future of the property market in the Eastern Cape, where people are currently making massive capital gains on their investments, certainly appears excellent. This province lags behind the Western Cape, considered ‘expensive’ in comparison, and, as such, local and foreign investors view it as a particularly attractive contender.
Location:
The Eastern Cape’s is experiencing its biggest boom since former top coastal markets have reached maturity in terms of stock availability and prices. February to May is traditionally the prime foreign investment season in the Eastern Cape and the idyllic southern coastal resorts are the most popular.
In Port Elizabeth, the commercial capital, demand is strong for everything from sectional title units to undeveloped land and stand-alone homes. The new multi-million Rand brewery in PE developed by South African Breweries, Volkswagen's major new export contracts and the return of Ford to the city has also boosted property demand. Moreover, there’s been a sharp increase in demand for industrial property as the new Coega deep-water harbour project advances to completion.
Along the north coast there’s also strong demand for residential property in East London, underpinned by the expansion of major industries including Daimler-Chrysler; this too is encouraging buyers to look further along to the older resorts of Cintsa, Haga-Haga and Port Alfred. Prices in these latter areas are rocketing as a result. Plots, which were selling for around 6 500 pounds two years ago, are now fetching as much as 80 000 pounds and developers are showing increasing interest. In East London and Beacon Bay, prices range from 66.5 thousand pounds to 85 000 pounds.
Inland, Settler Country is opening up to new property development in the likes of Bathurst, King Williamstown, Queenstown, Willowmore, Prince Albert and the Hogsback mountains.</P
<p>Meanwhile the ‘jewel’ of the Eastern Cape, St Francis Bay, has seen prices rise by more than 200% in the last three years and an increase in foreign investment. This pristine upmarket resort built on a waterway of canals, boasts its own private port, which has luxury apartments, currently attracting foreign tourists and investors.
Another increasingly popular investment area is in game farms that have seen excellent returns of 50 to 500% over the years. The growth and profit of this industry outstrips all others. There are more than 4000 game farms in this province that cover millions of hectares with more than 2 million head of game.
There’s also been a boom in golf estates that are starting to mushroom everywhere, offering golf lovers upmarket chalets on grandiose estates, and good investment returns.
Top designers are being roped in. For example, US legend Jack Nicklaus, is currently designing St Francis Links in St Francis Bay to world class standards
Economy:
This month’s drop in the repo (interest) rate by Governor of the Reserve Bank heralds increased economic growth and more disposable income in people's pockets, boding well for the economy and residential property market, according to top SA economists. Meanwhile against the dollar the erstwhile volatile South African rand, that strengthened last year, has traded since January in a higher range than in 2004.
The Governor contends that a competitive and stable exchange rate will contribute to continuing sustainable growth in output and employment. Also despite the uncertain global environment, the inflation outlook remains favourable.
According to economists, the real surprise in 2004 was not the strength of the rand; it was what drove the rand - capital inflows into the country. Inflows were not only far larger than expected, but also a lot bigger than the widening deficit on the current account of the balance of payments. During the first half of 2004, net inflows amounted to more than US$12 billion at an annual rate, up from US$9 billion in 2003 and some US$3 billion in 2002.
Analysts maintain the reason for the capital inflows is not only that investors are attracted by relatively high South African interest rates, but also because of the commodity price surge: the fact that South Africa's foreign exchange reserve position has improved, reducing the risk of holding rands. In addition fundamental issues come into play: extremely negative perceptions about South Africa have faded sharply with the acceptance that South Africa is politically stable; the fact that South Africa's economic growth has accelerated more than expected; recognition of the brightening longer-term growth prospects of the South African economy. (The economy out-performed expectations and grew by more than 3% in 2004); the government's fiscal and monetary policy is paying off; and also the country is starting to reap the benefits of a lower inflation rate and lower interest rates.
SA economists predict the overall trend for 2005/2006, like in 2004, will be a strong property market linked with the strong rand as a measure of economic stability. With strong demand, low interest rates, confidence in bricks and mortar and a continuing shortage of good property stock, the market is generally in pretty good shape, economists maintain, and should sustain itself up to and after the Soccer World Cup in 2010 in South Africa.
Forecasts by property economists also indicate that there is still room for growth in house prices, that it’s still a seller's market and buyers should not wait too long, because further price increases are expected. They expect GDP will grow at four or five percent this year, and this should have the greatest effect on property prices - residential and commercial. It will bring more jobs, higher salaries and greater confidence.
In 2005, all the factors are currently still in place for a bumper year for the property market, however, the country is still a long way from meeting the demand for housing, which shows no signs of tapering off, and exists countrywide, particularly by the poor.
Manufacturing is a key growth sector for the Eastern Cape, though other important areas are agriculture and agro-processing; tourism; investment in infrastructure; and investment in people. The province's manufacturing sector is well integrated into the world economy. For example, nearly a half of the 120 large-scale enterprises are part of international corporations, and plus 50% of these export more than 25% of their output. Many world-renowned companies have made major investments in the province, including Volkswagen, General Motors (Delta), Daimler South Africa and Goodyear Tyres.
The huge investment in South Africa's newest port by local and national government means private investment opportunities are boundless. With the Coega port development, an increase in job opportunities is expected - and with it the need to build houses.
Total provincial personal disposable income is estimated to be an annual R50-billion. This represents a major consumer market for producers inside and outside of the Eastern Cape. Exports from the province through the harbours of Port Elizabeth and East London amount to R8-billion (2004).
Electricity costs here are the second cheapest in the world. The water quality is of a high standard and can generally be drunk from taps. The province has abundant capacity to accommodate further industrial expansion and cheap industrial land is available in most towns.
Though still the poorest part of South Africa, particularly in the rural areas, this province has experienced massive growth in the tourism sector, netting the province R4-billion last year.
Property Market:
Investors face many possibilities when choosing land for development in South Africa. Private, state, provincial, municipal, and landholdings are potentially available for commercial development. Commercial real estate is well advanced, with private landholdings in urban and outlying areas.
Property investment in SA is enabled through a number of means: direct, indirect and shared ownership. Direct investment in property by foreign nationals is welcomed and the R/$ exchange rate again weighs heavily in favour of foreign investors. Indirect investment into property is usually through a Property Loan Stock or Property Unit Trust listed on the Johannesburg Stock Exchange. Shared ownership is usually in the form of syndication or shareblock structures, enabling smaller investment in a direct property.
Rand yields on direct property vary between 10% and 18%, with prime lending rate at 11%. The combined capital growth and income/interest from indirect property has consistently outperformed the JSE's All Share Index.
A non-resident is required to pay capital gains tax on the gains made from buying and selling immovable properties. Foreign investment in South African land has been encouraged by the performance of this investment. South Africa is now reputed to be one of the world's best performing property markets at around an average24% increase in value per annum.
There are no Reserve Bank restrictions on the importation of foreign currency, though this bank’s approval is necessary. A foreign purchaser may also borrow locally an amount equal to 50% of the funds imported into South Africa when investing in property. All monies brought into the country as well as any capital gain made from the investment may be repatriated without restriction.
However, land is a sensitive issue in Southern Africa and the Government is now considering introducing legislation to regulate and restrict land ownership by foreigners through leasehold arrangements in the future. This would apply to commercial and residential property.
Examples:
David Eastall Developer
South African house prices climbed by 22.7 percent in the year to the end of March 2004 compared with the previous year - the biggest annual increase in more than 20 years, and the highest increase worldwide for the period (ResearchWorldwide.com House Price Index)
The residential property market in SA is set for a record sixth consecutive year of real growth in home prices, around 20%, and experts agree that 2005 will be a year of steady growth. By October 2004, the national average house price was R594 500 - or more than double the 2000 average of R275 200. The average SA owner has seen the value of his or her home increase by 165% since 1999. In real (after-inflation) terms, the average house price for the first 10 months of 2004 was 29,4% ahead of the average for the same period of 2003. This followed year-on-year increases since 2000.
As for the Eastern Cape in comparison to Spain, where Sotheby's International Realty was recently marketing an 80m2 sea view apartment in Valencia for the equivalent of R2.7 million, for that sort of price in the Eastern Cape, one can currently acquire a much more spacious, more luxurious apartment on the coast - a 189m2, three-bedroom sea view apartment or a 143m2 sea view apartment with luxury finishes.
As, an aside, British developer, David Eastall, is investing R1-billion in a 470ha complex here that will include two 18-hole golf courses, a 500-home housing complex and a 360-room holiday resort.
On average prices for a three-bed roomed home, 130m2, with private garden and pool or mooring jetty is up - around 100% - except at the upmarket St Francis Bay resort, where house prices are considerably higher, but certainly still well affordable for foreigners:
Phase 1 (March 2003), 98 000 pounds
Phase 2 (March 2004), R130 000 pounds
Phase 3 (current) 150 000 pounds
Attractions:
From the TsiTsikamma natural forests in the south west with its pristine coastline that boasts a wide array of adventure activities, to the beautiful scenic beauty and beaches of the ‘Sunshine Coast’ stretching southwards from Port Elizabeth to Port Alfred, St Francis Bay, Cape St Francis and Jeffrey’s Bay, the province offers a host of things to see and do. Attractions include a full variety of water sports (including world-class surfing and sailing), 4x4 adventures, quality golf courses, historical trails, a variety of Eco-walks, plus annual festivals. Not least, less than hour from the coast, one is able to view the Big Five wild animals in a malaria-free area, plus numerous hunting farms abound.
The coastline north of Port Alfred boasts a lush network of rivers, lagoons, estuaries and grassy plains and includes South Africa's only river port at the mouth of the Buffalo River.
The emergence of world-class game reserves like Addo, Shamwari and Kwandwe has placed the province within striking distance for international tourists visiting Cape Town. There are 12 top game reserves in the province and some are even offering ‘The Big 7’, having added shark and whale watching to the traditional five.
The province also contains a museum devoted to global icon, Nelson Mandela, who was born here, plus there are historical sites where one can view bushman paintings - remnants of the first inhabitants, the Koi San people.
Transport Infrastructure:
The Eastern Cape offers major cities, airports and ports. The province lies equidistant from the major market centres of South Africa and is linked to those centres by a modern network of air, roads and railways. There is easy access to international airports in Johannesburg, or Cape Town that provide a less than 24-hour turnaround for products ordered from South Africa and shipped to, say, the Netherlands.
The container ports in East London and Port Elizabeth are of the highest international standard but are under-used. At the modern R2.65-billion deepwater Coega port facility, there will be additional transportation linkages - including road and rail networks, and a new international airport - through an initial investment of some R800-million.
Local Mortgage:
No data available
Inflation:
6%
Economic Growth:
3.5%
Sunshine Days:
The Eastern Cape has more 'sunshine' days than any other South African province - more than 300 out of 365 days are sunny. Along the coastal areas, the climate is mild warm temperate to sub-tropical.
Annual Rainfall:
The climate and temperature gradually changes from a temperate, winter rainfall 'Southern Cape' climate south of Port Elizabeth, through a warm coastal belt between Port Elizabeth and East London, to a humid zone beyond East London. It becomes sub-tropical in Pondoland beyond Port St Johns.
Temperatures:
Winter: TBA
Summer: TBA
Property Price Inflation:
0-25%
Local Currency:
SA Rands
Cost of Living Index:
No data available
Income Tax:
29-42 % on any income from property
Property Tax:
0.3% of property value per annum.
Capital Gains Tax:
No data available
Buying and Selling Costs:
7.5 % from seller
8% % of value of property
Rental Yields:
11-16% industrial/commercial
+- 6% on residential
There’s a big shortage of long and short-term rental accommodation in the coastal resorts.
Report Compiled By:
Bev Mortimer for The Property Investor
To download this case study in a handy pdf format use the link below:
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Report ref: TPI-SF-001
Date created: 28-09-2005
