- South Africa
How is the South African property market?
- In 2010, South Africa was the fastest growing property market in the world - 32% growth in Rand terms.
- In a 2010 survey conducted by Barclays, South Africa was the 5th most likely location for an overseas property investment (6% of all respondents) behind Spain, the USA, France and Italy. Accordingly, overseas demand for South African property is expected to increase over the next 5-10 years.
Why do Analysts believe South African real estate is undervalued?
- A widely accepted test to determine the market value of property, is a model based on nominal GDP.
- The argument is, that on a macroeconomic scale, property prices are determined by just two factors: consumer price inflation and real growth in the economy (measured by real GDP).
- Nominal GDP captures the combined effect of real economic growth and price inflation as the variable, it is measured as economic output in current prices. Basically it means comparing house prices against economic growth.
- The application of the model is straightforward. Property price increases should remain in line with the nominal GDP increases of the economy over the same period.
- Whilst appearing extremely simple in terms of application, the model carries a high degree of explanatory power.
- Due to economic isolation and uncertainty, as well as political instability, property prices have come off a low base, caused by deep undervaluation of as much as 20 percent from the late 1990s – as the economy continues to grow analysts believe the gap will continue to be closed creating high capital returns on property investments.
What are the key reasons for property growth in South Africa?
Government Policies to encourage inward investment
The government is proactively promoting tourism. As a result, properties which are developed to be used as short-term accommodation can benefit from an industry grant, which can be worth up to 30% of the value of the property. This can make an enormous difference when you calculate your expected returns, and make your investment decision.
As a result of following a policy of Affirmative Action & Black Economic Empowerment (BEE), a strong black middle class is developing with an instrumental effect on the economy. Over 2 million people have joined this middle class and with 658,000 jobs being created last year and the economic growth, the grouping is expected to continue growing rapidly. This middle class is now in the property market, is affluent and is having a strong influence on the upward trend of this market.
A strengthening currency
The country has managed to remain within the 4% - 6% targets for inflation and therefore the Reserve Bank has been able to drop interest rates significantly. They are now more than half of what they were in 1998 with prime at 10.5% compared with 25%. Thus property is more affordable to a far greater proportion of the population.
Repatriation of Offshore Funds
By September 2003 all South Africans, who had illegally taken money offshore during the Apartheid era, were allowed to bring it back under an amnesty period. Obviously this money has needed to be invested and thus the property sector has enjoyed the effect of this capital influx.
There is a significant trend towards purchasing property from both South Africans based overseas, as well as international buyers, as they have realised the value of South African property in a global context. Confidence in the country is at an all time high (60% of the population). South Africa is currently the 8th most optimistic country in the world (2005).
Increased connections to South Africa
Until now, a deadlock between the ACSA (Airport Company of South Africa) and it's European counterparts has limited the number of flights coming into the country. However, these deadlocks are in the process of being removed – accordingly, it is expected that air fares to South Africa will begin to decrease and number of flights increase.