April 2011

YDL’s Outlook for 2011 tried to answer the vexed question: “How long will substantially discounted opportunities remain available in the residential property market?”. The conclusion was that “data paints a mixed picture, but does seem to indicate that we’ll experience less distressed sales this year”.

But, we’re not out of the woods yet, and it is expected that financial distress will still be at fairly high levels, resulting in distressed sales, in particular until household debt levels return to more prudent levels. And, as mentioned above, household debt levels remain vulnerable to household utility increases, and interest rates”.

The latter issue was addressed in a recent report by FNB Market Analytics, titled “Household sector debt-service risk”. The latest SARB Quarterly Bulletin reported a slight reduction in the household debt-to-disposal income ratio to 77.6% (down from 78.7%). This ratio remains extremely high by historical standards, and has declined only moderately from the high of 82% reached 3 years ago in Q1, 2008.

A good predictor of home loan default rates is the household debt service ratio. “The household sector debt service ratio was 11.9% by Q4, 2010. This is significantly down from the all-time high of 16.2% reached in Q3, 2008”, which led to high levels of household financial pain. However, the ratio remains high, and needs to remain below 13% for “relative comfort”. A return of the prime interest rate to 15.5%, would once again result in distress.

The high level of indebtedness thus means that households remain vulnerable to interest rate hikes, and/or a deterioration in the economy. Most commentators are predicting that the next movement in interest rates will be up, and the Governor of the Reserve Bank said that “the risks to the outlook for inflation are on the upside”.

So, although a steep interest rate hiking cycle is not envisaged (given current economic data), a typical hiking cycle of 4 – 5% would result in a higher debt service ratio, and hence financial distress.

The above underlines our view that less distressed sales will take place this year. This is supported by the fact that the ratio of bank’s non-performing loans in relation to total loans has been falling.

The number of sales in execution is expected to fall, also as banks are doing their utmost to ensure that their recovery processes do not reach the sale in execution stage. It is time-consuming and costly. And, banks have to buy some properties back at Sheriff auctions in order to minimise their losses. This means that they have to manage such properties, even though this does not form part of their main business.

This means that YDL will increasingly be focusing on channels other than Sheriff auctions for the procurement of distressed properties.

As underlined above, households remain vulnerable, and distress could increase should external shocks impact on our economy, or if households will be subjected to a steep interest rate hiking cycle.

For the full report, click here.

As you would have seen in other articles in this newsletter, distress is still prevalent in the market, although at lower levels than last year. We’ve recently experienced a surge in interest and sign-ups for our Property Partner Programme, and assume that it has to do with investors still wanting to take advantage of current market conditions.

YDL has thus increased its capacity to service the increased need.

See below for examples of actual, recent deals.

Houghton
This lovely 2 bedroom apartment in Houghton was bought for R589,000 (including arrears), being 73% of market value (R800,000). The property had a sitting tenant at R6,100 pm, and earned income from day 1. The yield is 10%.

Watch a short video where Deon describes the property. Also scroll down to the bottom of this article to see a summary of the purchase.

Sunninghill
We recently bought a property for an investor in an up-market complex in Sunninghill. It is a 109 sq.m, 2 bed 1 bath loft apartment with 2 large balconies. It is in superb condition and has lovely views over Sunninghill. The previous owner was still in occupation and plans to move out within the next few months. Our investor agreed to allow him to remain in occupation, paying a reduced rental of R6,000 per month until he is back on his feet. The calculations below reflect the real scenario as and when the unit is rented out at a market-related rental value.

With a 90% bond, our investor will be marginally cashflow positive by R9 per month with a yield of 9.32%. Had she purchased the same unit on the open market, she would have been negative by R1,940 per month with a yield of only 6,86%!

Scroll down to the bottom of this article to see a summary of the purchase.

Fountainebleau (Randburg)
We recently purchased a 3 bed, 2 bath duplex for an investor in an older established complex. It includes a lock-up garage, a carport and has a quaint garden that overlooks the complex pool and leafy gardens. Although an older unit with a kitchen that requires modernising, our investor chose to do simple touch-ups that included mainly painting.

At a 90% LTV and a rental of R7,500, the investor would be cash flow positive from day 1 in the amount of R1,439. However, our investor chose to pay the balance of the purchase price plus the full arrears out of the equity he holds in his primary home loan. On this basis, his actual cash outlay was merely for transfer costs and fees. Even on this basis (the equivalent of about a 108% bond), he remains cash flow positive in the amount of R610. His yield is also a whopping 11.7%!

Contact YDL now for a free consultation where we will explain how we can help you to obtain similar deals. Call us on 011 465 7356 or email us on info@ydl.co.za, or sms us on 083 389 0321, or click here for a free consultation.

Examples of actual deals

Absa property analyst, Jacques du Toit says: "Higher-density housing, ie, flat and townhouses are believed to be the future of housing in South Africa, especially in the major metropolitan areas, mainly as a result of factors such as the availability and cost of serviced vacant land for development, the affordability of housing and housing finance, the running costs related to property, and transport related issues (costs and time)."

Absa's Marcel de Klerk says corporates are also getting their house in order by not taking on new projects, choosing instead to address their loan value, service their interest and reduce vacancy rates. Absa also says that corporates can expect some growth towards the end of 2011. "If you look at all the banks, bad debt is on average 50 to 60 basis points, in good days, the ratio should not be higher than 30 basis points," De Klerk said.

Absa property analyst, Jacques du Toit, says the following economic, household sector and property market related factors are expected to impact the residential property sector this year:

• Interest rates, influenced by developments on the inflation front;
• Economic growth;
• Employment;
• Household disposable income;
• Consumer confidence;
• Household debt levels and the cost of servicing debt;
• The National Credit Act and banks' lending criteria;

The affordability of housing and mortgage finance driven by:

• Property prices;
• Interest rates;
• Transfer duty on property;
• Municipal rates, taxes and levies, impacted by rising electricity prices, water tariff hikes and increased property tax rates;
• Consumer finances and the state of credit records.

Absa says a retail sector that is cause for concern is construction where nothing is happening on the demand side. The bank says it will continue with its policy of "responsible lending" and its conservative approach. Its aim is one of growth and reacting to demand in the market and to remain stable in areas where there is no demand. Absa's Mike Mortimer says business vacancies are around 8% to 10% in all major nodes while vacancies in the major cities are tapering off.

Mortimer says many so-called neighbourhood shopping centres are still struggling to recover from the global economic downturn. He attributes this to a proliferation of complexes during the 2006 to 2008 boom. Many were not sustainable once the economy slumped. "They could not withstand less favourable trading conditions," Mortimer said. The problem was compounded by high tenant and landlord turnovers. "When the crunch happened, consumers became more prudent and the larger shopping centres were able to provide holistic shopping." The smaller centres also catered for the discretionary retailers which could not survive the crunch, Mortimer said. He says this is likely to improve as property finance outlook improves towards the end of the year, adding unrest in the Middle East and the oil price were likely to have an effect on local markets.

The bank says commercial property finance remains its core business, but it will continue treading "cautiously and responsibly". It will not pursue vacant land aggressively, nor will it venture into golfing estates and specialised and leisure properties for which there is limited appetite.

Article by Micel Schnehage, Realestateweb
Click here to view the original article.

The headline total return is still dominated by the income component, which was 8.9%, while capital growth was 4.1%. After 18 months of little-to-no capital growth, confidence and fundamentals began their recovery over the second half of last year, during which period the bulk of the year’s annual capital growth was delivered.

Stronger retail sales growth and signs of a return to discretionary spending helped to drive capital growth in the Retail sector to 4.4% – the highest of any sector. Office and Industrial capital growth – at 3.9% and 3.2%, respectively – were slightly more subdued, in part due to concerns over fundamentals in the secondary markets.

Above inflation rental growth continued to underpin the majority of returns, and rose by 130bp to 7.4% in 2010, though yield movements remained conservative across all sectors. While the optimism surrounding the retail sector was reflected in a slight 12bp yield firming, office and industrial properties saw a softening of yields, by 7bps and 33bps respectively. A noticeable increase in the yield spread between market segments underlined the significant performance variation between prime and secondary assets.

Across the market, vacancies decreased from 7.4% in 2009 to 6.6% in 2010, but, again, there is a clear split between prime and secondary. Large shopping centres and prime offices remained well let, but vacancies continued to rise in secondary markets, such as B and C grade offices and neighbourhood shopping centres. At the end of 2010 vacancies stood at 5.2% for retail, 10.6% for offices and 5.4% for industrial.

Stan Garrun, Managing Director of IPD South Africa, says: “Given that the IPD Index covers two thirds of investment property in SA, we can draw from these results that the investment property market is undergoing a sustainable, though drawn out recovery. While capital growth has nudged back into positive territory, it is only to 2008 levels, but it is income which again continues to drive returns and sets South African property apart. As we enter the next recovery phase it will be the good management of property fundamentals that enhance these income streams, and that will distinguish investors in the market.”

The South African results mirror those already announced by IPD in other countries around the world, with 2010 returns generally outperforming expectations. For the first time in eight years the South African return was not the highest of the 23 markets reported on by IPD, to date beaten by the UK (15.1%) and the USA (14.2%) who both produced a more pronounced bounce back, though from a more severe downturn than South Africa.

Other asset classes in South Africa benefitted from many of the same macro-economic forces driving the stronger property returns. The JSE All Share produced a solid 19.0% return, while the listed property sector PUTs and PLSs both outperformed the broader equities market with returns of 25.5% and 30.9% respectively. These returns were supported by a firming long bond yield, which returned 15.7% for the year.

Article by propertyfundsworld
Click here to view the original article.

Three years after the credit crunch, Northern Rock, while shedding jobs with the one hand is offering 90% mortgages to first-time buyers with the other. The Government, while admitting that current house prices are unaffordable for first-time buyers, used the Budget to announce a year-long scheme to throw a little more State debt on top of FTBs’ ever-burgeoning student loans. Governments and developers will club together to lend first-time buyers their deposits, so they can buy expensive new builds at the top of a market that’s likely to still be falling in a year’s time. And – against a background of continuing investigation into the previous decade’s more questionable lending practices – a national lettings agency, Belvoir, warns in a message to landlords, this week, of the return of ‘No Money Down’ offers to buy-to-let investors.

It shouldn’t have taken hindsight to realize that NMDs would turn out to be the WMDs of the mortgage industry. They sprung up during the boom years of the last decade, offering investors the chance to invest without actually investing.

Property clubs took advantage of unscientific new-build valuations to offer flats at ‘below market value’ (BMV), when really they were just discounts on inflated valuations. Investors avoided having to pay deposits by arranging a temporary bridging loan, and then quickly re-mortgaged at the full valuation price… paying off the bridging loan and the clubs’ hefty fixers’ fee with the excess. The result was a spiv land-grab that sullied the reputation of small-scale property investment.

For a while, when lenders were clawing at each other’s throats for volume, and dodgy valuations combined with almost religious faith in property were enough to push prices ever upwards, it seemed that almost everyone won. (That is, until investors failed to secure tenants, missed mortgage repayments, attempted to remortgage in a post-2008 climate with little or no equity in their properties.)

Inflating the value of a property in order to gain a larger mortgage? It smells like mortgage fraud. But John Charcoal’s Ray Boulger agrees new clubs have recently been seen springing up and adopting similar, if less extreme, practices.

Recent rules, according to Boulger, formulated by the Council of Mortgage Lenders in co-operation with developers, stipulate that as long as a lender’s notified by both the buyer’s solicitor and the vendor that such an arrangement is in place, it’s not technically fraudulent, and it’s up to the lender whether to lend or not. Some will, but are unlikely to accept more than a 5% incentive, making the contemporary version more of a 'Less Money Down' deal.

It’s a far cry from the 25% difference between the official price and the price actually paid that characterised the bad old days. But even five percent has the potential to distort new build prices in the context of a slow market.

The more respectable Vendor Gifted Deposit – a popular way for developers to attract first-time buyers – raises similar issues. In order to help a buyer raise a deposit, the vendor gifts a lump sum. It’s a cash-back incentive on a larger scale and – of course - like the cash-back incentive it’s factored into the price of the property. It’s effectively a way of massaging the loan-to-value of a mortgage, and if property prices are inflated as a result, developers can live with that.

There are developers of all sizes currently offering 5% Vendor Gifted Deposits on new builds. One independent mortgage broker (Obligo) has launched a ‘5+5’ scheme and is encouraging estate agents to sign up and urge their clients to match a buyer’s 5% deposit and help get the market moving. A perusal of Halifax’s lending criteria page for intermediaries suggests they’ll lend on a property where up to 10% of the valuation is returned as a gifted deposit or other type of cash incentive.

John Mawdsley, chief executive of Omnii Intelligent Information (which helps lenders check customers against their lending criteria), warns that the effects of incentives can be over-played. He believes more Vendor Gifted Deposit schemes are advertised than are actually put into practice, and that lenders today are so busy having to worry about what responsible lending practices that they’re more likely to err on the side of caution. He does, however, ‘wonder whether a little more activity and increased competition in the next six months might drive lenders to accept more of these deals’.

Ultimately, the madness is in the message: that an affordability problem can be solved by lending at a more generous loan-to-value ratio than banks are prepared to admit, whether that’s disguised as a Government scheme or a vendor gift. In the long run, a fit and functioning property market’s in everyone’s interest, and it’s very hard to beat clarity.

Article by Linton Chiswick, citywire money
Click here to view the original article.

Our national FNB Estate Agent Survey for the 1st quarter of 2011 has suggested that the summer saw something of a mild strengthening in residential demand. This came as little surprise, with summer generally being a seasonally stronger period, and with the Reserve Bank resuming interest rate cutting in September and November. The survey has perhaps been a little confusing, though, simultaneously suggesting that the market may have become a little more oversupplied despite a demand improvement, possibly suggesting a strengthening in supply too. Breaking the survey up into income/price segments, 3 of the 4 “self-defined” income segments pointed to a stronger level of demand activity in the 1st quarter of 2011, compared to the previous quarter, using the 2-quarter moving average.

Due to sample size issues when segmenting the market, we use 2-quarter moving averages in all of the survey data displayed in this report. The general picture was one of mild demand strengthening for the 2 quarters to Quarter 1 of 2011, with the exception of the seemingly very flat “High Net Worth” segment.

The survey segments the market into 4 agent-defined* income segments, namely “Lower Income Areas” (average price = R582,000), “Middle Income Areas” (average price = R1.17m), “Upper Income Areas (average price = R2.01m) and “High Net Worth Areas” (average price = R2.8m). When asking the agents for their rating of demand activity in their area/market, on a scale of 1 to 10, agents in the Lower Income and Middle Income segments gave the highest average ratings of 6.34 and 6.02 respectively, for the 2-quarters to the 1st quarter of 2011, which represents improvement in the previous quarters. The Upper Income areas also reported some demand improvement, recording a 5.94 reading. The High Net Worth segment was the odd one out, recording the lowest 1st quarter reading of 5.45, which represents a slight declining from the previous quarter.

Since early-2010, the High Net Worth segment appears to have flattened out at a noticeably weaker demand level, compared with the lower 3 segments whose demand estimates have remained more narrowly grouped together.

Click here to download the full report.

• Despite the positive effect of declining inflation and interest rates in 2010, the household sector was plagued by continued job losses in most sectors of the economy up to late last year, while the ratio of household debt to disposable remained high at just below 79%.
• House prices continued to rise in 2010 after bottoming in mid-2009, but last year was a tale of two halves, with both nominal and real price growth in the second half of the year being significantly lower in the middle segment of the market compared with the first six months of the year.
• In 2010 the average nominal price of affordable houses was 2,6% higher at a level of R299 100, while declining by 1,6% in real terms. 2009 saw nominal price growth of 2,8% in this category of housing, with prices declining by a real 4,1%.
• House prices in the middle segment of the market increased by 6,8% in nominal terms in 2010, which was markedly better than the marginal decline of 0,3% that occurred in 2009. The average price of a house in this category came to a level of about R1 008 500 in 2010. In real terms middle-segment house prices were 2,4% higher last year compared with 2009 when prices dropped by a real 6,9%.
• In the luxury segment house prices were only a nominal 1,3% higher in 2010 than in 2009, to a reach level of just more than R4,5 million. The average real price of luxury homes was down by 2,9% in 2010 after declining by 5,9% in 2009.
• At a regional level house price growth occurred across all provinces, metropolitan areas and the major coastal regions in nominal terms, while in some regions some real price declines were recorded in 2010 compared with 2009.
• The affordability of housing improved further up to late 2010 on the back of slowing house price growth, declining interest rates and rising household income. This is based on trends in the ratios of house prices and mortgage repayments to household disposable income.
• Taking account of recent trends in house prices, as well as expectations with regard to the economy, nominal price growth of around 1,5% is forecast for 2011. Based on this forecast and a projected average consumer price inflation rate of between 4,5% and 5% this year, house prices are set to decline in real terms in 2011, after rising by 2,4% in 2010.
• Projections of a growing economy, some increase in employment, household disposable income growth, and low interest rates, are factors expected to support the residential property market in 2011.

Click here to download the full report.