In a poor economy property will help your money retain its value
South Africa, a country in serious trouble, is likely to face continued social upheaval, property economist Erwin Rode told the recent Rode-REIM conference at Steyn City.
Rode, co-host of the annual conference, predicted 2% annual growth in South Africa’s GDP over the years 2017-2022, not unlike the International Monetary Fund’s forecast of 1,9%.
“The problem with property is that it is integrated into the economy,” said Rode. “There is a serious brain drain. At least 50% of my friends’ children have emigrated, typically the most skilled. The government is playing a zero sum game, as it is more interested in redistribution than growing the pie. Jobs are increasingly more skilled, in a country with a dysfunctional education system. Fifty per cent of the population is below 25 years, and 60% of these are unemployed, which will lead to more and more social unrest. Our fiscus has run out of space. We’ve lived off debt since 2009 and can’t do it anymore. Commodity prices are not coming to our rescue. In the long run, interest rates will have to rise abroad, diverting foreign portfolio investment away from South Africa. Consumers are over-indebted.”
He pointed out that “property cycles are very long, lasting between 15-20 years. The implication is that over your lifetime you have the opportunity to buy property twice very expensively and twice cheaply. The long-term driver of property rentals and prices is inflation, but capital values without occasional serious renovation don’t keep up with inflation. However, if one adds the income return to the capital return, property is definitely an inflation hedge.
“House prices are still very high in real terms, meaning there is lots of space for them to come down in the event of an economic crisis. However, office rentals are actually cheap at the moment, and will grow explosively should the economy recover.”
According to FNB’s Property Barometer house prices in South Africa are growing at about 4% year-on-year, compared with Cape Town, where house prices are on average still growing at about 12%. This means that prices, excluding Cape Town, are contracting in real terms – when taking inflation into account.
“The retail property market over the past 40 years has been the best performing property investment, but now many new shopping centres are under pressure. For instance, food retailers’ trading densities in super regional centres grew only 4,4% in 2016.
In the office space market, take-up of space has stalled in the wake of low business confidence and a decelerating tertiary sector of the economy. This is true of the industrial market as well.
“South Africa is in serious trouble,” he concluded. “I predict we are due for continued social upheaval.”