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PROPERTY: The Rocky Road Ahead

 



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Speakers at this year’s popular annual Rode Property events countrywide had stern predictions for both residential and non-residential markets, with participants debating whether or not the ‘green shoots’ starting to appear in various sectors of the market are revealing any real indication of an upswing from rock bottom.

Acknowledging that South Africa’s conservative banking system had probably saved it from the total onslaught felt in markets such as the USA and UK, there was also healthy debate among speakers as to whether the conservatism should continue or whether the time had come for banks to loosen their reins on finance.
Said speaker
Tony Bales of Bales Investprop at the prestigious Spier conference near Stellenbosch: ‘Financiers are now having the largest impact on sales, and their hands are tied predominantly due to a real lack of liquidity. Yesterday, market value was determined by the simple equation of “Willing buyer, willing seller”. Today it takes a willing buyer, willing seller and an able financier! Therefore sellers can only sell to buyers with huge cash reserves and buyers want bargains.’

Nevertheless, added Bales: ‘With change comes opportunities – and there are currently lots of opportunities!’

This was a sentiment echoed by speaker Joop Demes, CEO of Pam Golding Hospitality who delivered a presentation on ‘The move to and prospects for budget hotels.’ Said Demes: ‘Globally, this is the fastest growing hotel offering at the moment, but in South Africa there are only two branded operators. Only 3 264 rooms have been brought on board since 2004, making up less than 7% of the total market available and yet this market sits at an average 18-19% above the average occupancy of other sectors.’

But again, while tremendous opportunity existed in the budget market with high occupancies and growing demand, Demes noted that challenges still existed in ‘getting banks to understand the budget hotel concept and therefore granting finance.’

Bank conservatism was also highlighted in a presentation delivered by Anthony Miller, MD of Lightstone: ‘Transfers have slowed right down from 80% of properties sold being bonded to 60% being bonded.’

However, sales in execution were, according to the Lightstone-Rode repeat-sales house-price index, no worse than in 2004. ‘But,’ noted Miller, ‘2004 was not a bad time for banks to go to auction as invariably the sale had a good outcome. Now there is a big push by banks towards alternatives other than distressed sales – in fact they will do anything to achieve “pre-legal” sales.’

Acknowledging the financial constraints under which banks currently found themselves, Rudolf Gouws, economist at Rand Merchant Bank, nonetheless called on participants not to follow the ‘It’s all the Reserve Bank’s fault’ war cry.
‘Either we didn’t realize the economy is cyclical or we didn’t learn our lessons during previous cycles, but the Reserve Bank is not likely to let us get to the same “bad place” again! Over the past few years our wealth existed, but only on paper. Therefore the current downswing is actually a pre-requisite for an upswing, and to ask the Reserve Bank to cut rates yet again is irresponsible.’ (This remark was made before the recent 50 basis points reduction in the repo rate.)

Delivering his own annual ‘Prospects for property after the storm’ presentation, property economist Erwin Rode said that he believed a tough time still lay ahead for a number of years − not only for residential property but for the South African economy in general, as it followed in the wake of international trends.

On the non-residential side, says Rode: ‘The industrial and office boom has clearly been interrupted, and as disposable income will be under pressure for a number of years to come, this will in turn see landlords of shops face the realities of more realistic market rentals for many a line shop or stare at empty space.’
With some 568 050m2 of retail space, planned during the boom years, still to come on line during 2009 and with retail sales having contracted by 6%, Rode predicted ‘serious consequences’ for shopping centres across South Africa.

On the residential side, Rode noted: ‘Building activity has clearly dropped off, and there will be a long period of stagnation of prices ahead. This will in turn see the value of land with residential potential depreciating.’


 
 
 
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