Real Estate Investor Magazine South Africa August 2013 | Page 44

FINANCE

BY JONATHAN SMITH

Riding Out The Risks
Of investment in a volatile economy
There are several risks which we face in this
regard but I would like to explore what I
believe to be the most pertinent to our current
circumstances, as follows:
• Political risk
• General economic risk
• Trading risk
• Consumption risk
• Property sector risk

Political risk

T

he recent volatility within the South
African economy has caused many an
investor to question the future of our
commercial property’s investment potential.
Commercial property has always been a longterm investment opportunity and (apart from
a very lucky few), most investors in this sector
know that they are in this asset class for the
long haul. The long haul, as it now turns out,
appears to have extensive risk and investors
want to know whether their money shall be safe
beyond a year or two, given that the average
investment horizon for commercial property
remains approximately eleven years at present.
The answer to our concerns lies in being able to
predict and interpret the political and economic
trends that present themselves. Sometimes
these trends can be matched to historic
circumstances which have played out so as to
see when the economic might improve. This, in
turn, permits us (as investors) to invest at the
commencement of the upward-bound cycle.
However, as has happened frequently in the
recent past, external events (termed marketshocks by economists) have presented themselves
to the detriment of our predictions, establishing
an unpredictable and volatile environment for
us. The economic future is largely unpredictable
but it is possible to recognise certain trends and
factors that will influence our ability to obtain a
sustainable (and, yes, meaningful) return from
commercial property.
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August 2013 SA Real Estate Investor

I am by no means being Afro-pessimistic
when I suggest that we do not live in the
most predictable of political environments
at present: it is absolutely true that our
national government remains committed
towards maintaining an healthy free market
environment in South Africa but it is their
ability to implement the National Development
Plan and encourage business confidence that
provides their most difficult challenges.
We have noticed several recent commitments
from our national government to improve skill
levels within the various departments and to
root out and prevent further corruption but
the implementation of these ideals still remains
vague: this, in turn, leads to a level of mistrust
within the private sector and, consequently, a
lack of business confidence.
A meaningful way to determine whether our
incumbent national government – and, most
probably, the government for the next ten years
– will encourage a suitable environment for our
property sector is to monitor and take cognisance
of the following key issues:
1. The national government’s tolerance for robust
and publicised public debate and constructive
criticism: if, for example, the Protection of
Information Act is signed into law and used
to curtail investigation into government
activity, then our future suggests a marked
level of distrust and both local and foreign
investment shall decline as the blanket of
darkness covers state activity;
2. The national government’s ability to
implement the various national infrastructure
and construction capital expenditure projects
which it has identified as being necessary to

our continued growth: these include Eskom’s
continued roll out of additional power stations,
the new port networks to be constructed along
our coasts and the new rail networks under
plan by Transnet;
3. The national government’s improvement
of services through education and training of
its personnel: readers of this magazine would
have noticed the exemplary service which we
obtain from the Department of Home Affairs
of late – a marked difference from a few years
ago. This level of improvement needs
to permeate throughout all of the various
government departments and local
authorities. If by, say, 2014, we do not see a
marked improvement, it would quite
reasonable of us to assume that we shall
never establish an environment conducive to
sustainable commercial property development.

General economic risk
Some unfortunate news is that neither the
world economy nor our local economy is
growing at a meaningful rate at present. Since
the credit-induced crisis of 2008 and 2009 and
the following European Sovereign crisis which
has prevailed since 2009 (and still endures
today), foreign investment into our local
economy has been subdued. Most recently, we
have seen a distinct selling off of our local bonds
and equities, including property shares.
Our economy, at present, lacks a catalyst
which can reignite the meaningful growth that
we experienced during the period 2003 to 2008
(confidence and world economic growth) and
2010 (the Soccer World Cup).
Our economic growth has hovered around
at a slow 2% in recent quarters and inflation
has threatened to transgress the 6% boundary
that we have set ourselves. Our saving grace
has been that our prime and linked interest
rates have remained comfortably low at 8,5%
which has helped to induce some property
sector growth.
Our rand exchange rate to the major currencies
in which we trade has fallen significantly in
recent months. This has partly been as a result
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