BY MONIQUE DU TOIT
D
eciding to invest in property is the easy part. Next, you need to decide which sector is the best bet for your money. With near-daily fluctuations in the local market, it can be difficult to know which type of property will best suit your needs. Before we get into it, let’ s break it down to the basics. We’ re looking at residential and commercial property. Each of these can be broken down into their respective subsets. It’ s important to note that no one type of investment will be good in all parts of the country. As always, be sure to do thorough research into the area you’ re investing in, and don’ t be shy to ask around and get the best possible advice from local experts.
Residential
For many investors, residential property is their first play at the real estate investment game. It’ s a simple market to understand, since we’ ve all been living in some type of residential property for our entire lives. But not all residential property will give you the same types of returns. The FNB Area Value Band House Price Indices, published in May, groups areas according to their average home transaction values, using deeds data, and include all cities and towns in South Africa.
The five indices are the Luxury Area House Price Index( Average Price = R2.358 million), the Upper Income Area House Price Index( Average Price = R1.251 million), the Middle Income
Area House Price Index( Average Price = R895,089), the Lower Middle Income Area House Price Index( Average Price = R577,587), and the Low Income Area House Price Index( Average Price = R364,937).
According to John Loos, household and property sector strategist at FNB, The Low Income Area House Price Index was again the strongest performer in terms of year-on-year house price growth, recording 13.9 % year-on-year for the 1st quarter. This is an acceleration on the prior quarter’ s revised 13.7 %. Loos is sure to point out, however, that these figures can be misleading.“ This index includes the subsidized housing component, and new homes in this category, which are not sold to their new owners, and are often registered at a value with the deeds office which does not reflect any market value.
“ Over the years, there have also been periodic sell-offs of rental stock by councils which have not necessarily taken place at market value. Such distortions mean that in a repeat sales index for Low Income Areas, many homes prices come of a very low base not reflective of market values, and show major price inflation when resold at market value at a later stage,” he explains.
Looking at the Lower-Middle Income Area Value Band, we see a 7.6 % year-onyear value growth, the second strongest rate behind the Low Income band. This, Loos explains, is possible evidence that the lower end has recently been showing strength relative to the higher end. He notes, however, that the year-on-year growth of this band is slightly lower than the previous quarter’ s rate( 7.7 %), and suggests that the segment may have been peaking recently.
Over in the Middle Income and Upper Income Area Value bands, year-on-year house price growth accelerated slightly in the 1st quarter of 2018. The Middle Income Area Value Band from 4.9 % in the 4th quarter of 2017 to 5 %, and the Upper Income Area Value Band from 5.4 % to 5.5 % over the same period. The Upper Income Area House Price Index showed its 4th consecutive quarter of quarter-on-quarter growth acceleration, from 1.39 % previous to 1.42 % in the 1st quarter of 2018, while the Middle Income Area Value band saw a 3rd consecutive quarter of acceleration from 1.23 % previous to 1.31 % in the first quarter of this year.
Loos explains that these figures suggest superior price growth performance at the lower-priced end of the market where average prices are well-below R1m, but that the magnitude of lower end“ outperformance” relative to higher end areas may diminish in the near term.“ At some point stronger house price growth in traditionally more affordable suburbs leads to their becoming less affordable, and their“ value for money” attractiveness diminishing relative to more expensive suburbs. In addition, sentiment in South Africa early in 2018 seems improved, interest rates are declining mildly, and leading economic indicators have been pointing towards a strengthening economy. This could lead to that search for relative affordability of recent years, that benefited the lower end more, just diminishing in strength somewhat,” he says.
The Luxury Area Value Band continued its run of slowed growth, seeing the most significant slowdown of all the value bands since 2014. In the first quarter of 2018, this band saw its growth rate fall from 5.2 % in the previous quarter to a rate of 4.9 %. Loos comments, however, that there has been a near leveling out of the growth rate, slowing only very slightly from 1.16 % in the previous quarter to