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ADDRESS BY DR ANDREW GOLDING

Characterised by at least a 50 percent fall-off in the volume of sales, an extreme scarcity of bank lending finance and, as a generalisation, a marginal fall-off in pricing, the past year has seen extremely tough trading conditions for the property industry - all of which conspired to leave companies in this sector competing in a market which halved overnight, said Dr Andrew Golding, CE of the Pam Golding Property (PGP) group in Cape Town (18 November 2009).
 
“All companies have had to adapt to these conditions and we have been no different.  Since the market started to turn downwards more than 18 months ago, PGP has managed to reduce its overheads by more than 30 percent.  This included some retrenchments and natural attrition in terms of agent numbers, amounting to close to 20 percent reduction in our permanent staff count and a 25 percent reduction in agents.  This is seen against the backdrop of a residential real estate industry where more than 50 percent of registered agents who were present 18 months ago are now no longer in the industry.  And depending on which statistics you believe, those numbers may even have dropped by more, supposedly from a high of 80 000 agents two years ago to somewhere in the order of 25 000 agents currently.
 
However, while these circumstances have been challenging they have also afforded the opportunity to make the business more efficient and certainly more focused on its core business.  In addition, through our own strategies and efforts, as well as the attrition in the market, there has been a significant increase in market share.  There has also been a flight to quality in terms of agents and so a number of agents who perhaps thought that in the good times it was sensible to go on their own or to start new businesses, have found the going tough and have been prepared to return to the safety of PGP.  As such, we have managed to retain our top agents as well as recruit a number of top agents from other companies throughout the county.
 
In addition to this, I believe that one of the other reasons for our success this year is the fact that we have stuck rigidly to - and in fact reinforced - our best practice marketing and administrative measures, strategies and resources which have been in place for some time.  We do believe that the sole mandate process is the preferred and most effective way of doing business and I think our results show beyond doubt that in fact we are able to achieve higher prices for sellers on a sole mandate basis than the far less manageable open mandate system.
 
Market Segments
In regard to market segments, starting first with the uber-prime market, while trade in this particular segment has been thin, it has continued to surprise us with its ability to push the top end of the residential property market in South Africa to new levels, and there have been well recorded record sales in SA’s top suburbs. There is no doubt that this segment of the market has now become measurable in terms of global comparisons and therefore it is not inconceivable that these prices will continue to rise as discerning buyers find value in SA’s very top properties.  As a result I think it is no surprise that properties are now being marketed in this genre at R100 million and beyond. 
 
Below this super prime market, the rest of the market segments, namely the affordable housing segment, the so-called low price segment, the mid-segment, as well as the high segment, have all performed in a similar fashion, categorised by a dramatic fall-off in volume of sales;  a moderate reduction in prices - probably in the order of 10-15 percent over an 18 month period;  a marked reduction in the ability to secure mortgage finance and as a result a trend towards much higher equity property sales; and a requirement for cash deposits and generally a significantly higher percentage of cash sales than before.


In fact one of the most fundamental changes that we as an organisation have had to adapt to is that in order not to be lulled into a false sense of security, we have had to be extremely strict in terms of recording what we believe are completed sales. In the old days a completed sale would be a successfully concluded sale with all suspensive conditions – other than bond approval - fulfilled and that sale would go up on the board in each branch, generally speaking with a cancellation rate of somewhere between six and eight percent. And we would be more or less assured of converting those concluded sales into transfers and ultimately into cash.  With the insecurity around the mortgage situation, as well as the general state of the market, we now encounter a situation where we have significant pipeline business with a great deal of uncertainty as to how much of that pipeline will actually convert into sales.  As a result, unlike previously, the pipeline business is now really no predictor of incoming business.  This has caused a change in thinking, and difference in the way that we plan.
 
Regional overview
In the Western Cape, in the Cape Town metropolitan areas, PGP has managed to survive and sustain itself through prudent business management and the sensible allocation of funds in terms of marketing, agent training and recruitment.  Highlights have been the sustained sales of properties in the very top end, mainly on the Atlantic Seaboard, to both local and overseas buyers.  When interest rates were relatively high, we saw the number of distressed sellers increase - and then decrease when interest rates reduced.  We saw development construction prices plummet, however this had little effect on the ability to develop due to the difficulties in terms of end-user finance. Other trends that emerged included that fact that a shortage of schooling is preventing people buying in some areas with the Southern Suburbs of Cape Town an example of that.  Security is more important than ever and areas with poor security record lack of demand.  In the Boland and Overberg, despite the difficult trading conditions, the region has performed very well, and is the one region which managed to exceed its sales turnover budget for the year-to-date, with Stellenbosch and Somerset West in particular the star achievers. However, the coastal areas where a large percentage of properties are second homes were most affected by the economic climate.
 
The Gauteng region of Pam Golding Properties has emerged from this period with an increased market share in all areas in which it operates. This year the most active market segment in Gauteng in terms of unit sales has been in the price range below R2 million, while the top end of the market - in contrast to some other parts of the country - has been in the doldrums for most of the year.
 
KwaZulu-Natal was probably the region most adversely affected by the downturn sooner than other regions - in fact some five months ahead of the rest of the country, probably due to the high percentage of properties that are coastal homes, that fall into the leisure category.  Interestingly, this market has also been the first one to show signs of improvement. Turning to South Africa’s Central or inland areas, including the smaller towns and areas in the centre of the country, the downturn in these markets has proved the most severe and is not that surprising, given the impact of the global recession on the manufacturing and mining sectors which are located in these areas.  In addition to that, towns such as Dullstroom and Clarens have been affected by the decreased leisure market.
 
The Eastern Cape and Garden Route region has proved to be the most stable throughout the past year, and while it has not experienced very many highs it has also not hit the lows of other areas.  In spite of this, coastal land sales have also been affected - in
particular areas like Jeffreys Bay, St Francis and Port Alfred, which have been struck by the lack of leisure buyers.  Areas which buck the trend include Grahamstown which, like Stellenbosch, has benefited from the educational components in the town. 
 
From a South African market perspective, in a year where PGP has had to tighten its belt, the group has come through these tough trading conditions in good shape and we hope to end the year, for the 12 month period ended February 2010 in having achieved sales in excess of R10 billion.  While these numbers are low relative to the stellar performances of prior years we are in fact very pleased with these results and in particular delighted with the significant increase in market share that we managed to achieve and our dominant share of voice in the minds of SA consumers.
 
From an off-shore perspective, PGP’s Indian Ocean Islands division, servicing Seychelles and Mauritius has continued to perform well.  As far as the Seychelles is concerned we have sold close to 270 properties with a value in the region of USD210 million and in the last six months have sold 21 properties totalling USD15 million.  This is primarily through Eden Island, which is the marina development just off the mainland of Mahé.  As many of these purchasers are South Africans the recently announced increased allowance up from R2m to R4m will hopefully give this development and others like it, an increased boost.
 
As far as Mauritius is concerned, in past six months PGP successfully sold 70 units to a value of R250 million in a new RES (Real Estate Scheme) in the Grand Baie area and also concluded re-sales to the value of R93m in at the Tamarina Golf Estate and Beach Club, which was the country’s first Integrated Resort Scheme (IRS).  Interestingly, almost all these sellers who purchased off-plan have seen capital growth in excess of 100 percent, even in these times. Looking forward, as the market starts to improve we believe Mauritius will continue to be appealing for lifestyle and security reasons.  A rand hedge investment, as well as the opportunity to acquire Mauritian residency and benefit from the increased foreign exchange allowance will add to the momentum going forward.
In the UK the housing market is slowly recovering from its two-year collapse and annual house price inflation has turned for the first time since March 2008, with house prices rising in October for the sixth consecutive month.  While the difficulties are far from over, prime central London, where PGP primarily focuses in the UK, has over the past couple of months seen a resurgence.  Being a market that has always been attractive to South Africans looking to invest offshore and diversify their property interests, we expect this to improve in terms of number of trades, and we intend once again showcasing prime central London product to South Africans next year.
 
Hospitality
Pam Golding Hospitality (PGH) has had its best 12 months to date. Room inventory across the country has increased by about six percent and will increase by a similar percentage in the next 12 months. This has, and will, translate into increased demand for the core activities and services on offer through PGH - including the facilitation of transactions in the hotel, lodge, guesthouse and restaurant industry, together with operator procurement, raising of finance and hotel feasibility studies.  Pam Golding Hotels has recently been awarded mandates regarding a number of high profile hotel investment opportunities in Johannesburg and Cape Town, as well as a prestigious mandate to sell a portfolio of leading boutique hotels and lodges situated around South Africa. Over the past five months to date Pam Golding Lodges & Guesthouses has facilitated nine transactions at a total value of close to R50 million – six concluded on behalf of overseas investors and the balance for South African upcountry buyers. During the past 15 months Pam Golding Tourism & Hospitality Consulting was awarded 22 assignments and feasibility studies – 65 percent commissioned by international hotel operators and/or investors. Good news for South Africa’s construction industry and job creation is that these are now being converted into real projects representing an estimated capital investment of R4.3 billion and providing 2423 rooms and 2062 direct jobs.
 
Looking Ahead
Much has been said about green shoots and a recovery in the market.  We have certainly seen this in the last couple of months, with significantly increased volumes in the order of 20 percent over the past six months. And while prices have not, in our view, moved into positive territory, they certainly have halted their decline.  We believe that while this improvement is due to the relatively low interest rate environment, a general improvement in sentiment and a very marginal loosening of the taps in terms of bank lending criteria, it is however primarily due to sentiment and the fact that people who have the ability to transact primarily on a cash basis are now prepared to do so.
There is also the slow but steady emergence of the first-mover, investor buyer who is seeing this as the opportunity to get into the market ahead of the pack.  We hope and are optimistic that this upward trend will continue through 2010 but of course the major catalyst for the true re-ignition of the residential property market in SA will be when the banks start to vigorously lend again and actually compete for business.  It is our hope that this will begin in earnest towards the end of the first quarter of 2010.
 
Soccer World Cup
One cannot talk about 2010 without mentioning the Soccer World Cup and I do think that this event is going to be magnificent in itself and truly a once in a lifetime opportunity.  It’s going to put the country on the world stage and advertise South Africa and by implication its property opportunities to a global audience, really for the first time on such a mammoth scale.  In some respects it is an advertiser’s dream and by implication a property advertiser’s dream.  And while the short-term effects of the tournament in terms of business for PGP as a property company will be good, it is the long term effect which I am really excited about and which I think will have long-lasting and positive benefits for the property industry in SA in years to come. 
While sales to foreigners have been relatively slow over the past year, I anticipate that once the world sees what SA has to offer that the long-awaited potential of direct foreign investment into property might well be realised over the next 10 years.  And we fully expect foreign investment by way of property to increase slowly and steadily during the period after the tournament.
 
Investment Hotspots
Highlighting a few investment hotspots we think will be sought-after in the year ahead. Starting firstly with Cape Town, coastal property is always sought after - and in particular the Atlantic Seaboard as well as the West Coast of the Cape which provides excellent value, while Cape Town’s Southern Suburbs remains a blue chip investment area.  In the Boland and Overberg, most of the coastal towns from Pringle Bay to Hermanus offer good value due to the correction of the market over the last 12 months. From a KwaZulu-Natal perspective, Durban North, Umhlanga and Ballito are important areas relative to the new King Shaka International Airport at La Mercy and an area we believe worth watching. From a Gauteng perspective, apart from the usual aspects in this region, the areas in Johannesburg and Pretoria that lie along the routes of the state-of-the art new transport infrastructure, including the R20 billion Gauteng Rapid Rail network and Johannesburg’s Rapid Bus systems are certainly areas that we think will outperform the rest of the market this year.
 
Expectations
All in all, looking at 2010, there is cautious optimism that the market, both in terms of volume and in terms of value, will slowly but steadily improve through the year.  Our expectation is for house prices to remain flat for the first half of the year and then to increase by between five and 10 percent in the second half of the year with an ever-increasing tempo in sales activity.  This is seen against the usual backdrop of potential South African issues, both in respect of potential political uncertainty as well as economic uncertainty - and of course the proposed Eskom tariff hike and concomitant effect on inflation, which may have a dampening effect on this recovery.  Nevertheless we remain optimistic and enthusiastic about the country, about the residential property market and in regard to Pam Golding Properties.  We are particularly proud of our achievements this year in tough conditions and feel that the business is well placed to capitalise on the initiatives that were undertaken this year, and are looking forward to 2010 with anticipation."
 
Issued by Gaye de Villiers



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