Looking for value in residential property in 2013

While there is a great deal of mixed sentiment in the property market at the moment, according to Aucor Property there are still opportunities for investors in 2013, if they know where to look.

“Listed property funds continue to yield record returns and the record low interest rate environment, which has seen the repo rate remain unchanged since November 2010, means that there is still a positive amount of activity in the residential property market,” says Bradley Stephens, director at Aucor Property.

“Despite economists and some banks painting a picture of a somewhat difficult property market over the short to medium term, there are still a number of positive indicators being released,” continues Stephens. “For instance, year-on-year growth in middle segment house prices increased to 9.1% in January, up from a revised 7.4% in December 2012, according to Absa.”

Stephens explains that while this growth is expected to moderate during the year, South Africans still find themselves in a position where property prices will remain relatively stable in the major metropolitan regions of Johannesburg, Pretoria, Durban and Cape Town. “This is in stark contrast to other regions in the world where price deflation still persists and the property market still hasn't seen the bottom of the downturn.”

According to Stephens, some sellers can also expect to see returns on their investments in 2013, as house prices in key coastal areas such as the Atlantic seaboard and KwaZulu-Natal North Coast continue to buck the trend. “Couple this with the fact that record low interest rates should remain stable at this level throughout 2013, and we have an environment where both buyers and sellers can benefit,” he says.

However, one of the issues still facing the residential property market remains liquidity and access to finance, says Stephens. “This has been a major contributing factor to the general stagnation in the residential property market since 2009. Home loans have become a much riskier business since 2009 and the returns from home loan books are now far less for the major banks. This means they are less inclined to lend against properties in current market conditions.”

Compounding the issue is an oversupply of properties in the residential property market. “We expect a big inflow of properties as the market is due for a correction in 2013. Sellers who have been struggling to come to terms with the loss in real property values over the last 5 to 6 years, having paid inflated property values in the boom years of 2006 and 2007, will inevitably look to cut their losses and pay down outstanding debts,” continues Stephens.

“The reality of the market is that consumers do struggle to cope with above inflation price escalations in school fees, utilities, food, petrol and transport. These factors will lead to an oversupply of residential properties in outlying areas as many are forced to sell their homes.”

While this paints a somewhat bleak picture, Stephens explains that this translates into good deals for buyers who have good credit records and access to finance or liquidity. “With so much stock on the market it will take some time before demand starts to exceed supply again, and drive house price growth. However, the intrinsic value of property in this country remains, making it an attractive investment for those who can afford it.”

Furthermore, Stephens believes that this oversupply will force a correction in house prices, bringing them more in line with real market value. “This will help the market as the ever growing disparity between bank valuations and asking prices was stifling sales. With more realistic pricing, more people can afford to buy property through vanilla financing options and drive the market forward in 2013.”

Stephens also feels that this price realignment, which is a more realistic reflection of real property values, will be a key driver of the market in 2013. “Sellers and investors will still see returns if they are realistic about the value of their properties and choose the right sales channels to divest. There is no question that it remains a buyer's market. If investors have the access to finance or the liquidity, and are willing and able to hold on to properties over the long-term, then there are great opportunities out there.”

But that doesn't mean that sellers aren't able to realise a suitable return as well, says Stephens. “Throughout 2012 a growing number of investors turned to auctions to either divest or find the right property at a fair price. The reason for this is that auctions of non-distressed properties will always realise the real value of a property because buyers at auctions have been vetted and have the access to finance to make a purchase. For this reason it is becoming an easier, faster way to transact, making it an attractive option for both sellers and buyers.”

Whilst the auction channel is one that tends to eliminate certain potential buyers at the outset due to the strict requirements relating to financing and the non-suspensive terms of sale,  it is a channel that continues to grow in popularity. “Despite recent events in the auction industry, the image of auctions and perceptions around the selling process have changed significantly in South Africa over the last few years. It has become a real, trusted sales channel as it has proven to be an extremely effective method to sell properties quickly and at a fair price for a growing number of property investors. While the growth has not been massive on the residential side there are regular sales happening through auctions, and we have many buyers and sellers who are happy with the outcome,” concludes Stephens.

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