1. Property Outlook
2. The Seven Year Itch
3. Residential Building Outlook Wanes
4. National Credit Act Not A Licence To Increase
Your Debt
5. Ensure That Investors Have Relevant Information
6. Decide On The Level Of Risk You Are Prepared
To Take
7. Tip For The Month
8. Thought for the Month
Property Outlook - Jack Travena
2007 began with pessimism predominately caused by the slowdown of housing sales as sellers overestimated price increases and buyers faced the harsh reality of the 2% rise in the prime rate last year.
The word on the lips of estate agents countrywide at the beginning of 2007 was, to quote, “Quiet!”.
But the reality of the growth and strength of the South African economy has emerged strongly from the middle of January and onwards into February, creating a new dynamic and optimism in the property market.
According to the leading banking institutions, a single digit rise of around 9% is expected in house prices this year. However, a double-digit increase of around 11% is expected in 2008.
As before I have stuck out my neck to predict house price increases in the face of the leading economists' views. Last year the experts predicted a 12-15% increase, while I steadfastly forecasted a 15-18% increase. I am pleased that the overall house price increases for 2006 was 15.4%. For 2007, my prediction is a 10-12% national rise in house prices.
You may ask, “Why the optimism?” It is based on three notable facts, the first and foremost being a confirmed 4.9% GDP growth in 2006.
This is only 1.1% off what used to be the government's incredulous growth target of 6%. Now, it is a target in sight.
Secondly, the steady increase in employment figures and the rise of thousands of previously disadvantaged people into the middle class continues to drive every sector of our economy, from retail to car sales to property sales.
Overall, these two economic drivers represent one thing – unprecedented growth of wealth in South Africa across all sectors of our population.
Thirdly, my predictions are underlined by the good news budget delivered by our Minister of Finance, Trevor Manual.
Announcing the first budget surplus in decades, the finance minister has ploughed back the fruits of this economy into the welfare of the people. Notable elements from his budget speech are:
- A welcome R8.4 billion in tax relief. This translates to a tax saving of around R180 per month on an annual income of R100 000 or R640 per month on an annual income of R300 000. The minister requested that South Africans save this money, instead of spending it, starting with paying off their debt.
- A real surprise was the elimination of tax payable on retirement funds, which translates into about R3 billion in tax savings. This can be ploughed back into retirement funding. In addition, the tax-free allowance for retirement annuities, long set at R120 000, will be reviewed upwards this year.
- Investors will benefit from the cut in the Secondary Tax on Companies (STC) later in the year, which currently stands at 12.5%. In future shareholders will pay tax on dividends but at a reduced rate of 10%. Furthermore, the sale of shares will attract Capital Gains Tax (CGT) at a rate of 10%, should the shares have been held for three years or longer.
- Improved depreciation rates on commercial buildings will now be permissible, and although no detail was given in the Budget Speech, this will add to the impetus currently experienced in the commercial property market.
- R11 billion will be spent on social housing, while teachers' salaries are to increase by R8 billion. Both these factors will boost the property market, because teachers are a very important house buying consumer segment.
- Exchange controls have been relaxed further but there has been no increase in individual allowances for offshore investments.
- A social security scheme for the entire South African population is under review and the Minister undertook that the complex arrangements for the implementation thereof will be completed by 2010. This will be a massive boost for the economy in years to come, given that social grants can be better targeted when the aged are cared for by their own savings accumulated during their lifetime. We will have millions of AIDS orphans to care for in years to come at current infection rates.
- In addition, the minister announced a further R17.4 billion to further promote the World Cup Soccer in 2010.
This is indeed a good news budget by any standards. Such government expenditure, coupled with powerful economic growth and tempered inflation will augur well for house sales and rises in house prices during 2007 and beyond. In turn, rentals continue to rise at more than 8% per annum. This will assist investors who are currently required to subside costs of property by as much as 30%, in the form deposits, in order to break even.
The Seven Year Itch - Gina Schoeman
The Seven Year Itch: What to do with your 'property-relationship' in 2007.
Married or not, you're likely to have heard the warnings of the seven year itch. In a marriage, it is thought that the seventh year anniversary brings with it a small helping of trepidation, a pinch of complacency and above all, a large dosage of consolidation. Similarly, the seventh year in this decade's property market hints to bring about a certain period of consolidation after some very comfortable years of becoming rather intimately acquainted with booming property prices.
The official meaning of the idiom, the seven year itch, is that of the inclination to become unfaithful after seven years of marriage. If one applies this to one's marriage to the property market, it may be suspected that some individuals may feel inclined to shift away from property and into other asset classes (such as, for example, the equities market). I am, however, about to take on the role similar to that of a marriage counsellor to explain the advantages of remaining in the property market over this period of consolidation, even though the itch may at times seem unbearable.
The graph below depicts the cycle that South African house prices have followed from 2000 to 2006. It is clear that the trend has been exceedingly positive throughout these years, while the recent decline in house price growth continues to remain above growth levels at the start of the decade. It is expected that during 2007, although growth will not reach the historic highs of 30%, it will remain on a path of stabilised growth. The most recent data shows that house price growth has decelerated to single digits of 6.24% year-on-year in December 2006 from the double digits experienced in the first six months of 2006. This single digit growth is expected to remain throughout 2007 as the combined increase of 200 basis points in interest rates in 2006 begins to impact the demand for housing. A phase of great growth in a market often requires a period of consolidation whereby the consequential wealth creation is able to be absorbed completely. It is for this reason that 2007 is expected to bring about a solid perspective on the future of property prices in South Africa.
A few factors have dampened house price growth, and for good reason:
- Interest rates were hiked four times during 2006, thus stabilising the demand for housing due to the debt repayment becoming more costly;
- The natural incidence of first-time homebuyers migrating into the housing market has been stalled in some circumstances where the individuals find the housing market too expensive, thus remaining in the rental market in anticipation of their income levels rising; and finally,
- The anticipation of the National Credit Act, to come into effect in June 2007, plans to bring together increased transparency to both the lender and the borrower, thus initiating a stricter form of credit control, while at the same time, more responsible participation in the credit market.
It is expected that following a period of consolidation in 2007, the following year will once again see property price growth move into double digits as demand and supply catch up with one another. For this reason, it is expected that this market will continue to be highly beneficial for investment purposes, attributable to the historical high returns conducive to owning, managing and understanding property.
In respects to the seven year itch, although some individuals understand the long-term benefits of participating in the property market, others may well look toward greener pastures and the instant gratification of higher returns. However, when shifting one's investments out of property (or, scratching that itch) a thorough assessment of the risk involved is required. Knowledge is power, and for that reason, some of the most powerful property players remain in the property market despite cyclical downturns and upturns. Why? Because knowledge and experience brings about a certain competitive advantage that increases the proficiency with which the investor both manages and understands the properties they own. The main advantage to a property is the ability to leverage one's investment or, put simply, to be able to borrow to help fund the purchase of an investment property.
Further, the return on property is two-fold:
- Rental income is generated; and
- Growth in the value of the property.
In conclusion, property cycles will go up and will come down; these are simply the natural adjustments through which all markets move. Similarly, the joys of a marriage will have its highs and lows and, although the seventh year anniversary may not necessarily bring about the exhilaration of the honeymoon originally experienced, the benefits and experience gained are far more deep-seated. 2007 may not necessarily bring about the previous highs experienced in the property market, however, similar to the richness that comes from a marriage that lasts a lifetime, the benefits accrued from a long-term position in the property market can not be argued with.
Residential Building Outlook Wanes - Evan Pickworth
The outlook for residential building activity in South Africa is on the wane, while non-residential should continue to grow strongly in 2007, according to analysts.
Building statistics for December 2006 - released by Stats SA in February - bring to a close a good year for the built environment and construction economy.
Overall real building activity grew by 15.2% in 2006, unsurprisingly of a similar order of magnitude to the strong +13% y/y real value added growth in the construction sector for the year.
"While 2006 saw a decisive slowing in average house price growth, the market remained fairly buoyant at the lower end of the price spectrum with overall real residential building activity growing by 10.9% on the year.
Signs of a more pronounced slowdown in residential building activity did emerge in the final quarter of 2006, however, with real seasonally adjusted completions only growing by about 5.7% on an annualised basis, and plans passed falling by 2.4% on the quarter," said the analysts.
Q1 2007 is therefore likely to see a further slowdown in real residential activity, before seeing a slight uptick in the second half of 2007 following a peak in interest rates, but it is unlikely to be enough to push residential construction growth higher than 0%-2% for the year.
"Perhaps the most reported story of the past year has been the solid performance of the non-residential building sector, which to some extent, has taken up the slack left by the cooling residential market," they add.
Growth in real activity in 2006 was 21.8%, helped by a surge in activity in Q4, with real seasonally adjusted completions increasing by just below 60% on the quarter.
"Growth of this magnitude will not be sustained into Q1 2007 and non- residential completions may even fall q/q between January and March before activity picks up strongly again for the remainder of the year on the back of high growth in plans passed toward the end of 2006, and continuing investment spending in the industrial sectors. A weaker Q1 2007 should cause real non-residential construction growth for 2007 to moderate to between 12% and 18%," said the analysts.
They add that the surprise in 2006 was the surge in demand for additions and alterations, which caused activity to increase by 27.5% in real terms on the year, accounting for a full 30% of total real building activity growth.
The most encouraging aspect of growth in demand for this type of building activity is that it encourages growth and improves turnover, cashflow and profitability among small and medium construction businesses, encouraging job creation for artisans as well as semi and unskilled labour, the analysts told I-Net Bridge.
"This category of building can be expected to continue thriving as new residential activity wanes. Firstly, homeowners will increasingly choose to add, alter and improve their homes with the diminution of market-related asset appreciation in order to realise desired capital gains. Secondly, rather than choosing to buy new homes, existing homeowners may settle for improvements to existing homes.
"For these reasons, growth in additions and alterations activity should remain strong in 2007, but may moderate to between 10% and 20% in the face of higher building costs," the analysts point out.
Overall real y/y building activity growth should moderate in 2007 to around 6% on the back of the slowdown in residential activity, with very strong growth in public and private infrastructure construction activity driving overall real construction sector growth for 2007 to between 8% and 11%, according to the analysts.
"What level of growth in this band the construction sector actually achieves in 2007 will depend on the extent of skills shortages and other capacity constraints, supply bottlenecks, and rising raw materials costs facing the domestic industry," they conclude.
National Credit Act Not A Licence To Increase Your Debt - Neesa Moodley
If you are entering into loan agreements and committing yourself to debt, be warned that the National Credit Act (NCA), which comes into full force on June 1, will not apply to any loan agreements taken out before then.
You will also not be able to default on credit agreements that you entered into before June and cite the NCA as your protection. This means you will be fully liable for any credit agreements entered into before June 1.
Reckless lending provisions in the NCA (these place more responsibility on stores and banks that give you credit or lend you money). But these provisions will apply only to transactions entered into after June this year, Peter Setou, the senior manager of education and strategy at the National Credit Regulator (NCR), warns.
However, the Banking Association this week announced it had a code of conduct which banks have promised to adhere to with immediate effect. The principles of the new code will remain in force as a minimum standard for banks even after the NCA comes into play in June, Cas Coovadia, the managing director of the Banking Association says.
Some of the provisions in the new code of conduct for banks include:
- Bank representatives will inform you at the beginning of a telephone conversation that the call is about a credit offer and the conversation will continue only if you agree. The representative will end the call if you, at any point, indicate you are not interested in the offer.
- Banks will contact customers to offer credit only if they have assessed the customer's ability to repay the debt.
- The bank will inform you that a preliminary assessment indicates you qualify for the offer but you will still be taken through the appropriate credit checks and Financial Intelligence Centre Act (FICA) processes if you accept the offer.
- Banks will limit their credit approaches to the hours between 8am and 7pm from Monday to Friday and between 8.30am and 1pm on Saturdays.
- Unless you agree to it, salespeople will not contact you more than once every two months to offer you the same product and calls will be subject to client confidentiality. All outgoing call-centre campaigns will be recorded.
- The code will cover all communication channels, including direct mail, call centres, SMSs, e-mails and faxes.
For existing bank clients, provisions of the new code of conduct include:
- Banks will ensure that they regularly and accurately update your credit bureaux records with regard to credit agreements you have made.
- They will make you offers based only on an estimate of your ability to repay the loan using your last known salary and internal customer account information, as well as your debt obligations as listed by the credit bureaux.
- Bank employees will confirm they are speaking to you before making you any offers telephonically.
- The salesperson will ensure the product is fully explained and an explicit decision is obtained from you.
- If you are not a client of the bank that is offering you a credit service, then the bank will make the funds available to you only once you have signed the necessary documentation.
From June, debt-counselling services will be available to you if you are unable to honour credit agreements. However, the service is not about pardoning defaulters or writing off debt but is about assisting consumers who have more debt than they can afford to reschedule or restructure so that repayments are at manageable levels.
Ensure That Investors Have Relevant Information
‘The information is there but it may be obstructive or malignant
disclosure’
While the unit trust industry has done well in terms of disclosure, new
requirements will take it a step further towards ensuring that investors
have better quality and more relevant information.
Pieter Koekemoer, head of personal investments at Coronation Fund Managers, said the collective investments industry had always prided itself on being the most transparent area of the financial services industry.
However, information that was both relevant and easy to understand needed to be made available to investors if they were to be better informed.
All too often, when managers made information available to their clients, the meaning got buried in a mass of legal terminology.
“The information is there but it may be obstructive or malignant disclosure, where the intent is to meet reporting requirements but to obscure information from investors,” Koekemoer said.
One area in which the industry did not seem to have been providing adequate information was in relation to expenses, he said.
The industry had argued that performance league tables and past performance results provided information on an after- costs basis and this was adequate disclosure.
However, this did not give investors a real idea of the total costs incurred in the management of their investment.
There are two new forms of disclosure that come into effect later this year: total expense ratios and standardised disclosure of information about performance fees.
At the moment investors are told the annual management fee, such as 1.25% plus VAT. However, they are not necessarily told the costs of trading, such as the brokerage fees incurred by the fund or the costs of audit and custody services.
Investors are paying these costs over and above their administration fees and this makes the information germane to the process of fund selection and retention.
“The new requirement also addresses the layering of fees such as in a fund-of-funds environment where fees are paid to a multi-manager and to the underlying fund managers.
“Furthermore, performance fees have been typically shown as a percentage of outperformance of some target but it is difficult to identify the levels of historical fees actually charged,” Koekemoer said.
Decide On The Level Of Risk You Are Prepared To Take - Di Turpin
One of the key ingredients of a well-thought-out investment plan is understanding how much risk you are willing to accept in your investment portfolio.
We all have different personality make- ups, with our own comfort zones.
While some people can accept huge volatility in their fund prices over the short term, others would choose to sleep well at night.
All investments are subject to risk — there is a risk-reward ratio — and your aim as an investor is to ensure that the capital returns meet your projected accumulated capital goal targets.
When building a portfolio, one should diversify across all the asset classes. The percentage in each depends on your risk profile, and this is where collective investments can offer the advantage of diversification.
Cash or money-market investments are obviously the safest but show relatively lower returns than, for example, equities — the top-performing class historically. Equities are volatile and follow market cycles.
Local funds aside, you can further diversify by investing outside of the South African market in offshore funds, either in currencies, equities, bonds or cash.
When trying to minimise risk it is worthwhile looking at the automatic investment options offered by collective investments where each month, through a debit order, you buy units.
Over time this brings the benefits of rand- cost averaging, which lowers your investment cost.
Lastly, wise investors ignore short-term fluctuations in the market and invest for the long term. The longer you are in the market, the better your returns. Few people successfully manage to time the market.
Have you updated your insurance since the gift-intensive festive season?
According to a leading Insurance Company, many families forget to review their policies when they have bought a new lounge suite, home-entertainment system, etc.
Besides, at 5% inflation, some items may cost significantly more to replace than when you bought them - so if you don’t update, you might be left out of pocket.
Here’s your insurance to-do list:
- Itemise all household items, including new purchases, and list a reasonable replacement value.
- Anything that is worn or carried out of the home, like laptops, cellphones and jewellery, must be specified in the all-risk section of your policy if you want them insured.
- Consider all improvements or changes to your home.
- Don’t forget, you can save on your premiums by improving security.
It takes 20 years to build a reputation and five minutes to ruin it.
If you think about that, you'll do things differently.
- Warren Buffet (1930 - )
