Despite a bid deal being sealed in Washington, a tough market is experienced in SA

Auction Alliance concluded some pulse racing deals in July, but the world’s largest deal was the one struck in Washington on the last day of July.
After Greek inspired Euro-jitters, the world was watching to see if the USA would be the next economy to stumble and cause a deep double-dip recession. At the final hour, sanity prevailed among US legislators and a deal was agreed between President Barack Obama and leaders in the House of Congress.

The deal will see some US$2.8 trillion in deficit reduction measures over 10 years, mostly through spending cuts, rather than new taxes. This will allow the US debt ceiling to be raised by $2.4 trillion.

Most markets around the world were however less concerned about domestic American partisan issues, and more concerned about the global effect of US default which would trigger worldwide panic. Markets seem to be quite relieved that a deal has in fact been struck – even if at the last moment.

Equity markets, around the world seem to be reacting positively with rises in most stock markets and gains in the US dollar. Gold, which many investors rushed into in the face of further global crisis, will marginally cool off as investors look at alternative asset classes.

In a world of inter-connectivity, what happens in the world’s largest economy affects markets throughout the world, and there was a glimmer of good news in the embattled US housing market. The recently announced small month-on-month rise experienced in US house prices is positive news for the residential property sector. That said, it is too soon to tell whether the increase in US house prices will develop into a consistent upturn, but the news that values are finally starting to climb is welcomed. The US house price rise came after the latest Standard & Poor’s/Case-Shiller index revealed that locations on the 10 and 20-city composite indices increased by 1.1 and 1 per cent respectively in May compared to April. However, all regions recorded a drop when compared to the same period in 2010.

In this inter-dependent world, South Africa’s small yet open economy reflects global movements and the recent strength of the Rand is indicative of skittishness in the Dollar. Like the USA, South African housing investors are looking around at the market and people are searching, but still not rushing to actually put their money down and invest in the property market. In December, we predicted that local house prices would still drop, and I would say that things have remained fairly consistent over the last 12 months. When enough investors re-enter the market, house prices will start to rise again in South Africa. For now, it’s a buyer’s market and those who are buying will reap the same rewards as all investors do in tough times.

According to Etienne le Roux, the chief economist at Rand Merchant Bank, South African consumers will face some “head winds” over the next 12 to 18 months. Le Roux, who was speaking at a function last week to discuss SA’s economic outlook, said rising inflation would be the “big deal” for consumers in the coming months as this would squeeze their income gains. Consumers also faced the possibility that interest rates would soon start to rise.

SA’s current economic recovery and growth was consumer led, Le Roux said. He noted however that it was “critical” for the private sector to invest in order for the economic recovery to be sustained.

In an inflationary environment, South African real estate has historically proven to be an inflation hedge and that is why we are still seeing strong demand for commercial property. We have been saying for some time now, that the market is one of “trophy and trauma” with the distinction between the two extremes growing. So it is no surprise that well positioned, income producing commercial properties with strong covenants are achieving phenomenal prices. At the IPD’s 9th Annual Conference held in Cape Town last week, I reiterated the point that auctions are often achieving prices well ahead of market expectations.

There is no doubt about it that it’s still going to be a tough year ahead but those investors who have access to funding are getting a smorgasbord of investment opportunities. Real estate, like most sensible investment classes is only a quick get-rich scheme in boom conditions. For other periods, it’s a long term investment which produces great returns despite the vagaries of the market.