Auction Alliance’s 2010 year end results reflect a property market characterised by lacklustre buyer demand and increased distressed selling. A subdued housing market suggests that the year is ending with a fizzle, leaving many investors questioning whether the market will deteriorate further in 2011.
According to the auctioneer’s year-end review, historically low interest rates have stimulated entry level residential homes and tenanted commercial property, but the broader market was weak all year, particularly at the top end.
“Festive season chatter about property will be more sombre this summer than last, when the world cup was around the corner. In fact, by June this year, pre-world cup property optimism quickly gave way to a mid-year sobriety as the realities of a lacklustre global economy, constrained bank funding and a stubborn local recovery showed a general drop in property trading and fall in house prices,” explains Chief Executive Rael Levitt.
Levitt explains that 2010 was a historic year for South African property, not because of the Fifa world cup, but because, “this is the first property downturn in modern local history, which coincides with single digit interest rates.” South Africa now follows most North Atlantic countries where the negligible costs of borrowing have simply not kick-started the property market. “The bottom line is that next year we won’t have the world cup to boost infrastructural spend, tourism, mid-year retail and most importantly investor sentiment. It appears as if real estate is set to weaken further in 2011.”
In terms of the auction industry, Levitt explains that “in recessionary markets such as these, the counter cyclical aspects of the auction industry emerge. Contrary to popular view, auctioneers perform far better in boom times, but our strong year end results reflect strong growth in distressed sales.” Auction Alliance has ended off the year 22% ahead of budget, with R5.2 billion worth of assets sold at auctions over the year.
While many property purchasers and developers were paralysed by poor investor sentiment, the South African auction industry saw the highest value transactions ever recorded, which produced a strong set of company results.
High volume, low value, distressed single residential home sales were in fact 19% down on 2009’s peak, but this type of retail foreclosure was replaced by high value assets been brought to the auction floor, with a median value over R5 million.
The Alliance Auction Index reports that mortgage stress has declined year-on-year by 38% in number. Furthermore, 2010 was the year when speculative buyers stormed the market looking for bargains. “This is another new phenomenon; in past downturns, demand disappeared, but this time buyers with access to cheap funding are out in full force finding low value deals. These speculators have made serious money this year.”
This year liquidations of property developments and commercial property investor schemes reached unprecedented levels, with over R4 billion worth of development real estate going to auction in 2010.
”In our 2009 report, we predicted increased numbers of commercial property hitting the distressed auction floors, and despite this market being fundamentally sound, the retail, industrial and office sectors were all under pressure in varying forms. Any investments that offered strong cash returns were snapped up at low yields by investors hungry for cash returns,” says Levitt.
Throughout the year distress remained for large tracts of vacant development land, incomplete developments and a few golf estate developments, which were under severe pressure. Despite some large sales such as the Sitari Golf Resort in Somerset West, land at Pinnacle Point and a development in Hartenbos, Southern Cape, it is our view that it will take years for this market to reach stability, clear out the distressed inventory and start to grow again.
“Another unique aspect of this recession is that our Auction Index reveals that with the low cost of borrowing and average property prices dropping, the weight of money coming through the auction room has doubled since this time last year. “The first and fourth quarters experienced a big demand bounce, and based on December’s sales, I am not convinced that the foot is going to come off the pedal anytime soon. Buyers have been flocking to our auctions in record numbers, which hopefully isn’t only for the good food on offer,” observes Levitt.
Both the investor buyer profile and seller profile has changed in 2010. This year we saw banks, liquidators and legal entities selling record numbers of assets through auction floors, while property speculators and medium-term investors streamed back into the market.
The Soccer World Cup had a negligible impact on the property market and actually caused a mid-year distraction, which dampened demand in an already weakening market. Any thoughts of soccer tourists popping into Sunday show houses quickly evaporated after the June 11 kick-off.
The reality is that this year the South African property market has halved since its 2005/2006 peak when approximately R20 billion in sales were recorded every month. This year we saw just under R10 billion a month. Chances are these numbers may further weaken in 2011.
From an Auction Alliance trading perspective, we report as follows:
Northern Provinces: Gauteng, Limpopo, North West and Mpumalanga
In the country’s Northern Regions we performed 41 percent ahead of budget and consolidated our position as market leaders in both transaction units and value. The most striking feature in these provinces was the insatiable demand for well let commercial, retail property and a large supply of distressed luxury houses in wealthy suburbs, particularly Johannesburg’s northern suburbs. We noticed a surge of buyers attending our auctions, with peaks in March, July and October.
In Pretoria there is plenty commercial development taking place, including news that we are shortly going to have at least four 5-star hotels. A confirmed fact is that two banks have signed lease agreements to move their regional offices to Pretoria – a move likely to stimulate the demand for properties in Pretoria.
Western Cape Region
This region has generally shown about 19% growth in sales turnover over the same period last year and we have firmly consolidated our position as undisputed market leaders in this province, with little competition at the top end of the market. Despite the luxury end of the market slowing down considerably, we sold many homes in the R20 million plus bracket.
The Atlantic Seaboard and Southern Suburbs are perceived to be distress proof but this is not our experience. We had five sales in the R30 million price range including three sales in upper Bantry Bay at R39 million, R21 million and R24 million.
From a commercial property perspective the Cape Town CBD seems recession proof with high demand. A sale on the Camps Bay beachfront fetched R26 million, the La Splendida Hotel in Mouille Point sold for R28,6million and 22 beachfront properties in Yzerfontein were sold, raising R25 million and reflecting the strong demand for coastal properties.
Southern Cape Region
A large part of the Southern Cape regions are coastal towns and therefore fit primarily into the secondary holiday homes market. It’s in these markets that supply is high and cash buyers are looking for bargains. Taking these market conditions into account these regions have fared well, exceeding budget by 63 percent and achieving record sales in the last couple of months. Enquiries from upcountry, Gauteng and KZN, are still strong, with buyers looking for areas with low crime rates and a more relaxed lifestyle.
In KwaZulu-Natal the commercial property market showed a recovery in the last quarter but this was a tough year with trading marginally down on 2009. The commercial property market has been quiet and investors are looking for higher yields than in other provinces.
Values have now been aligned and this offering is the key to sales in the greater Durban area including Pietermaritzburg, Amanzimtoti, Richard’s Bay and Pinetown. Only by November did we see an increase in activity, which resulted in large year-end sales. Durban North, Umhlanga and north to Ballito are areas which have benefited from the growth around the new business nodes close to the King Shaka International Airport at La Mercy.
While sales at the lower end decreased in volume they picked up in price. The opening of the airport coupled with the on-going success and popularity of business hubs and residential estates in Umhlanga and La Lucia have further boosted the desirability of the Ballito and surrounding coastal areas, including Zimbali where we concluded several high value sales. Our group’s largest sale was in Umhlanga Ridge at just over R100 million, sold to a financial institution for development.
Both Port Elizabeth and East London had an extremely successful year and while certain private sellers are still holding out for the prices achieved in 2007, we achieved record prices, including Kings Court in Walmer selling for R53 million and King’s Court in Gonubie selling for R56 million.
Free State and Northern Cape
With little distress been seen in the agricultural sector, the region performed solidly with many residential sales in the R1 million – R2 million range. The region also saw successful, non-distressed sales of farms, partly because of a lack of land claims and a strong emphasis on food security. The highest price achieved in the Upington region was a game farm sold for R20 million.