Jackie Cameron

Posted: Tue, 15 Feb 2005 17:00

Cape Town's central business district (CBD) and surrounding areas are dotted with cranes - testimony to the bricks and mortar boom that has gripped the country.

Many of the new developments are residential, though commercial properties are being redeveloped as trendy apartment blocks and mixed-use buildings.

The CBD and City Bowl and Atlantic Seaboard neighbourhoods have become highly sought-after by investors looking for buy-to-let investments.

Bachelor flats under construction are fetching up to R1-m and even more, while you can expect to pay well above R1-m for anything with a separate bedroom.

Further afield, in the southern suburbs and Tyger Valley in the north, buy-to-let fever has also spread.

In Claremont, new student pads are on the market for R1-m and more, while in the northern suburbs you can get a little more for your money in new developments in Durbanville where one-bedroom flats are going for around R750 00.

These days, you'd be hard-pressed to come across a Capetonian who hasn't bought a second or third property or is, at the very least, contemplating such purchases.

Property market talk dominates many social gatherings. But what's not being talked about at most dinner parties is the abundance of stock that's set to come on stream soon.

Many buyers may be putting down cash for their investments, but there are also many who are dipping into their home loans to come up with deposits and just generally taking on a lot of debt to fund their rapidly expanding property portfolios. That means a large number of investors will have to rely on a steady stream of rental income to fund their property purchases.

Hidden supply

Estate agents Moneyweb has spoken to have speculated that there could be about 2 000 units - mostly bachelor and one-bedroom flats - coming onto the market in the CBD/City Bowl area and Atlantic Seaboard as developments are completed over the next 18 months.

However, at least one developer estimates there could be as many as 4 000 units being completed in these areas in that period.

And, with demand from foreign travellers for short-term holiday accommodation lower than in previous years when rand weakness made South Africa all the more attractive for tourists, most of these properties will have to be filled by locals.

Elsewhere around the Cape Peninsula, new developments are also mushrooming, with some estimates putting the number of new units under construction in north-western areas, like Century City and Table View, at about 6 500.

Late last year, Dr Andrew Golding of Pam Golding Properties cautioned that central Cape Town might be one area where investors could get their fingers burnt.

Like other property industry watchers he has said there will always be tenants available - but questions what they will be prepared to, or can, pay for accommodation.

A property economist told Moneyweb he was puzzled at the enthusiasm for inner city residential developments. While they have taken off in the world's most vibrant cities, like New York, urban rejuvenation has started from the ground up in those countries.

Walk down Long Street on a Sunday, however, and your nostrils will be greeted with the stench of stale urine in a city that, unlike New York, pretty much shuts down after business hours.

Yes, the Cape Town authorities have engineered a turnaround of the urban decay that had seeped into the Mother City - but it's not nearly enough to make you feel the same about an evening stroll as you might in, say, a European city.

Big player gets nervous

This week Mike Flax, the chief executive officer of Spearhead Property Holdings Ltd - a listed property company that specialises in Western Cape properties - revealed that he too sees possible trouble looming on the horizon for the Cape's residential property market.

Spearhead, the top-performing property company on the JSE last year, has been behind a number of upmarket residential developments in Mouille Point, near the Waterfront, but no longer has any residential property in its portfolio.

His company buys buildings to generate an income stream for investors but also sells properties to "spice up" returns.

"We'll have transferred our last units by July. We've sold out," he said of Spearhead's last residential development, South Seas in Mouille Point, in its portfolio.

A major risk to developers when a property market turns is that investors walk away from their deposits, leaving the developer to carry the can - a situation Flax wants to avoid.

Right now, Flax says he is "nervous" about the residential market.

"The market has definitely slowed down in the last six months. The top end has gone off the boil. In about September/October it started cooling," he reflects. This top end is properties priced from R2-m.

The speculators are leaving the market because the government has closed a loophole that allowed a saving on transfer duty, however they are also noticing that rentals are falling short of expectations, says Flax.

There is a rental ceiling. The top rentals achieved in Mouille Point for example are generally around R8 000 to R10 000/month - regardless of the price paid for an apartment.

In other areas like Tyger Valley and Century City, there appears to be a rental ceiling of around R3 000 to R4 000/month - again regardless of what owners paid for these properties.

"It's a tenants' market," says Flax.

As more units become available, it seems only logical that this rental ceiling will decline even further as landlords fight to secure tenants.

This, in turn, would put pressure on prices, so the viability of a new development goes out the window, notes Flax.

Time to sell?

Once you've factored in all the costs, from mortgage repayments to maintenance, you wonder why people are "investing" in pricey apartments at all.

Investors who have paid about R1m for trendy bachelor apartments in Cape Town's city centre are going to struggle to find people prepared to pay more than R4 000/month.

A bond puts the costs in the region of R10 000/month, leaving the landlord to subsidise his or her tenant to the tune of several thousand rands a month and pay for other costs associated with the property.

Along with the huge supply and property owners who have taken on maximum debt, you can expect landlords to become a little less discerning about tenants.

And, says Flax, as soon as you let the first drug dealer rent in a block, the other units in a block become generally undesirable. Prices -- rental and resale - would drop further.

Flax says finding tenants should not be a problem - there are many Capetonians in lower income areas who would prefer to live closer to work - however it is a question of how much they are prepared to pay.

According to Flax, Cape Town's residential property market is overpriced and there could be a "flattening" of prices.

Others, however, are more optimistic.

Take Len Pears of Pears Properties in Cape Town, who said this week that sales in the southern suburbs have increased at a slower rate of roughly 15% annualised in the past two months while rental returns have softened in the last two years.

Nevertheless, he said: "The much talked about 'property bubble' is a fallacy. Now that South Africa has become a part of the world market and Cape Town an international and national favourite, we are confident that property will continue to grow."

Barak Geffen of Sotheby's International Realty (operated by Lew Geffen) points out that even when interest rates had shot above 20% in the late 1990s and crime was rampant property was still holding its value in Johannesburg.

Jacques du Toit, a senior economist at Absa, says latest data suggests that there is a "downward trend" in price growth, but a total collapse in prices is not expected.

Prices are still rising, though more slowly than in recent years.

The peak in the luxury market was in mid-2004 and apartments in Cape Town's CBD and surrounds probably fall into that category, said Du Toit.

He agreed that rentals are under pressure, but that rentals like prices go through a cycle.

"During periods when interest rates are low, people look at buying rather than renting. Interest rates will eventually go up and then affordability will be more of an issue so the rental market will pick up again," he said.

In the meantime don't over commit yourself if you are about to sign up for a new mortgage, cautioned Du Toit, as interest rates must, sooner or later, go up.