Can your clients bank on the ‘safe as houses’ catch-phrase?

Are your clients among the growing cohort of ordinary South Africans who have given up on residential property as a store of wealth? As a long-time homeowner, and one-time buy-to-let speculator, your writer has had about enough. He sold out of his buy-to-let portfolio years ago after finding the risks associated with second home ownership too intense; and has since found the lacklustre capital gains on his main residence less than appealing.

Is residential real estate losing its shine?

Today’s discussion was piqued by a media released from Lightstone, a data-driven solution provider for the property sector, titled: Is residential property losing its investment appeal? And your writer’s opening paragraph hints at the answer. 

According to Lightstone, private residential property investors in South Africa are growing increasingly wary of the asset class, or to quote their exact phrasing, “investors appear to be losing their appetite for growing their property portfolios.” The research digests data from 153 000 natural persons who each own three or more properties, totalling 460 000 properties, through purchase rather than inheritance. Furthermore, it only considers transactions exceeding R100 000,00. 

Hayley Ivins-Downes, Managing Executive Real Estate at Lightstone, revealed year-on-year growth in investor volumes spanning 2006 until 2021, followed by a levelling off in 2022, and a decline in 2023 and year-to-date 2024. In this case, volume is the total number of qualifying residential units held. “It is, of course, too early to call the decline of investor volumes a trend, and we will be keeping an eye on the data as the year moves to a close”, she said. Investor property volumes peaked in the R750 000,00 to R1.5 million value range, with around 46% of the 460 000 investment properties being unbonded. 

The latest assessment reveals that roughly 60% of the 153 000 investors owned three properties; 20% owned four properties; 10% five; and 10% six or more – with residential properties dominating the statistics at 87% versus the 13% not classed as residential, and having links to agriculture. Ivins-Downes said there had been a significant decline of natural person owned investment stock in non-metro areas since 2019, and especially stock not classified as residential, while investment stock was slightly up in metro areas on 2019 numbers. 

Mopping up the ‘must sell’ properties

Somewhat counterintuitively, the report suggests investor activity has flattened in the Cape Town metro, and picked up slightly Johannesburg, Pretoria and Durban. Ivins-Downes said volumes could drop as falling rentals push investors to sell, or they could rise as investors move into an area that is attracting interest, or where investors are ‘mopping up’ properties sold inexpensively under pressure. Your writer would argue the latter phrasing holds for any recent ‘jumps’ in property interest, especially outside of Cape Town. 

“It was highly probable that the lack of investment property in Cape Town was driven by stock shortages pushing house prices up, and offering investors an attractive exit on their investments,” Ivins-Downes said, partially confirming these suspicious. In another interesting shift, the data shows that property investors prefer sectional title units within estates (+4%) rather than freehold units in estates (-4%). One would think that the double-levy of estate within estate might dissuade investors, but then again, these units are probably the easiest to lease out to higher income earners based on their security features. 

For a deeper dive into residential real estate, you writer paged through the latest Absa Homeowner Sentiment Index (HSI) publication. The HSI, last published for Q2 2024, is branded as a leading indicator of the overall state of consumer confidence in South Africa’s property market. It leads, “Confidence is highest around perceptions of now being the right time to invest in property and to renovate or make alternations to property; but confidence in ‘today’ being an appropriate time to sell property continues to be low.” So, it is a buyer’s market, which implies house prices are subdued. 

Selling Pretoria, Johannesburg for the Cape Town life

This report was full of surprises too, revealing that though the main HSI metrics had not shifted significantly compared to the previous quarter, consumers from the Western Cape consistently showed poorer confidence in the property market across all metrics compared to the first quarter. Clearly these consumers have not spent much time weighing up selling their Durban, Johannesburg or Pretoria hovels in an attempt to relocate to one of the ‘in favour’ suburbs in the Western Cape. 

Per the HIS, overall consumer confidence in the South African property market increased in Q2 2024 to 84% from 82% in Q1. Under the ‘buy sentiment’ tagline, 70% of respondents responded positively versus 72% in the first quarter 2024. According to Absa, “Buy sentiment improved by 12% compared to Q2 2023, [with] consumers starting to signal their intent to buy property.” This is a welcome turnaround from the consistent downward trend that had persisted since the start of the interest rate hiking cycle back in November 2021.

 Meanwhile, the ‘sell sentiment’ indicator hovered at a mere 47%. “Sellers feel less positive that they can get the price they want for their properties and that if they don’t have to sell, they would rather wait,” Absa wrote. Around 41% of respondents said affordability was a big motivator in any sell decision, suggesting that people were being forced to sell rather than carefully weighing up their options. Anecdotally, location remains all-important; just compare a R2 million purchase in Durbanville circa 2020 versus the same investment in Tshwane. 

The crime, growth, politics and unemployment ‘drag’

The overall HSI is built up from dozens of metrics. According to Absa, the positive side of was helped along by consumers who believe property always increases in value (54%); those who believe that property creates long-term income (53%); and those who believe there is high demand for rental properties (45%). 

The drivers of negative sentiment include consumers who are concerned over an unstable economy (61%); those who are worried about political instability in South Africa (50%); and the usual concerns over unemployment (49%) and crime (37%). A further 46% expressed concerns over affordability or excessive property valuations, and 40% complained that their buying power had decreased. 

To bring the discussion back to property investing, Absa publishes a useful ‘invest’ sentiment which declined by 2% over the prior quarter, to 80% in Q2 2024. “This is the highest level this sentiment has averaged since Q1 2021 and an indication that property investors still feel that it is an opportune time to invest for future value and returns …  when asked to indicate if it is a good time to invest, 9% of respondents were less negative than the previous quarter,” Absa wrote. 

Fair enough; but the survey is based on just a handful of individual consumers, and therefore a bit ‘light’ to gleen a clear picture on sentiment in the property investing sphere. From a financial advice perspective, this article highlights the need for advisers to have a nuanced understanding of the property market and its current trends, especially when reflecting on how primary residences integrate with the long-term financial plan. 

A less-reliable wealth-building tool

Traditionally, residential property was seen as an excellent store of value to help in retirement; nowadays, it seems less reliable as a wealth-building tool. As investor sentiment shifts, advisers and planners should consider discussing alternative investment options with clients. For example, supporting investments in physical property with discretionary investments across diversified asset classes. The latter approach offers more stable returns and better aligns with clients’ long-term financial goals. 

Advisers can also add significant value by helping clients understand the implications of both buy and sell sentiments in today’s property market. For those still weighing up property as an investment, you must shed light on the many risks including the ordinary concerns around affordability and market volatility, and extraordinary ones around crime and the capabilities of local municipalities. By providing a balanced perspective, advisers can empower clients to make well-informed real estate decisions that support their overall financial well-being. 

Writer’s Thoughts:

There was a time when you could bank on your client’s primary home as an excellent equity release for late-stage retirement. Is this still a viable financial planning strategy in the South African context? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.