Challenging times ahead - what every property owner should know
The South African economy is facing many challenges as 2015 moves into the 3rd quarter. Caught between weakening commodity prices as a result of lower growth in China and imminent rate increases by the US Fed, growth in GDP is subdued, the Rand is under pressure and interest rates have to increase. This scenario negatively impacts the demand side of the economy with consumer confidence at a 14 year low, private sector fixed investment in negative territory and very weak industrial production.
Lesetja Kganyago, the Governor of the South African Reserve Bank has both the empathy and the foresight to know that tightening monetary policy will be a painful experience for the heavily indebted South African consumer. In addition, this will provide no countercyclical relief and may not have the desired positive impact on the value of the Rand. Attracting foreign capital to our shores to bolster the Rand and help finance a wide current account deficit may prove a difficult task especially if the US Fed raises rates.
The above economic circumstances have a direct impact on South Africa’s property market. The most important is that of rising interest rates. As bonded property owners in all sectors are faced with higher repayment costs the inevitable consequences are forced sales, repossessions and liquidations. Secondly, capitalisation rates for investment property will increase driving sales prices down. If inflation continues to tick upwards it will also drive up rental rate escalations along with default and vacancy rates.
Is there any light amidst this scenario for property owners?
The most important tool any decision maker has at their disposal is preparation for the inevitable. South African interest rates have been at historic lows for almost 3 years and then they will increase. By how much and how quickly, we cannot say. Prepare for this scenario whether you are a commercial, industrial or residential property owner. You have three choices, namely, reduce your expenditure on other budget items to cater for the increase in debt servicing costs, increase your income or dispose of your property before you are forced to or the price is adversely affected.
At Deal Core we specialise in property auctions that provide a cost effective and efficient means of disposal. This may seem like an opportunistic approach to take during tough times, but auctioning property offers exactly the same benefits to the seller during good times.
However, when faced with an adverse financial situation, speed and cost effectiveness in the disposal of a property can be the difference between repossession or liquidation and staying afloat. The best case scenario for distressed sellers is the ability to settle and avoid the negative consequences of black listing, business rescue or, in the worst case scenario, liquidation.
The seller has the benefit of an aggressive marketing campaign focussed on auction day which is never further than four weeks from signing a sole mandate and agreeing on a reserve price. The auction methodology brings together qualified buyers who compete for the purchase of a property. This gives the seller the comfort of a sale that is not dependent on finance or any other suspensive conditions.
In addition, the auction methodology provides the seller with a clear indication of willing buyer value with the protection of a reserve price. Price is the most important factor in the sale of a property and many property owners try to inflate prices in the hope of covering other costs or debts unrelated to the value of the property.
A successful sale can relieve the seller of a debt burden too heavy to carry and the opportunity to get their cash flow into a more healthy state. Time is always of the essence and choosing the auction methodology can alleviate a painful wait for a buyer as you sink deeper into debt.
Next week Deal Core will be adding to our editorial theme of “light in difficult economic times” with an article about the pricing of commercial property in Durban relative to equivalent property in other African countries.
Samantha is an economist by profession and has spent many years as a property asset manager of a multi-billion Rand portfolio of property. She is now resident at Deal Core and is a property auction specialist.