Unease about the government’s plans for restricting land ownership could see local residential property owner-investors who rely on foreign buyers choosing to leave the market for fear of further restrictions, a researcher warns.
President Jacob Zuma announced in his State of the Nation address that the government intends restricting foreign ownership of agricultural land and capping the amount of land a person can own at 12 000 hectares.
The state is expected to release the Land Holdings Bill in Parliament later this year, when more details will emerge.
Paul-Roux de Kock, analytics director at Lightstone Property, said that the planned land restrictions were unlikely to have an effect on the residential property market for now. He was speaking at a press conference in Paarl held last week.
Negative consequences may unfold in two ways, De Kock said. “The first is the amplified nervousness of foreign owners, prompting them to sell,” he said. “But because the proportion of foreign ownership of land in South Africa is so low already, our view is that this in itself will not have an impactful effect on residential property prices.”
By Lightstone’s estimate, only about 3% of local property is owned by foreigners.
The secondary effect could see South African owner-investors – who rely on the country’s popularity as an international tourist destination – opting to sell their properties while they still have a large pool of buyers in anticipation of further restrictions, said De Kock.
Policy certainty needed
“Our hope is that political clarity around the issue will avoid such a scenario,” he said. “Our government … should be very clear on what they want to do with this restriction of foreign ownership.”
Policy uncertainty aside, he is “cautiously optimistic” about the prospects for residential property prices. A strong economy was key to ensuring the market reached growth levels of 7.3%, he said. This is the rate at which the property market is expected to grow under Lightstone’s optimistic high-level forecast, versus its mid-level expectations of 5.8% and low-growth scenario of 3.5%.
Prolonged labour unrest in 2014, however, reduced the purchasing power of buyers as well as the risk appetite of banks to lend to people, particularly in the low- and mid-value markets. The growth of the low and middle segments of the sector is important for sustaining the growth of the rest of the market.
Strong price growth in these segments, which is driven by increased demand for formal housing, keeps the overall residential property market healthy, feeding buyers into the higher-value markets, according to Lightstone.
If the country succeeds in enabling more people to afford formal housing, and in “developing a wealth-building group to drive higher-value markets, the South African property market should be in good shape in the long run”, said De Kock.
Although many South Africans remain poor and live in informal housing, the ascendance of a small number of people into higher income brackets and formal housing has been positively sustaining the growth of the property market, according to De Kock.
Price growth in the low-value segment of the property market – homes valued at less than R250 000 – has outperformed other market segments as well as the national average, Lightstone found.
Low-cost homes on the rise
The low-value segment grew by almost 30% last year, compared with the national average of 6.7% or the 8.5% seen in the mid-value segment – homes valued at between R250 000 and R700 000.
Low-value homes make up 36% of the country’s estimated 6.1-million residential properties, Lightstone said, but comprise only 6.2% of the value of all real estate stock, which it estimates at R4.3‑trillion.
Demand for affordable housing continues to outstrip availability, with the housing backlog estimated at 2.1-million in 2012 and increasing to 2.3-million in 2014. Despite this demand, the residential property sector remains the least attractive to investors in the overall property market, according to PwC.
But this was not a uniquely South African problem, Ilse French, real estate leader for PwC Africa, told the Mail & Guardian. “Globally, attracting private investment into social housing has been difficult, with needs tending to be met by government and only more recently by public-private partnerships,” she said.
Rental returns in the residential sector are often low, at 5%, with a significantly higher financing cost, French noted, whereas sectors such as commercial property are more attractive because of their potential for far higher returns. “Private capital does not track needs, but rather opportunities with greater returns,” said French.
There is an increased appetite for specific types of residential sectors, such as student housing, with international investors entering the African market. “In addition to the development of student housing, mixed-used developments that include residential [components] are becoming more popular,” she said.
Research by PwC into the European market has revealed that one of the main reasons for European investors avoiding residential property was the low returns, according to French, who said the same reasons were likely to apply in the South African market.