The state of property development in South Africa

Property is a long-term game: developers have to be patient

Property is a long-term game: developers have to be patient

Property markets are local, they are not traded on global markets like commodities, currencies and equities, but real estate is influenced by global forces that ultimately shape its long-term prospects. These global megatrends drive growth opportunities in key African markets. South African real estate is however influenced by its political history and continues to be shaped by unfolding domestic developments.

South Africa’s position as the most developed country in sub-Saharan Africa and a member of Brics is supported by key factors, namely its well-developed financial, legal, communications and transport sectors, as well as an open trade policy and a comparatively strong domestic market. These factors should provide an environment conducive to growth. However, South Africa still faces the triple challenges of poverty, unemployment and income inequality. The current property development trends are always just that — trends that answer to an ephemeral and often fickle market taste.

This is according to Jason McCormick, managing director of McCormick Property Development. “However, in terms of where the residential development market is currently focusing, there is an increasing interest in student accommodation and low-to-middle income housing, due to massive demand in both sectors.” According to PwCs Real Estate 2020: Building the Future Report, due to massive urbanisation — expected to reach 70% by 2030 — the housing backlog in South Africa is rising rapidly.

Economic downturns have reinforced less bold property development. Developers are more inclined to spend money in reinventing property, rather than building on new land. In the development of institutional rental housing stock, there is a strong drive towards the redevelopment of inner-city office blocks into accommodation across the spectrum, from entry level units such as Maboneng Precinct, to upmarket units such as the re-development of Nedbank’s head office in Cape Town into The Onyx.

On the commercial side, property development requires a substantial amount of capital, so with the current state of the economy, it is critical for developers to find new ways in getting customers through their doors. McCormick says that location is critical, especially for retail — the objective is to ensure that customers do not spend more than R15 on taxi fare. The transport sector is a key contributor to South Africa’s competitiveness in the global markets.

He warns that we will see a slowdown in the development of retail mega-malls within traditional urban centres, as a weakening market and over-saturation of retail space in these areas forces retailers to become more circumspect in their footprint expansion strategies. McCormick remains optimistic that there will be growth in the development of rural areas and the peri-urban townships though the opportunities are diminishing, as most previously underdeveloped areas are now catered for.

For anyone looking to enter this exciting yet challenging space, his advice is to start small and build from there. Their property development company started with the development of a single line shop in a tiny town called Dendron. They used the the income to pay off the bank and rolled the income thereafter into two more line shops, and so on. He makes the point that if you do not have collateral to secure funding, then partner with a reputable developer and learn from them. He also stresses that property development is more about leasing, sales and the financial model than it is about the bricks and mortar.

There is a future in property development, irrespective of the current economic downturn, says McCormick: “South Africa’s economy may be in a parlous state a the moment, but the reality is that we will still be around and growing in five to 10 years’ time. Property development is a long-term game — one has to be patient.

“Plan for the long term and try as best you can to mitigate the downside, especially in terms of rising interest rate cycles. Established developers and those with prime sites in sectors in demand will continue to roll out developments successfully.”