The property market can be tough to navigate. There are many aspects that go into the valuation of a property and it can be overwhelming for those trying to make decisions regarding property sales, purchases, rentals or development. As a property valuer with years of experience in the valuations industry – and in training our next generation of valuers – I thought it pertinent to share some insights with the public. We have all heard that interest rates are low and it’s a “buyer’s market”, but what is really happening?
It all comes down to the economy
It is important to understand that the economy is the most important driver of the property market. People are selling their properties because they are in financial trouble, and many sellers are happy to just break even. This means decreased property prices and an attractive market for new homeowners. However, like many things, the economy is cyclical. What we are seeing with our economy is not just the result of the current Covid-19 pandemic but more a continuation of what was happening pre-Covid-19, just at a faster rate than initially expected. But the economy will improve, as it always does, and the market will respond, property values will increase again and the cycle will continue.
Like anything, supply and demand are important
In line with the economy, the cycle of supply and demand also plays a role in valuations. For example, currently the demand for residential property is increasing because the interest rate is low, prices are attractive, and there are many sellers. However, this will shift in the near future, where people will start having to outbid each other for a property and sellers will realise they can increase prices.
Another good example is the office rentals market. The demand for office space is low at the moment, as people will continue to work from home in the long-term. Companies which didn’t cancel their leases during lockdown have realised that their office space needs have changed. They are reducing their office space, if not voiding it completely. In response, many office parks are considering a revamp into residential space. This will reduce the supply of office space and boost the supply of residential space. If you think about the implications for property values, it means that eventually the office rentals market will improve for landlords, and home rentals will see an oversupply, therefore lowering the rental price again.
Further, the supply-and-demand factor has meant a boom for the industrial and logistics space. The growth in e-commerce, for everything from groceries to non-essentials, out of necessity or “retail therapy” has meant that the industrial property market has seen more demand for logistics and warehousing space. There are more warehouses in development to meet demand and, just like the other property sectors, prices will change based on this.
Public infrastructure development has a knock-on effect
With an increasingly urbanising and growing population, it is important that public infrastructure and services keep up with demand. For a new office block to be successful, it needs to be supported by quality roads, bulk water supply, reticulation and so on. However, with the current lack of infrastructure development by government, developers are having to build the required infrastructure at their own cost, with no support from the public sector. This drives up the cost of development, and to a level that many banks are unwilling to support, because they don’t think the demand is sufficient to warrant such an investment.
Another effect of the infrastructure freeze is that big construction companies, which are usually hired for massive infrastructure builds, are having to look into smaller projects and developments that are not really suited to their skillsets. As a result, and for various other factors, such skilled professionals decide to leave the country in search of bigger projects and greater career opportunities. This results in a decreased skills capacity in South Africa for quality infrastructure development – all of which impacts the property market.
The important role of valuers
Our role as valuers is not to make the market, but to interpret it. Valuation is not done based on an opinion of what prices should be, but on careful analysis and research of the trends and appetite in the market. As you might now understand, a lot goes into valuing a property – the points in this article are just the tip of the iceberg. The property market is full of intricacies and complexities, which make valuations more of an art than a science. Valuation is not a skill easily learned from a book or a class; it takes ongoing education and mentorship from others in industry.
The South African Institute of Valuers is a voluntary association for property valuations, which focuses on education and ethics in the work that we do. We ensure that our members are mentored and guided, promoting consistency and integrity in the valuation of property. Ultimately, the work we do has an impact on every single person in South Africa, and we will continue our drive to do our job well with the constantly changing economic cycles and supply and demand.