OUTH African estate agents point to an increase in foreign buying of domestic property, which appears to have coincided with the recovery of popularity of property globally.
The First National Bank (FNB) estate agent survey continues to point to improved levels of foreigner buying of South African residential property. With regard to the major city regions, Cape Town remains the city with the highest estimated percentage of foreign buyers at 7.5% for the first half of this year, followed by Johannesburg with 4%.
FNB property analyst John Loos says that while the weakness of the rand in recent years may have made some difference to the levels of foreign buying, by making local residential property more affordable in hard currency terms, “we contend that the recovery of property’s popularity globally is the bigger driver of foreigner buyingâ€.
SA’s residential market in recent years has become a lot cheaper for foreigners whose incomes are denominated in some of the world’s major currencies.
“This is due to a major depreciation in the rand over the past few years, which has negated any house price growth which has taken place in rand terms.
“In rand terms, 2014 has seen the FNB house price index showing year-on-year growth hovering at near to 8%. In recent months, a slowing in the pace of rand depreciation has meant that we have begun to see some stabilising in the FNB house price index in foreign currency denominated terms,†Mr Loos says.
For last month, the FNB house price index still declined year on year by -7.4% in UK pound terms, which remains significant. However, in euro terms the decline of -1.9% was marginal, while in dollar terms it has reverted to mildly positive growth of +1.1%.
Nevertheless, compared to the end of 2010, the FNB house price index is still sharply down, by 21.7% in euro terms, -19.4% in dollar terms, and -25.6% in pound terms. In short, South African property still appears to be cheap for foreign buyers.
With South African property now a lot cheaper for foreign buyers than a few years ago, some would perhaps say that it would not be surprising to see an uptick in the levels of foreigner buying in the local market.
“And indeed, this is what we appear to have been seeing. From a low point of 2% of total buying at a stage of 2010, the survey respondents have gradually raised their estimates of the foreigner buying percentage to 4% by the first half of this year.â€
Mr Loos says the question remains, though, as to what extent this multiyear rand weakening has stimulated the rate of foreigner buying of domestic residential properties?
“Because, on the one hand, property has become far cheaper for these buyers, but on the other hand, the weak rand is in part reflective of a deterioration in investor sentiment towards SA, and it is tough to ascertain whether the overall impact on foreigner buying would be negative or positive,†he says.
The gradual rise in the estimated foreign buying percentage did indeed start around 2011, and it was then that the multiyear rand depreciation started to lower local home prices for foreigners.
But it was also in 2011 that a lull in the global housing market reached the bottom, and from 2012 global house prices accelerated, reflecting a recovery in residential property’s popularity as an asset class.
“Our admittedly subjective answer to the question of the role of rand weakness in boosting foreign demand is that the weakness of the rand has probably had less impact in driving foreigner buying of local residential property higher than has the property asset class’ global increase in popularity,†Mr Loos says.
Experience in SA, with regard to exports of goods and services, is that periods of rand weakness do not appear to generally show a major surge in exports. Domestic exports appear to be better correlated with global economic performance and thus demand for such exports.
“With regard to foreigner demand for residential property, we believe that the same would probably apply. Viewing the Knight Frank global house price index, we see the confirmation that the global housing market has been going through a more solid period in recent years, with house price growth having picked up speed since early 2012, recording 7.1% a year-on-year rise in the first quarter of 2014.â€
Coinciding with the global house price rise from 2012 was an increase in the percentage of estate agents in the survey reporting a rise in “foreigner buyer numbers, while the percentage reporting a fall in the numbers, declined (the majority of respondents reporting unchanged foreign buying levels throughout)â€.
Mr Loos says one may claim that this rise also coincides with the rand’s weakening, and by and large it does. However, back in 2008 and early 2009 the rand had also weakened significantly, causing domestic house price values to drop significantly in dollar, pound and euro terms.
“However, that time around the bottom was falling out of the global economy and its property asset class, and foreign buying activity in SA actually receded, according to surveys, through the latter half of 2008 and through 2009,†he says.
Therefore, while the weakening in the rand in recent years may have influenced some foreign “bargain hunters†to buy local residential property, “we believe that … rand weakness on its own has a limited impact on the levels of foreign buying locallyâ€.
Rather, it is a strong global economy and high levels of popularity of property as an asset class that are likely to support this source of local property buying. So in the high-volume market of 2005, estimated foreigner buying was as high as 7% of total local home buying despite rand strength making local property relatively expensive for foreigners. Property at the time was an extremely popular asset class.
Mr Loos says the Knight Frank house price index first quarter inflation rate for this year slowed slightly on the prior quarter.
We believe that rand weakness on its own has a limited impact on the levels of foreign buying locally
