Bugle Sales Talk Editorial

Author: Andreas Wassenaar
Date: 2015-07-10

The level of foreign buying of our domestic South African residential market is always of interest to me as we do deal with foreign buyers from time to time. Whereas some areas of the country such as the Atlantic Seaboard have enjoyed strong demand from foreign buyers for an extended period of time, KZN has not had a history of being able to attract meaningful levels of foreign demand, except for Zimbali Coastal Resort, which represents the pinnacle of residential opportunities available within the province. The current level of foreign buyers as a percentage of total homebuyers is measured by FNB in their latest property barometer as being 4% as at the 2nd quarter of 2015, down from 5,5% at the end of 2014, but up from a low of 2% in 2010. So what are the main drivers of foreign buying in South Africa?

FNB have proposed three main forces that influence the level of foreign buying: (1) A reasonably stable Rand exchange rate in recent times. The depreciation of the Rand has varied across certain currencies with Euro denominated pricing inflating somewhat recently while Dollar and Pound denominated pricing decreasing. (2) The global popularity of residential property as an asset class has cooled off. (3) Domestic economic performance measures and the heightened social tensions which have raised red flags for foreigners looking to invest in South Africa.

It is interesting to note that during the first half of 2015 the Rand has been relatively stable, appreciating by 4% in February on a trade weighted basis and then depreciating by 4% in June this year. The net effect is therefore negligible.

When we consider the FNB House Price Index in foreign currency terms, the Euro-denominated Index indicated a 10,6% average house price increase. Since February of 2014 South African residential properties are a cumulative 16,1% more expensive in Euro terms. The UK Pound denominated Index currently shows an average decline of -0,8%. On a cumulative basis from February 2014 our domestic properties are 1,4% more expensive when measured in Pounds. The Dollar denominated Index is a different story with a current average rate of decline of -8,8%. The cumulative effect in Dollar terms since February 2014 is a decline of -4,6% of our average home prices. So the pricing of our residential property in foreign currency actually provides for more expensive property for those making decisions in Euros such as the typical German investor. The buyers from the UK have noticed a marginal increase in pricing of our local assets. For those international investors basing their decisions in US Dollar terms our properties do actually appear cheaper and more affordable.

The Knight Frank Global House Price Index has indicated a significant drop off in its growth from 6,3% in the 3rd quarter of 2013 to 0,3% in the 1st quarter of 2015. What does this mean? With global economic demand and global property market demand retreating in general, we can expect the impact to be felt in terms of demand for our residential properties by foreigners.

Investor sentiment can be influenced by social tensions and negative media coverage relating to violence on foreigners. The African foreign homebuyers as a percentage of total foreign buyers was estimated by FNB to be 20,5%, down from the 24,5% recorded in 2014. There is no doubt the widely publicized xenophobic attacks on foreigners did have an impact on African foreign buying into South Africa.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

Andreas Wassenaar

Principal - Seeff Dolphin Coast

Cell: 082 837 9094

andreasw@seeff.com

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