Property Talk

The difference in the performance of sectional title homes versus freehold properties are often contemplated by property economists and price indices measured by segments in an attempt to pinpoint which type of properties are attracting the most relative demand within the market at any given time. As urban land becomes increasingly scarce, the pressure begins to mount for relatively smaller housing solutions. FNB's recently published report on the segmental analysis of house price data unravels some of these issues and provides interesting insights into which segment of the market has been attracting the most interest from buyers. Sectional title transactions have risen to 29,9% of total property transactions as of May 2016 from a cyclical low of 23,7% in 2010. This has been driven largely by the recovery of first time buyer activity in the market since 2010. This market is typically looking for smaller sectional title apartments or townhouses as the ideal starter homes. If we consider the price performance of sectional title homes versus freehold homes over the past 15 years, these price indices have tracked each other reasonably closely with some periods of over and under-performance. By the 2nd quarter of 2016 the sectional title prices were escalating at 6,63% per annum while the freehold prices were recorded at marginally more at 7,38%. As the first time buying market slows, a symptom of tighter macroeconomic conditions and tighter mortgage finance conditions, we can expect the sectional title price growth to slow relative to freehold price growth. According to the FNB Estate Agent Survey, 1st time buying has declined in significance from an estimated high of 28% of total home buying in the 2nd quarter of 2014 to 21% of total home buying by the 2nd quarter of 2016. It is no surprise that rising interest rates since 2014 has had an effect on first time buying demand, as this market is far more sensitive to credit and the cost thereof. It is however interesting that the FNB Valuer's report, which is compiled from all the properties valued by FNB, still indicates strong demand for sectional title properties relative to freehold properties.

If we drill down into the sectional title segment and consider price growth by property size, then we see that smaller seems to be better. The "less than 2-Bedroom" segment showed double-digit price inflation of 13,7% in the 2nd quarter of 2016. This was followed by the "2 bedroom" segment with 7% growth and the "3 bedroom and more" category showed price growth of only 5,1% on average. If we compare this to the segmental analysis of the freehold property market, the smallest sub-segment "2 bedrooms or less" showed growth of 9,6%. The "3 bedroom" segment price growth was 7,6% and the "4 bedroom and more" segment showed growth of 4,1%.

This historical price growth picture is instructive to those looking to buy investment properties off-plan. When a choice between one-, two- or three-bedroom apartments is provided by a developer, then from this report the recommendation would be to purchase the smaller one-bedroom options as the preferred investment vehicles anticipating that the price growth on those properties will outperform the larger options. Pricing strategies for developers would therefore be to price the 1 and 2 bedroom units relatively closely in order the make the 2 bedroom units relatively more attractive from a purchase price point of view.

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