Property Talk

As a property professional the big news for me on our domestic landscape is not the extraordinary behavior by the President and resultant cabinet reshuffle or the amazing show of public condemnation through the national marches organized last Friday by the clever Save SA Campaign, but the international ratings agencies S&P and Fitch downgrading South Africa's foreign currency debt.

To be exact S&P downgraded our foreign currency debt and Fitch downgraded the foreign and local currency debt, to sub-investment grade or "junk status" Nedbank's Political Analyst, JP Landman, provides an insightful overview of the political economy in his recently published Investment Research Note entitled Deeper into the Morass.

Does not sound good I am afraid. Although local currency debt is still investment grade according to two of the three ratings agencies, Moody's and S&P, both however have SA on a negative outlook. So why is this important to you as a mortgage bond-holder on an investment property in Ballito or on your primary residence

The two key considerations are the impact a downgrade has on the cost of capital and therefore interest rates and on sentiment. We all know that sentiment drives markets - whether it is a property market or equity market it remains the same. The first important aspect to be aware of as a property investor is that by having an investment grade rating for our sovereign debt or bonds, South Africa qualifies for inclusion in the World Government Bond Index.

Foreign investment funds are permitted to buy South African bonds and money can still come into the economy. Should S&P and Moody's downgrade our local currency debt, South Africa will be dropped from that index and the international investment funds will be barred from buying SA bonds.

They will be obliged to sell or disinvest. This is when you assume the brace position because then the proverbial hits the fan. Do not be uninformed or na*ve to this potential outcome as your ability to service the debt you have and hang on to the property you are nurturing depends on your vigilance. In the short time that Pravin Gordhan was recalled from London the interest payable on our local currency debt has shot up from 8,5% to 9% as of last Friday 7th April.

This extra cost to the government in interest, is equivalent, according to JP Landman, to R2,6m per day for 365 days. This he says is equivalent to 8,000 RDP houses or the cost of sending 24,000 students to University. A higher cost to the government of raising and servicing debt immediately translates into higher interest rates in our local economy and the cost of servicing your monthly mortgage debt.

Lower economic growth and higher inflation results, and this stagflation in an economy leads to tougher economic conditions. The impact of sentiment on our property market has already been felt at the microeconomic level as buyers hold back or change their minds on investment decisions in properties, which typically requires a long-term view, in the face of great uncertainty. Our expectation is therefore for the buyers market to continue and for most prices to come under pressure. Quality destinations will probably provide ideal buying opportunities over the next six months.

Interestingly political analysts such as Landman see Zuma as a gift that keeps on giving to the opposition parties with the ANC rapidly losing support across a broad spectrum. The 2019 elections may prove to be a watershed moment in South Africa's political landscape.

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