South Africa : Perspectives for the Real Estate Market

South Africa : Perspectives for the Real Estate Market

A solid economic growth paired with a strong currency against the dollar make the nation a magnet for foreign investors  that focus their portfolio on  real estate. However, the residential property market may become less attractive for domestic buyers.

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Property costs and housing arrangements in any country are largely dependent on its economy. A solid economic growth paired with a strong currency against the dollar make the nation a magnet for foreign investors  that focus their portfolio on  real estate.

Until very recently, South Africa is one of the countries that has maintained a very bullish property market despite its recent  very challenging macroeconomic conditions. With the downgrading of the rand by S&P GLOBAL  to the status of “Junk”,  Interest rates are bound to increase, which may affect downward the real estate market.

The impact for local home buyers :

Average homebuyers will be the most prominent parties affected by the rise of interest rates. Adrian Goslett, the regional director and CEO of REMAX remarked, “While prospective home buyers have already been subjected to interest rate hikes, an increased cost of credit would be too much to bear for consumers.”

Raise in interest rates combined with the stunted economic growth, which may have an impact on the unemployment rate, along with the significant hike in the drought-driven food prices  and the rising energy tariffs, will result o, a substantially higher cost of living for the prospective buyers and current homeowner.

Useless to say, in such a perspective, the residential property market may become less attractive for domestic buyers.

A contrasted impact for foreign investors

The current rate of the Rand is 12.84 against the USDollar, down from 15,23 in December 2017. In theory, the direct consequence should be an increase in foreign investment  for real estate property, the currency becoming dramatically less expensive for foreign buyers. However and according to  to the First National Bank’s Estate Agent Survey, therehas been no significant increase in foreign investment.

Evolution rand vs dollar

Evolution rand vs dollar

The underlying rationality being that the weaker Rand has generated a strong sense of mistrust in the minds of foreign actors, and real estate does not provide sufficient guaranty to cope with the potential turmoil of South Africa’s economy.

Other aggravating factors repelling the international investors relate to the higher transfer duties  and taxation. The investors that could have been attracted by the weaker Rand have been pushed back by the increasing property taxes and the capital gains tax that is automatically reduced from the sales proceedings.

Perspectives

The population growth of South Africa is one of the factors that will drive growth in the residential sector. UN’s World Population Prospects Reportsuggests that the population will reach 72.9M, which means that there will be a necessary surge in the development of urbanization and therefore an increasing demand for residential solutions.

In this context Infrastructure and energy solutions will need to be developed. It is our opinion that The property market will pick up very quickly,depending on the efficiency of the Central government to restore confidence and positive perception of the economy toward international investors.

South African citizens, however will have to face higher mortgage and interest rates, and the general line of communication from to banking institution advises them to pay their short-term debt and consolidate long-term debt to strengthen their future financial position.

Real estate market in South Africa remains challenging, but offer significant upsides for foreign investors. The situation seems more sensitive for local property buyers, who may need to buckle up and wait for a next more friendly economic cycle to start and invest in their personal home.

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