The differences in the value of residential property in Cape Town and Gauteng — and Durban and the upper-market suburbs of all the other SA cities — is most striking.
I learn anecdotally of a modern multi-bedroomed home in a gated estate near Johannesburg, largely grid free, that is municipality free and has been on the market for six months for an asking price of not much more than R3m. Yet there have been no takers.
The owner wants to move to Cape Town, as do so many others, and the market is flooded with such homes — palaces that would cost R10m or more to build. Yet the same R3m would have difficulty securing a well-appointed two-bedroomed apartment in Sea Point.
These differences are easily explained. In the Cape, property owners in most towns and suburbs get reasonable value for the wealth taxes and service charges they are forced to pay. This adds to, rather than subtracts from, property values — unlike the abject failures of service delivery almost everywhere else that destroys demand for homes and valuations.
The sad news is that the hopes of many have been dashed. Those who have responsibly been saving, paying off their mortgages each month and expecting that the growing equity in their homes will help fund their retirements when they downsize and cash in. The expectation now is that the value of their homes has not and will not keep up with inflation.
I am informed by a leading property appraiser that on average commercial real estate in Cape Town is expected to increase in capital value by 6.5% per annum — ahead of forecast inflation — while equivalent property in Johannesburg is expected to gain just 3% per annum. Furthermore, the so-called capitalisation rate at which future rental incomes are discounted is lower for Cape Town property that a similar building in Johannesburg. A value-adding 1.25% margin in favour of Cape Town discount rates is estimated.
Recent property transactions confirm this difference. The Table Bay Mall was sold for an initial yield of 7.75% to Hyprop. The Mall of the South in Johannesburg was sold to RMB at a significantly higher initial rental yield of 9.5%. For landlords of residential property in Cape Town, initial rental yields (net rents/market value) range from about 3% in the most favoured suburbs to 5%-6% where there is less competition.
It should be assumed that the total return expected by investors in real estate will be similar everywhere in SA. Flows of mobile capital make it so. But total returns come in two parts: an initial yield, in dividends or net rental income, and capital growth. Thus, the more growth expected in net income, the lower will be the initial yield for homes of similar quality. For many cash-strapped migrants relocating to the Cape, it is easier to rent rather than buy — with expected capital growth conceded to the investor.
The good news for our cousins in the north is that their cost of living is dramatically lower than ours in Cape Town. The bigger and better the home, the more consumption power it delivers, and such delivery comes at far lower cost in Joburg.
The opportunity to live in an inexpensive palace rather than a crowded bedsitter for the same modest outlay, either in rentals paid or sacrificed by owner-occupiers, should surely be a reason not to migrate — enough of a saving to help owner-occupiers go off grid and behind gates, and run a 4x4 to negotiate the potholes when off to their bushveld retreats.
My New Year advice is therefore to buy more of what is cheap. To house up and take advantage of bargain basement offers, in the hope that all the bad news about service delivery is in the already low prices.
The best-performing asset class in SA in 2024 was listed property. Residential property might just enjoy a similar rebound should service delivery unexpectedly improve rather than deteriorate further.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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