An oversupply of residential property in Cape Town's city centre is driving down prices, spooking investors but offering hope to tenants who have battled skyrocketing rentals.
Some flagship developments have stalled and others are on hold as property stakeholders battle a perfect storm of negative market sentiment, low demand and gloomy economic indicators. And the situation looks set to worsen before it improves, with more top-end accommodation coming to market.
FNB's latest price indices report shows price drops at the top end of the market, including the city bowl (a 2% contraction year on year for the first quarter of 2019 compared with a 0.2% contraction in the previous quarter). The Atlantic seaboard, meanwhile, registered an "average house price growth plunge" of -5.1% - a record low - in the first quarter of this year compared with a multi-year high of 25.5% year on year in the first quarter of 2016.
Though the correction is good news for buyers excluded from the city bowl by exorbitant prices, it could be ominous for many property speculators who have bought into big-ticket developments.
Insiders in the property industry this week warned there were likely to be further casualties before the downward cycle ends.
According to one survey, as much as 95% of recent off-plan purchases of new top-end residential property in Cape Town is investment-driven - made by people not intending to live in the properties.
"What we're seeing is a constant stream of supply but we don't have enough demand at the moment to mop up supply, because prices haven't adjusted down," said FNB economist Siphamandla Mkhwanazi.
He said the affordability ratio - calculated as the ratio of annual income against property prices - was currently the highest in recorded history, due largely to dismal current economic conditions. "For affordability to improve, one would need prices to adjust further downwards because we don't expect income to go up significantly because of the economic downturn. Declining prices we already see at the high end are likely to spill over to other areas as well," he said.
The property value in the CBD stands at about R65,000/m², up from about R27,000 in 2011/2012, according to those in the industry, who believe the inflated price is the result of investment hype in 2015/2016 when property developers initiated several major projects.
"The price needs to be at about R45k/m², not R65k. Greed and hype have pushed it up," said one prominent property stakeholder. "The whole thing has been skewed because people have been speculating."
Though some investors may be left reeling, the downturn is potentially beneficial for people historically priced out of the city centre. And potential new buyers or tenants might soon have additional relief in the form of a glut of new accommodation.
New developments, either pending approval or due to come onstream soon, include:
- 16 on Bree, with about 400 apartments, nearing completion;
- The Vogue, a 37-storey mixed-use building, awaiting planning approval;
- Zero-2-One Tower, a 44-storey building (the tallest in Cape Town) with retail and 550 luxury apartments. Still to break ground;
- Sir Lowry Square in Woodstock, an R800m² retail and residential mixed-use development. Construction expected to start in the next four to six months;
- 117 Strand Street. A R600m mixed-use development with 117 apartments;
- The Yacht Club, a mixed-use development with 170 luxury apartments adjoining the V&A Waterfront; and
- The Rubik, corner of Loop and Riebeek streets. Luxury mixed-use building.
We don't have enough demand at the moment to mop up supply, because prices haven't adjusted down
— Siphamandla Mkhwanazi, FNB economist
Laurie Wener, Pam Golding Properties senior executive for developments in the Cape region, said: "The market happens to be in a very fluid state at present, due to multiple economic factors which have resulted in an increasing supply of property with reduced demand. This is likely to stabilise as sentiment improves, which it tends to do after a price adjustment."
Developers hoping to ride out the market doldrums are in some cases stalling projects, even where approvals are in place, sources said. The jittery market is also affecting the construction industry. Johan Louw of JLK Construction said: "It is a spiral situation at the moment. Prices are coming down in real terms." He expected the down cycle to last three or four years.
Another source said the great number of developments means investors "would be lucky to find a tenant to pay the rent".
However, the price downturn might also give effect to the city's long-term vision of a more vibrant (and affordable) CBD, with "micro-apartments" possibly becoming more attractive.
John Jack, CEO of Galetti Corporate Real Estate, said mixed-use developments are one way to breathe new life into the city: "Cape Town is further advanced in terms of micro living and it is certainly attracting people to the city centre."
John Edgar of Zenprop said the oversupply is partly linked to the allure of quick profits via Airbnb, which is now a saturated market. Property investors are not seeing expected returns, with operational costs rising and rentals on the decrease, and in many cases properties are now standing vacant or coming back onto the second-hand market.
Zenprop is working on funding mechanisms to assist first-time buyers. Said Edgar: "There are desperate youngsters who can't raise a mortgage and nobody is looking after them."
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