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Low-end residential market is booming

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Prices of South Africa’s residential properties at the bottom of the market are booming.

Deeds office data analysed by the Lightstone Group show that the best property investment in the country by far is at the low-value segment of properties, priced below R250 000.

These showed an average 8% price improvement in 2013, before shooting up by 31% in 2015. But Paul-Roux de Kock, a Lightstone data and analytics ­director, noted at a briefing held near Paarl last month that this end of the market was subject to a false economy as many properties were initially state-subsidised.

Nevertheless, as the ward councillor in the Cape Town township of Dunoon, Lubabalo Makeleni, pointed out, there are a number of entrepreneurs making massive profits by ­buying RDP houses, building on a second storey and converting them into flats. These are either rented to a number of families or sold to landlords.

However, as profitable as this end of the market appears to be, in terms of the value of property traded, it only comprises 6.3% of the current R4.3 trillion worth of residential property in South Africa, even though it makes up the largest share – 37.7% – of 6.2 million titled residential properties.

On the other hand, returns in the rest of the ­property market are under pressure. This compares with 10 years ago, when ­national average property returns were ­between 12% and 25%, depending on which market sector they occupied.

Deeds office data analysed by the Lightstone Group show that since recovering from the substantial property dip below zero – which lasted from the ­second quarter of 2008 to the second quarter of 2009 – price growth levelled out at about 3% in 2011, increased slowly to about 5% in 2014 and is now dipping to the 2011 levels.

The high-value properties between R700 000 and R1.5 million, and the luxury segment between R1.5 million and R3 million, were the worst performers, De Kock said, ­offering returns that just kept pace with inflation.

The profits were being made in estates, which in 2015 ­started outstripping their luxury segment rivals to now sit about 1% above them on returns. Predictably, the high-end and luxury markets make up the smallest number of residential units, yet the largest portion of their R4.3 trillion value.

However, Cape Town and Johannesburg go against the grain. Rather than making up the least number of units, Cape Town’s high-end and luxury segments comprise almost a third (31.3%) of the city’s 700 000 residential units, adding up to almost two-thirds (61.8%) of the R0.8 trillion value in that city.

Johannesburg figures are similar.

What this means is that people without access to significant wealth are priced out of their own city. While this has been a common complaint among Capetonians since property ­prices leapt upwards in about 2004, it was assumed Johannesburg was more reasonably priced.

And it seems middle class and working class Capetonians might have Gautengers to blame for their inability to get a foot in an inflated property market.

De Kock’s analysis reveals that there were 4 000 transactions showing Gauteng homeowners bought property in Cape Town in 2015 – up from about 2 600 in 2008. Furthermore, about 75% of the properties they bought were in coastal ­suburbs.

De Kock said foreign ownership was “negligible”, although he did not drill down into foreign ownership in Cape Town suburbs such as Green Point, which bucks national price ­return trends by offering a price return above 12%, making it the best-performing location in the country.

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