The gloves are off!

THE clash between the bulls and the bears in the property market is as fierce as ever.

Analysts and industry players are divided over whether there is still further upside in this asset class or whether property has had its day.

The opposing views on the property market were well and truly aired at a debate organised by BoE Private Clients this week. Analysts were divided into two teams — bulls and bears — to put forward the opposing views on the market.

On the bullish side, Jarod Kolman, a director of Lime Stone Investment Properties, maintained the rise in residential prices would continue, “if you buy correctly”.

This was despite the fact that the Absa House Price Index for September showed the average house in South Africa was now almost 34% more expensive at R594500 than it was at the same time last year.

Kolman, whose business focuses on Sandton, believed in the prospects for the area: “We haven’t scratched the surface. The next three years will be very active.”

He said that over the past three years development had not kept up with demand and only about 2700 units had been built in the area.

Jack Trevena, a director of mortgage originators BondExcel and another property bull, said he would launch another buy-to-let product soon.

Speaking as a corporate employee, he said that property was viable when “share options have not paid off”. But he admitted prices and returns were beginning to flatten at the higher end of the market.

Residential property as an investment is bought for two reasons: rental income and capital growth increases.

But property economist Francois Viruly, for the bearish side, said people were in denial. In the 1980s inflation was 14%; today inflation was 4% and could no longer drive property prices up so fiercely.

The number of residential housing plans passed has increased by 46% from a year ago, indicating a slew of developments in the pipeline. This could be made worse by potential buyers who put down a deposit of 5% or less. Viruly said some people might change their minds about buying and merely forfeit their deposits.

Kolman, rejected the possibility the market might become flooded with vacant properties, saying: “God makes more people, he doesn’t make more land.”

“But God didn’t mean that everyone must live in Sandton,” said chairman of the debate, political analyst JP Landman.

Frank Berkeley, head of property and asset finance at Nedcor and very much a bull, said he had never seen such a fundamental positive change in the economy.

Berkeley anticipated continued growth around Sandton because commuting had become a nightmare and people wanted to live near their work.

However, he warned that investors needed to be cautious in the low inflation environment.

So where should investors look to get a decent return? Here, the gloves came off between “Mr Sandton” Kolman, and Viruly.

Viruly saw more capital growth potential in an area like Klerksdorp. “Witbank is more appealing than the Atlantic Seaboard.”

Kolman countered that property in sought-after areas such as the Cape’s Atlantic coastline and Plettenberg Bay was irreplaceable.

But as Roger Eskinazi of BoE Private Clients, Gauteng, reminded everyone: “The best time to buy property was last year.” Evan Robins, fixed-income analyst at BoE Private Clients, said residential property was an illiquid asset class with “exceedingly high transaction costs”, tenant problems and was not tax effective.

Yields on residential property were at 6% to 7% and Robins said investors could get double that in listed commercial funds with a better chance of seeing a capital gain.

“Residential as an investment makes little sense,” he said.

However, gearing was what has helped people make so much money out of property. Banks were willing to lend up to 100% of the purchase price for a mortgage bond, but much less when it came to other asset classes.

Robins said investors could get some gearing for an investment in listed property, which came with far lower transaction costs than residential property.

David Alcock, a director of Broll Properties, was “cautiously optimistic” about the prospects for the commercial property sector because of low vacancies, low interest rates and a more restrictive approach to town planning.

He said prospects for commercial rentals in A-grade property were good, but double-digit escalations were a thing of the past.

But not everyone likes listed property at the moment. Marriott’s Property Income Fund is closed. Marc Thomas, marketing director for The Income Specialists, a division of Marriott, says the fund was closed in June last year because it had met its investment threshold, and asset managers kept it closed because “we think listed property is overvalued”.

Articleby: By Adele Shevel -