Luxury property

Luxury property not immune to drop in prices

LUXURY property prices dropped due to tighter credit, rising unemployment, negative investor sentiment and falling home prices, the Alliance Group said today.

Spokesman Rael Levitt said even those with ultra-luxury homes were being forced to sell at a deep discount. "As the residential property recession grows in South Africa, jumbo mortgage loan defaults (which are defined as outstanding mortgage of over R5 million) is growing," Levitt said.

"Not surprisingly shrewd, wealthy buyers are snapping up these bargains," he said. The Alliance Distressed Asset Index indicated that the residential property market was in the third quarter of a technical recession and that repossession, insolvencies and distressed property in the luxury market jumped in the first quarter of 2009.

Mortgage stress, where bondholders were in arrears for two months or less, was showing a sharp increase across the board, from 75,000 in the third-quarter of 2008 to 130,000 in the last. Severe mortgage stress in turn, where bondholders are over four months in arrears, catapulted from 8,000 in the second quarter of 2008 to over 35,000 in the last quarter.

The index also indicated that 80% of bondholders who were in severe mortgage stress would, in all likelihood, have to sell or lose their homes. "Although distressed luxury residential property comes off a very low base, it is increasing and the interest rates cuts are only having a muted effect on these jumbo mortgage arrears," said Levitt.

Properties in previously unaffected upmarket suburbs like Clifton, Franschhoek, Camps Bay, Plettenberg Bay, Sandhurst, Hyde Park and Umhlanga had started to trickle onto the market. These homeowners, who had borrowed against their properties, were now in trouble. "A foreclosed luxury mansion in Sandhurst, Johannesburg, in December last year is a case in point. Auctioned by The Alliance Group for R65 million, the property represented the top end of the market.

As homeowners in wealthy suburbs have equity in their homes and were largely unaffected by interest rate hikes, they would not suffer too much because of housing deflation and, therefore, were excluded from mortgage distress. "But the jumbo mortgage defaults we are witnessing tell another story," Levitt said. "We have sold distressed apartments in the V&A Waterfront, wine estates in Franschhoek and beach bungalows in Clifton and Camps Bay."

The Alliance Group was also dealing with several distressed golf estates which should hit the market in the next few months. The last time the group sold off bankrupt golf estates such as Simola in Knysna and the Riviera at the Vaal was in early 2000.

A recent article in the British Financial Times entitled "Repossessed riches" reported that luxury was under increasing liquidation. Citing other struggling cities such as Miami, the Costa del Sol, Marbella and Dubai, the report anticipated that luxury resorts were struggling, leaving open the possibility that multi-million dollar golf, marina and beach retreats will be sold way below their original asking prices.

The article said this excluded some of the few supply-constrained, seriously wealthy luxury markets around the world such as Manhattan, Paris and well-established holiday home destinations such as Tuscany and Cote d’Azur. Globally it was a struggling market and forecasts for the year were not promising -- either in South Africa or overseas.

"But we believe that by 2010 there will have a rapid rebound and owners of upmarket homes will have a unique opportunity to present their properties to a world-wide audience," Levitt said. "Sadly, many jumbo mortgage holders will not benefit from this exposure at this eagerly anticipated event. The bargain hunters, who are snapping up properties now, will be the real winners at the World Cup," he said.

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