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Junk status: where to from here?

SA’s recent credit rating downgrade and the effects of the Covid-19 lockdown have an already ailing economy reeling as government scrambles for solutions. What does this mean for the property industry?

WORDS: DEBBIE LOOTS :: PHOTOS: SUPPLIED AND SHUTTERSTOCK

For a financially challenged country in the grip of a national lockdown, the Moody’s downgrade of SA to junk status could not have happened at a worse time, according to government. The other two major credit rating agencies, Fitch and Standard & Poor’s (S&P), downgraded the country to sub-investment in 2017, and although analysts anticipated the same from Moody’s, the announcement came as a low blow to an economy already against the ropes.

CREDIT HEALTH

Moreover, navigating a national Covid-19 lockdown alongside the rest of the world experiencing its own medical and economic meltdown, SA’s latest credit rating downgrade may seem a lesser concern right now but it is significant – more than ever before. Ratings represent the credit health of a country’s government and investors, especially foreign ones, really take these measures to heart. Moreover, it is the first time since 1994 that SA has not had an investment-grade rating and this sends a message of no confidence to prospective investors.

RESET BUTTON

Could this latest downgrade be the catalyst to press the reset button on the South African economy? Or is it a final wake-up call? The jury is out and there is as much diverse opinion about government’s approach to combatting the spread of Covid-19 as there is about how best to fan back to life the fast-dying embers of our economy.

Either way, the economy needs urgent CPR and, as one of the major contributors to the overall GDP of the country, the property sector represents a vital lifeline. HomeFront asked market experts about SA’s local and international property investment potential and how they advise their clients to navigate the real estate market during this unprecedented time.

“The property market will remain a bellwether for the challenges in the country and will reflect the broader macroeconomic trends, but ultimately people always need somewhere to live” Samuel Seeff, chairman, Seeff Property Group

INDUSTRY OPINIONS

First National Bank

Even though downgrade expectations largely have been priced in, we believe sentiment will still take a knock. This could eventually affect investment and purchasing decisions in the property market. Firms will likely spend less on investment, which in turn limits employment prospects for households and, ultimately, their income growth prospects. This bodes ill for market activity. Nevertheless, the recently lowered interest rate should cushion the market. The impact on international investors is rather ambiguous. On the one hand, loss in confidence could curtail their appetite. On the other hand, weaker currency makes it much cheaper for investors to purchase property in SA. Combined with already weakening price in affluent segments, this could spur purchasing activity from international investors.

We expect the virus shock to have a sharp but short-lived impact on growth in SA. Positively, the policy response (including from the private sector and civil society) to Covid-19 has been considerable and far-reaching. Along with income support, a range of fiscal and monetary policies has ramped up the incentives for firms not to lay off workers and for financial institutions to continue lending, which could help minimise the effect of the outbreak. – Siphamandla Mkhwanazi, economist, FNB Property

Pam Golding Property group

Although the market initially reacted negatively to the downgrade, there is a growing acknowledgement that, largely, the long-anticipated decision had already been priced in.

A severe recession will mean both buyers and sellers are worse off. This will represent a significant headwind for the housing market. Given the volatility of global stock markets, confidence in bricks and mortar could increase. Because property has proved a sound investment, many will regard it as a safe haven amid the economic uncertainty. We are in for a period of weakness, the extent depending on the severity of the global recession and lifestyle changes in the wake of the lockdown.

During periods of turmoil, foreign investors withdraw their assets from emerging markets, favouring developed economies. However, SA appears to be dealing with the crisis decisively and as soon as signs of a recovery emerge, renowned sub-regions like the Atlantic Seaboard may attract foreign investment again. As banks’ balance sheets come under pressure, they may no longer be as keen to extend credit at favourable rates. This would be regrettable, because bank lending appetite is a positive factor that continued to underpin the housing market even as the local economy remained subdued. – Dr Andrew Golding, CE, Pam Golding Property group

Dogon Properties

We have been struggling to achieve acceptable prices for sellers for two years now, and the downgrade is not really going to make things much worse. SA has shown impressive leadership and incredible solidarity, which bodes well for the future. Investors and home buyers will realise that there has never been a better opportunity to achieve a good property portfolio. However, many are uncertain about their income or employment prospects, making it difficult to plan ahead.

Homeowners can alleviate strain by negotiating interest rates and investigating more cost-effective insurance policies. Short-term financial relief is available too. To astute investors: after lockdown the world will return to a new normal and properties will be available at bargain prices with low interest rates. Take advantage of this. As SA will be coming from a low base, we will have a rapid recovery. Industry, mining and commerce will start up again in a world with a new mind-set. This includes banks that will have to review their policies to assist the property industry and all other sectors for economic recovery. First-time buyers, go ahead: banks still seem to be bullish in their lending as the Reserve Bank is supportive of stimulus measures. – Denise Dogon, CEO, Dogon Properties

Seeff Property Group

Rather than impacting it negatively, the Covid-19 lockdown emergence phase will be characterised by pent-up demand in the primary residential market. Buyers are eagerly waiting to take advantage of market conditions – lower transfer duty, further cuts to the interest rate, eager sellers who are willing to reduce their asking prices and banks who are likely to be keen to lend. We do not expect to see any notable uptick in sales above R20m or in foreign sales. That said, an astute foreign buyer can certainly find excellent value in our market and standard of living. For local wealthy buyers, the upper end of the market offers exceptional value.

Sellers have already cut their prices by up to 20% and buyers will find that there is room to negotiate further – but their commitment to investing in property will depend largely on their confidence in the future of the country. We expect a busy market. Interestingly, our international partner, Hamptons International, reported that post-Brexit they experienced two of their best months in trade. The property market will remain a bellwether for the challenges in the country and will reflect the broader macroeconomic trends, but ultimately people always need somewhere to live. – Samuel Seeff, chairman, Seeff Property Group

Rawson Finance

In a downgraded economy, the government will probably divert money from certain internal investments and projects to service its debt. Foreign investors will be wary and the capital outflow may increase, which will weaken our currency. This will lead to higher inflation, impacting on the equity growth in properties as well as general commodity prices. An economy with a junk rating affects the operating environment for our lenders and as a result our five banks have also been downgraded. Most were prepared, though, and have reserves to withstand a downgrade. This is good news for the property sector, as banks will continue to lend albeit on a slightly tighter scale.
The Covid-19 crisis will cause the world economy to shrink by at least 1%, but measures are being implemented to cushion its effect. Consumers must not lose hope – economic structural reforms will assist in mitigating the impact in the short to medium term. Many companies are under financial strain, which will affect employment and prompt banks to revise their lending policies. They will have to price for risks, and this will influence the interest rates and the loan-to-value percentages they are prepared to accept. – Leonard Kondowe, national hub manager, Rawson Finance

Lanis Salmon Properties

If you have to put your home on the market now, talk to agents in your area about pricing and be honest about your financial needs so you can receive the best advice. Landlords who have good tenants in place should waive increases in rent if possible. Despite the initial negative reaction to the downgrade, there will be little direct impact on homeownership. The property industry was already experiencing a buyer’s market and this will continue, with supply outweighing demand as more properties may be placed on the market to alleviate financial strain. This will allow buyers to secure good deals and take advantage of the increased transfer duty exemptions and interest rates that have been lowered even further. Property has always proved a more stable investment and is resilient because it reflects improvements in market factors quickly. In addition, accommodation is always needed whatever situation we find ourselves in. – Lanis Salmon, CEO, Lanis Salmon Properties

RealNet

In the current circumstances, all the usual “rules” concerning a downgrade are suspended and its effect will probably be much less severe than it could have been. The playing field is being levelled by other countries and financial institutions also being downgraded. International oil prices have crashed and the markets had anticipated the downgrade and already priced it in. The Covid-19 crisis has necessitated large drops in interest rates to make things easier for consumers. Fortunately the Reserve Bank still has scope to do this. Consequently, we would advise against any “panic selling”. The real estate and other markets will stabilise and that will be the time for owners and investors to make decisions. Apart from capitalising on the weak rand, international investors’ interest may in fact be further boosted by SA’s swift and organised response to Covid-19. Such a massive effort to combat the effects of the lockdown is remarkable for a developing country. South African banks have anticipated the downgrade and built up additional reserves. This enables them to assist borrowers with reduced and deferred repayments. Meanwhile, falling interest rates will lower the cost of new loans and should encourage lending to those with good credit records. – Gerhard Kotze, MD, RealNet

Tyson Properties

The South African economy was already under pressure before the expected downgrade and Covid-19 and there is going to be a lot of uncertainty about job security, which will impact the banks’ decisions to lend money. This will reduce the number of sales being concluded and affect property prices as it did in 2008 with the global financial crisis. We are, however, not anticipating the impact to be as severe as it was then, because in 2008 we came off a very buoyant market as opposed to the subdued market we have been working in lately. International buyers only make up a small percentage of all the sales in SA and we were already seeing a decline before the downgrade, owing to concerns about land reform and investment security. The downgrade will further affect this. We may see some international buyers taking advantage of the weaker rand but international travel restrictions will hamper this. Sellers should re-enter the market sensibly after lockdown. There will be more stock because of job losses so it is crucial to price properties correctly. There will be fewer buyers and a bigger selection to choose from. Working on a sole mandate will allow real estate companies to invest more in the sale through video tours and digital marketing. Tyson Properties agents are ready and trained to deal with sales and rentals under strict coronavirus guidelines. – Chris Tyson, MD, Tyson Properties

We would advise against any ‘panic selling’. The real estate and other markets will stabilise and that will be the time for owners and investors to make decisions” Gerhard Kotze, MD, RealNet

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