Commercial Property News

Risky Times Require a Cautious Approach - 3 September 2010

Events in 2010 continue to remind us that, besides the proverbial death and taxes, another certainty is "change and the uncertainty that it brings."

Over the last 3 years we have also watched as a large part of the World economy was shocked into change, and unfortunately we probably have yet to see the end result...with the possible "Double dip" recession having become a hot topic of discussion. The US fiscal deficit is as wide as the Grand Canyon as the Federal Government tries to borrow and spend its way to greater economic growth, US interest rates are at a low of 0.25% meaning no further room to cut, unemployment rates are very high and consumer confidence extremely weak. The world waits with bated breath to see how this will play itself out...

Closer to home, South Africans are battling to adjust to the abovementioned global economic turn of events in recent years. Our July FNB Mortgage and Household credit report was released yesterday, showing a slight increase in the year-on-year growth rate in total mortgage advances outstanding from 3.4% in June to 4.6% in July. This slight increase is the result of what our economist John Loos often refers to as the recent "mini-recovery" in the residential property market, but the slow growh continues to reflect a financially stressed household sector (following the 2008/9 recession), as well as tight lendig criteria in the banking sector.

It's no wonder that credit remains hard to come by. At FNB we are concerned about fragile state of global economy, and the potential impact that it can still have on South Africa and its property sector, as if the last recession wasn't enough. Approval rates on residential mortgages average around 50%, with the household debt to disposable income ratio at an uncomfortably high level of 78%. The National credit regulator stats released in July report around 48% of SA's consumer base is showing some form of financial stress.

Certainly, this enviroment reflects a massive change from four or five years ago. Where is the opportunity in all of this? Well, one would think that these current circumstances would drive greater demand for rental property over the next few years, gradually improving the yields for the would-be buy-to-let buyers. This appears to be the case, with our 2nd quarter FNB Estate Agent survey having pointed to further improvement in buy-to-let fundamentals. This is probably the combination of some improvement in rental demand as well as a constrained supply of new rental stock, with buy-to-let buying having been in the doldrums for quite some time. And so, in the 1st two quarters of 2010, the FNB Estate Agent Survey pointed to an increase in gross yields on residential property to 7.9%, up from 5.6% at the end of 2009. This isn't a great yield yet, but the trend is good, and if it carries on, buy-to-let investment may yet again become an attractive option in the not too distant future.

Nevertheless, it is time that we face the stark reality, and that is that the improvement in the fundamentals that underpin the property market will in all likelihood be slow going, given the global and local economic challenges that we face, and will be up to us to achieve.

Prudence will probably remain at the forefront in the consideration of home loan applications for some time to come. The requirements for a home loan application today are different from those pre-NCA (National Credit Act), and we would do well to pay attention to what is required when looking to buy. Credit record, nett disposable income, availability of deposits and good security are ever more important.

But it is also crucial that households realise that one's finances and debt management are far too important to be left entirely in the care of a lending institution. The National Credit Act has improved the way in which lenders behave in certain instances, but lending will never be an exact science, and lenders make decisions with limited information at their disposal. In these risky global times, it is up to the household sector to take action to reduce its average debt-to-disposable income ratio, while also increasing its dismal savings rate. The beauty of tougher economic times is that everyone starts to think a lot more as to how they can do things better. We as a household sector would serve oureselves well if we took advantage of a low interest rates to, in many cases, not to borrow more but rather to reduce our debt, especially consumption-related debt. That brings me to another near certainty in life, and that is that interest rates are sure to go up. It is merely a question of when and by how much.

There is much speculation around a further rate cut in September, and we believe it very likely. Such times of low interest rates are often the riskiest times to borrow, because of the increasing possibility that the next interest rate move is upwards. Should that be the case (and ultimately it will be), are we in a position to absorb the increase in cost of servicing all our short term debt as well as increasing monthly home loan repayments? Sadly, many people never ask themselves this question prior to incurring very significant amounts of debt. This time around, we at FNB would like to think that it will be different.

Clinton Martle: FNB Home Loans Regional Sales Manager: Western Cape Region