Areas and Places

Strong demand for rental properties will push up Southern Suburbs investment buys in 2016

Cape Town’s Southern Suburbs are renowned for leafy avenues, scenic mountain views and in suburbs such as Bishopscourt and Constantia, for rambling luxury estates that would fit comfortably anywhere in the world. This six-bedroom architectural masterpiece set in 3.5 acres of pristine landscaped garden with uninterrupted views across the Constantia valley is on the market for R115 million.

Cape Town’s Southern Suburbs are experiencing a heightened demand for homes to rent which resulted in a sharp increase in rental prices in 2015 and augers well for a steadily growing demand for investment properties in 2016.

The consistent popularity of this established residential area is largely due to its convenient location and wide variety of homes catering to the broader market. This is according to Arnold Maritz, Southern Suburbs Co-Principal for Lew Geffen Sothebys International Realty who says: “In areas such as Plumstead, houses that achieved rentals of R10 000 per month in 2014 have seen escalations in excess of 50% and more, and are now fetching rentals of R15 000 and even R16 000″.

“In apartments, this trend is especially prominent in the Kenilworth and Claremont areas, where units which brought in rentals of R10 000 in 2014, realised rentals of between R12 000 and R14 000 in 2015″. Maritz adds that despite these hikes, rental properties do not remain on the market for long before being tenanted.

“With banks still showing caution to lenders, many people are opting to let out their properties to service the bond and, with limited stock available, tenants are prepared to pay the prices on offer.”

Maritz says while the demand for rentals soars, the market for sales in the Southern Suburbs is being directly affected by the subdued performance of the national economy.

“It follows that the general state of the economy will have a more significant impact on the potential growth of the prices of normal freehold properties, as will the ongoing increases in the cost of rates, electricity, water and other utilities”.

“As Southern Suburbs cover a large expanse, some areas and sectors have outperformed the norm while others fared less well, but as a whole, during the year to date the total number of properties sold across these areas decreased by 4.7%.”

Comparing the number of sales in 2015 with 2014 the contrast is apparent. For example, the area of Pinelands and the sectional title market in suburbs south of Rondebosch experienced an increase in sales of between 10% and 17% while the volume of freehold sales in Newlands and Wynberg decreased by between 35% and 50%.

Says Maritz: “And while Southern Suburbs’ total sales value or turnover has increased by 1.1%, per property the average sales price achieved in 2015 has been 6.1% higher than in 2014.”

In terms of the total sales price achieved per suburb, the volumes above again had a significant impact, with Pinelands and Sectional Title faring best, and Wynberg, Newlands and parts of Constantia showing the highest decrease in turnover.

The median sale prices tell a different story and here the best performing areas were the security estates in Constantiaberg such as Silvertree, Stonehurst and Steenberg, followed by Constantia and Tokai.

“These areas all saw average selling prices surge by 20% or more. In contrast, the median price of sectional title properties in Wynberg, Rondebosch, upper parts of Bishopscourt, Claremont and Kenilworth increased by no more than 3% in the last year.”

Says Claude McKirby, Maritz’s Co-Principal in the Southern Suburbs: “As property prices do appreciate each year, it becomes more difficult for first time buyers to gain a foothold in the market, dampening the prospects for younger house buyers and prompting the more affordable route via sectional title property, which has the added benefits of security and convenience”.

“Mortgage originator ooba recently reported that 54% of all their bond applications in October 2015 were from first-time buyers. In our market we estimate that no more than 20% of our sales involve first time buyers, more frequently than not looking to buy sectional title properties”.

“This growing desire for sectional title living with all its inherent advantages has given rise to an increase in sales activity and our prediction for the Southern Suburbs is that demand and supply will even out more during 2016″.

“More developments will come to market in the form of sectional title schemes as well as small, freehold security complexes, and the prices of these types of property will increase above inflation.”

McKirby says this is good news for investment buyers who are on the rise, although they still comprise a very small percentage of the market.

“But with the uptake in sectional title units gathering momentum and more developments coming on line to address the increase in demand, we expect this percentage to grow.”

Areas such as Claremont and Rondebosch have seen a number of larger sectional title apartment blocks developed while smaller townhouse security estates have been established in suburbs like Wynberg, Newlands, Upper Claremont, Kenilworth and Constantia.

Maritz says that in terms of the number of properties sold, sectional title properties have generally performed better than freehold. But when considering property price growth, the freehold properties within security estates have fared best of all, followed by freehold sales in suburbs as diverse as Tokai, Constantia, Plumstead, Claremont, Harfield, Lynfrae and Hout Bay.

“Year on year, reviewing the suburbs between Wynberg and Kirstenhof, a total of 200 sectional title properties sold in 2015 compared with 171 in 2014, reflecting an increase in volume of 17%. Between 2014 and 2015 the median prices for these properties also increased by a healthy 11.4%”.

“In freehold property, taking Tokai for instance, although five less units sold in 2015 compared with 2014, the median price for sales increased by a notable 21.4%”.

While the negative impacts of the economic slowdown have had the effect of decreasing the overall volume of property sales, another factor to consider is the increase in transfer duty which, in conjunction with the creeping effect of capital gains tax, has especially affected the upper end of the market.

This has contributed to the reduction in the number of sales and has also prompted some prospective sellers to renovate rather than sell and upgrade.

McKirby adds: “The time taken to sell a home is also indicative of a slight slowdown in the market. During the first half of 2015 the average period for a property on the market was very similar to 2014, but this has gradually increased during the latter half of the year”.

“Similarly, the number of buyers responding to the launch of a new listing has also begun to show some decrease during the second part of 2015, with a marked increase in the number of show days on Sundays. This indicates to a shift towards greater equilibrium between supply and demand, with buyers becoming more price-sensitive and overpriced properties remaining on the market for increasing periods of time”.

“This is clear signal to sellers that market-related pricing is essential if they want their properties to move quickly.”

McKirby says that buyers are also being affected by the increase in property prices as banks may be reluctant to take on unnecessary risk, especially when faced with the possibility of further interest rate hikes in 2016.

For the first time in recent years, ooba’s approval rate declined to 71.9% in October 2015, from 76.4% in October 2014. The deposit percentage paid in 2015 reduced to 12.1% compared to the average 14.5% deposit paid in 2014, while the average bond value approved in the third quarter of 2015 was R898 798 which is 8.6% higher than that of a year earlier.

But Lew Geffen, Chairman of Lew Geffen Sotheby’s International Realty, is upbeat about the Cape Town property market for next year, and the Southern Suburbs in particular: “From a return on investment perspective we believe that in 2016 the average cost per square metre of real estate in Cape Town will remain slightly higher than the rest of South Africa”.

“This is for the same reasons that originally gave rise to that situation, which include the natural beauty of the region, the limited availability of land and the more efficient and effective manner in which the city and province are being administered”.

“This is also why many home buyers from other provinces, particularly Gauteng and also from KwaZulu-Natal, are even prepared to compromise on size in exchange for the considerable benefits of living in Cape Town. For families, the Southern Suburbs is the natural choice because of its fantastic range of amenities, and because it is home to some of the best schools in the country.”