Economic forces playing themselves out elsewhere in the country are supportive of Mandela Bay property in the long term.
In a recent article for the Private Property magazine, I put my head on the
proverbial block by picking KZN as the star performer of the three major
provinces over the rest of the decade. Although I have not changed my mind since
then, for similar reasons that I selected KZN as the star, I believe that we
need to take a look at the far smaller metro of Nelson Mandela Bay, which could
in many ways replicate Durban on a smaller scale, perhaps with a bit of a lag.
There are many drivers of property markets - economic growth, interest rates, or
even a neighbouring province's holidaymakers. "Displaced economic activity" from
neighbouring provinces will perhaps be a key driver of Mandela Bay's market.
When pondering the future of property markets in and around Mandela Bay, one
must consider economic events unfolding in other major regions of South Africa.
This is because there are linkages with certain other regions of the country,
and because a lack of "expansion capacity" in some other property markets could
imply that a portion of new economic activity searches for a "viable
alternative".
Property markets are about far more than just interest rates. "It's the
economy, stupid", was the war cry of the Clinton era Democrats during their
electioneering, and this applies to property too, which is strongly driven by
the economic growth of a region.
Gauteng is firmly establishing itself as the "engine of growth" not only of
SA but of Southern Africa too. It has acquired a momentum of its own despite the
reason for its initial existence, i.e. gold, having all but disappeared. Mining
is still important to Gauteng, as it is in the heart of the still mineral-rich
former Transvaal region, and is the region's services hub. SA's capital lies in
the province, as do the bulk of the country's corporate head offices. It is the
place where Africa comes to shop, and much of the country's manufacturing
activity takes place here.
And the relevance for Madiba Bay? On a smaller scale compared with KZN and
the eThewkwini metro, there exist economic linkages between Mandela Bay and
Gauteng, and there is a reasonable correlation between the economic growth of
the two regions. The correlation is partly because both regions are affected by
the same global economic forces as well as interest rate cycles. However, it
also has much to do with manufacturing being estimated to account for 31% of
Mandela Bay's economy. Many of these manufactures, motor vehicles being a good
example, end up in Gauteng, SA's biggest consumer market.
Economic linkages with the rest of SA, and dependence on some of the same
greater economic forces, i.e. interest rate cycles, has seen to it that the
nationwide improvement in economic growth over the past decade or so has not
bypassed Mandela Bay, whose real economy was believed to be growing at a rate
above the national average from 1996 to 2005.
Therefore, it is unsurprising that Mandela Bay has also gone through a
massive property price boom in recent years similar to that of the rest of the
country, as depicted in the chart below. The chart below also shows the PE house
price index expressed as a ratio of the national average price index, and one
can see that PE seems to have played significant "catch-up" with the overall
national market since late-2003.
One explanation for this is "affordability". Mandela Bay remains by-and-large a
cheaper property market than the three major metropoles. Greater affordability
is an attraction to some. As coastal holiday property prices skyrocket along the
KZN and Western Cape coastlines, an increasing number of people would have
looked to the Eastern Cape as an area offering greater "value for money". Rising
prices in other major regions have the ability to pull Eastern Cape prices up
with them.
On top of this, there is a space problem, as there is only a certain amount
of coastline in South Africa, which is filling up steadily with holiday property
developments. Land availability and holiday season congestion in certain areas
is increasingly an issue. Just as this has caused Western Cape property demand
to move up on the previously ignored West Coast, so greater national demand
could be expected to shift to the Eastern Cape.
Like other major cities, this metro has also been through some inner-city
decay and as with the other cities, there are efforts being made to reverse this
decay. The inner-city rejuvenation accompanied by the planned waterfront
development will further increase the city's attractiveness as a holiday
destination.
But it is more than merely about holiday property. Mandela Bay offers more
affordable industrial land than the other big metros, its economic
infrastructure is under far less pressure than the others, and the Coega
development will dramatically increase its transport and industrial
infrastructure capacity. As the other metros experience increasing pressure on
their economic infrastructure, e.g. their congested roads, and industrial and
commercial space becomes scarcer, so Mandela Bay will become an increasingly
popular alternative to the likes of a strongly growing Durban, both as a
manufacturing hub and as an import and export "gateway" to and from the
country's large inland economy. This would be a major long-term boost for
economic growth in the region, and in turn will also be a huge plus for the
residential property market in Mandela Bay through creating a far larger group
of employed people with far more spending power.
Therefore, when pondering the future of Madiba Bay property, economic growth
and prosperity is arguably a far more important driver of the property market
than interest rates in the long-term. Furthermore, the rest of the country's
economic fortunes are crucial to Mandela Bay property's well-being. SA is on a
long-term trend of accelerating economic growth, and this trend is not passing
Madiba Bay by. The metro may well continue to lag behind the other three major
metros in terms of property price levels, but the solid long-term property price
inflation that I anticipate in other increasingly prosperous regions, with a
gradual recovery to follow the slowdown after the end of the current round of
interest rate hikes, is the same solid price inflation trend that I anticipate
for Mandela Bay over the longer term.
What about other alternatives such as Maputo and Richards Bay? Do they pose a
threat? Given their closer proximity to Gauteng, perhaps they do in part. And
this could be an issue in a stagnating growth economy, but in an accelerating
growth economy such as SA's, there is a steadily increasing amount of economic
activity and purchasing power to go around.
In short, besides the fact that many of the economic forces that drive the
bigger economic region also drive Madiba Bay, this metro has the added advantage
of being cheaper by-and-large, as well as being less congested from both a
residential, holiday season and economic activity point of view. The metro may
for years be known as the "catch-up" province, lagging the others in terms of
price levels, but solid capital gains on property can still be expected as the
region capitalises on economic activity and holidaymakers increasingly looking
for additional space that will be increasingly scarce in the major metros.