Port Elizabeth Residential Property Market

Private Property South Africa
John Loos

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.

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