FNB Township Property Barometer, October 2008

Summary

The FNB October Township Property Barometer survey of township estate agents, regarding property conditions in their areas, revealed a weakening market with all the indications that financial stress is building amongst households in these areas. However, it also indicated that the township markets, which lag the suburbs in the property cycle, are still in better health than their suburban counterparts. Demand activity levels, as rated by agents on a scale of 1 to 10, recorded 4.84 in Gauteng, 5.23 in Durban and 5.55 in Cape Town, all higher than the 4.1 of the suburban markets.

Demand activity levels are arguably being kept higher by a number of factors. One factor relating to the cycle is that of affordability. With financial strain having risen, agents in suburbs and townships alike estimate high percentages of sellers selling to downscale, and it is conceivable that significant numbers of suburban sellers at the lower end of those markets are downscaling back into the more affordable townships, providing some source of support for these areas. But structural changes must also play an important role. Township infrastructure, retail, entertainment and services upgrades are gradually making these areas more attractive for people with significant purchasing power to live. The fact that, in the survey, Soweto is believed to have the highest percentage of buyers being buyers from the suburbs may be reflective of these improvements, because Soweto appears to be a leader with regard to such upgrades, and its image has improved dramatically.

The broader structural changes to the country’s economy and to its labour market are also significant, with many new labour market entrants being from the so-called black population group. Many of these new labour market entrants steadily become property market entrants too, and much of this new entry is done via the township market. Hence township agents report far higher percentages of first time buyers in townships than what is estimated in the suburbs.

Supply constraints also play a role in supporting township markets, and a significant percentage of agents still report shortages of stock relative to demand, particularly in Durban. Higher demand activity than the suburbs, and arguably greater supply constraints, combine to translate into high price inflation off a very low base, and it was estimated using Deeds Office data that the average price for the major townships around the Big 3 Provinces’ metros inflated year-on-year by 19.4% for the third quarter of 2008.

Township markets cannot entirely avoid the negative impacts of rising interest rates and inflation, and a slowing economy, in the near term, and most indicators point to slowing for the time being. But ongoing upgrades to infrastructure, and the “natural” transition from being dormitory towns to being mixed use diversified economies with higher job creating ability, could see many townships’ residential markets showing longer term capital growth that beats the national average.

Township Property Still In Much Better Shape than Its Suburban Counterpart, But the Slowdown Is In Place

When FNB launched its October Township Property Barometer this month, an annual supplementary survey to its main quarterly Property Barometer, the results showed ongoing superiority in performance by townships over the former white suburbs, although a slowing trend is observed.

The Township Barometer is a survey of a sample of estate agents, operating in former Black Townships(excluding so-called Coloured and Indian areas) as classified in the Apartheid era, regarding the condition of these areas’ residential property markets. The survey was limited to the major regions’ townships, i.e. Gauteng, Cape Town and eThekwini metros.

The survey found that the township markets are, like their suburban counterparts, on a slowing trend, feeling the financial pinch caused by rising inflation, interest rates and a slowing economy to name the key economic factors. However, their performance remains significantly better than the suburban markets.

Whereas, on a scale of 1 to 10, the main FNB Barometer shows suburban estate agents rating demand activity levels at 4.1 in the third quarter, the October survey of Townships recorded higher activity level ratings of 4.84 in Gauteng, 5.23 in Durban and 5.55 in Cape Town. All township areas’ activity levels were down on previous years’ surveys.

Tell-tale indicators of a slowdown were also found in some other key survey questions, including a broad increase in the estimate of the average time that a property remains on the market until it is sold (Gauteng being the longest at 9 weeks and 2 days), as well as a significant rise in the percentage of sales being concluded at below asking price, which reflects possibly not only a weakening market but also a prevalence of unrealistic sellers. Unrealistic expectations may be especially relevant to Durban, where stock is said by agents to be in very short supply, but yet as much as 64% of sellers are being required to drop their asking price.

In all 3 township regions’ cases though, the situation remains better than the suburban markets where as much as 88% of sales were estimated to have taken place at below asking price and the average time on the market is now 20 weeks and 1 day.

Household financial pressure is nevertheless in evidence, and reflected in the part of the survey asking estate agents the various reasons for sellers selling. In Gauteng it is believed that as much as 44% of sellers are selling to downscale due to financial pressure, compared with a more moderate 24% and 29% for Durban and Cape Town respectively. These coastal regions percentages are similar to the national suburban market estimate of 26%, while the Gauteng market appears to be in distress comparable with the lower income segment of the suburban market (40%).

In these troubled financial times, the township markets have some advantages over the suburban markets when it comes to sources of support. Having been relatively neglected infrastructure- and services-wise under the Apartheid government, and having housed the poorest population group, these markets are by-and-large the cheapest and most affordable.

Since the 1990s, in a faster growing economy that has become a net job creator; disposable income growth has grown the fastest in the so-called black population group, which should not come as a surprise given this group’s entry into the economy after having been largely excluded in the Apartheid era. The strong growth in black employment numbers is probably seen in the figure for first time buyers in the townships, and with townships being the most affordable, it stands to reason that a very high proportion of total buyers in townships are believed to be first time buyers, i.e. 59% in Gauteng, 50% in Durban and 45% in Cape Town. This is compared to a mere 12% in the most recent “suburban” Barometer survey.

The townships do not have the national emigration problem of the suburbs, although, interestingly, some emigration is said to exist on a small scale. Whereas 20% of sellers in the suburbs were believed to be selling to emigrate in the third quarter, only 1% to 2% of sellers were believed to be doing the same in the townships.

However, townships have typically had a significant exodus to the more affordable end of the suburban market over the years. The most recent survey, however, suggests that it is not all one way traffic to the suburbs. In Gauteng, 31% of township buyers are believed to be from the suburbs, wanting to return to the townships, compared with 24% in Durban and 26% in Cape Town.

The drivers of this return could be numerous. While cultural factors can play a role in certain cases, another driver may well be the indication that 40% of lower income sellers in the suburban markets are downscaling due to financial pressure, which could suggest that a significant amount are downscaling back into the townships.

But a third partial reason for the flow of buyers back into the townships is believed to be the structural changes taking place in the townships, including infrastructure upgrades and retail developments.

These developments are making townships into more attractive places to live, especially for middle class households who demand quality retail and entertainment. The survey shows that the township region believed to have the highest percentage of buyers being people trying to returns from the suburbs is Soweto (38%), which may be coinciding with the rapid pace of retail developments and upgrades in this region.

The abovementioned structural changes are expected to play an increasingly important role in township residential performance, as townships follow a similar process to the suburbs of the 1970s in transforming from dormitory towns to mixed use areas with a diversified economy, greater job creation and thus purchasing power. The first step in the diversification towards mixed use areas is retail upgrades, which are coming fast and furiously in many townships, but still to follow is the development of a diversified services sector making use of office nodes in townships. Such development can have an enormously positive impact on residential property performance.

• Township house price inflation still impressive, especially in Durban

Finally, superior township property performance is not all about demand levels, and admittedly the township demand activity ratings don’t exceed the suburbs by a huge margin. It is also about supply constraints, and with townships traditionally being less traded areas due to lower mobility of low income people, many estate agents surveyed do indeed indicate a shortage of stock relative to demand, particularly in Durban. In Gauteng, 31% of respondents report a shortage of stock relative to demand, 38% in Cape Town, and a massive 68% in Durban.

And so, although demand activity levels are no longer overly impressive in the townships, stock shortages may be playing a key role in sustaining still-impressive house price inflation. Year-on-year average house price inflation for the 3 major metro’s townships (using Deeds office data) was estimated at 19.7% year-on-year in the third quarter, which compares extremely well with the FNB National House Price Index inflation rate of a mere 3.3% for the same quarter.

Split up into the 3 regions, the Durban Township House Price Inflation rate was estimated at 40% year-on-year for the third quarter, well above the 18.4% and 7.4% for Gauteng and Western Cape Townships respectively. The far-higher inflation rate of Durban townships would seem to corroborate with what Durban agents are saying about chronic stock shortages.

• Key Township Barometer Statistics and Comparisons with the suburban markets

*Townships – the term used to describe residential areas formerly limited to the so-called black population group during the Apartheid era
*Suburbs– the term used to describe residential areas formerly limited to the so-called white population group during the Apartheid era