Things are looking promising for inner cities' property markets - even Joburg.
There's so much positive going on in South Africa's property markets these
days that some more cautious-minded individuals could be forgiven for believing
that this is too good to be true, and that it will surely "end in tears".
In the 80s and 90s we had the exodus of many retailers and companies to the
former white "suburbs" (if Sandton and the likes can still be called suburbs),
to the apparent detriment of the traditional Central Business Districts (CBD).
Arguably the worst-hit was that of Johannesburg. Now, there is widespread talk
of turnarounds in the fortunes for the likes of Johannesburg and Durban CBDs,
while Cape Town can be said to have "made it" in terms of averting a Joburg-style
catastrophe.
The big question is will the rejuvenation efforts in the CBDs ultimately
succeed? While nothing in the future is ever certain, the driving fundamentals
of inner city rejuvenation appear better now than in the previous decade or two.
This is mainly due to accelerating economic growth and a shortage of economic
infrastructure such as roads and electricity distribution infrastructure to name
but two.
There has also been an increasing shortage of commercial property space,
manifesting itself in declining vacancy rate trends in retail, office and
industrial space categories.
Not surprisingly, therefore, inner city property values have had price booms
similar to the rest of the country, as the massive decline in interest rates
since 1998 along with stronger economic growth has boosted property demand,
while supply has not adjusted rapidly enough. However, price booms have not
necessarily changed the relative position of inner cities, with much of Joburg
inner city still lagging the city's decentralised "suburban" areas.
I believe that the revival of the Cape Town inner city, now well-advanced
compared to the other major inner cities in SA, has demonstrated the importance
of an upmarket precinct which is an attractive playground for the "rich and
famous". One wonders what Cape Town would look like today should there have been
no V&A Waterfront development. I doubt whether nearly as many affluent people
would have lived in the city bowl today. What one also sees now is outward
growth of development from the core waterfront development, with the
International Convention Centre and some top hotels being built outside of the
waterfront precinct. Therefore, the precinct was the catalyst for development,
which has now "grown wings" as it moves towards the city.
I believe that over the years Durban is set to achieve a similar result, with
dramatic upgrading of property surrounding its own new waterfront development.
Johannesburg inner city, however, has no such upmarket precinct in the pipeline,
and rejuvenation efforts are arguably far more piecemeal. Nevertheless, on the
Western side of the city things are looking promising as major South African
lifestyle changes loom.
A rising shortage of office space in the Gauteng region is forcing many to
re-examine the inner city as an alternative. This can be expected to drive a
degree of building renovation for the purpose of office space, which in turn
will serve to bring more employees to the inner city on a daily basis as the
economic activity of the area grows.
We know, however, that the increased spending power caused by an increase in
working people in the inner city doesn't guarantee major benefits for the area.
Many corporates have everything that "opens and shuts" within their buildings,
and many employees almost never leave the building from the time they drive into
the underground parking until the time they drive out to go home.
Important, therefore, will be to raise the number of residents (as opposed to
employees alone) with high levels of spending power in the inner city. The
increase in traffic congestion in the major metros may ironically be on the
brink of providing a solution to this challenge through driving major changes in
living and commuting patterns. It will do this by raising the desire of an
increasing number of commuters to reside within closer proximity to their place
of work, because time on the road is effectively a cost.
The diagram below indicates a traditional living pattern of many more
affluent South Africans - out in the suburbs with significant commuting distance
and a holiday residence on the coast for some.
For many, traffic congestion may change this pattern of commuting and
property ownership. Instead of owning coastal property, which is not regularly
accessible for the "Vaalies", inland "platteland" property may become more
appealing, possibly along the Vaal River in towns such as Parys, or even in
towns such as Potchefstroom. These properties could then in many cases become
these people's primary residence, with their secondary residence being a smaller
one in the city, for instance a luxury apartment near to work. Already, many are
buying "platteland" primary residences, as witnessed by the massive residential
growth in Hartebeespoort Dam area. However, most of the commuters living there
commute daily back and forth. Far worse traffic congestion in coming years will
make this daily commuting option less attractive, raising demand for a weekly
commute to the secondary residence in the city.
The above pattern of living, on a large scale at least, is probably a good
few years away. What is happening right now, arguably on a far larger scale, is
a proliferation in demand for CBD accommodation, as both young professionals and
students attempt to keep their transport costs and time low. This, to me, is the
Joburg inner city middle-to-upper market that will flourish in the near term.
Much of this market (at least the white component of it) resided in Hillbrow in
bygone years. Many of these people head off to the suburbs later in life as they
start families, settle down, and desire more space. In future, an increasing
number may move from primary inner city residence to the abovementioned
platteland-CBD residence-place of work living/commuting pattern, thus retaining
an inner city base.
This group is more concerned with keeping its cost low than it is with luxury
retail and entertainment, and will move into the inner city in significant
numbers prior to the development of a precinct of the standard of a Cape Town or
Durban Waterfronts. This group can be seen in increasing numbers in apartments
in Braamfontein, which incidentally has the benefit of being near to Wits
University.
This group of individuals can be expected to drive the improvement in the
quality of retail and entertainment in the city by raising the purchasing power
significantly. This would be the precursor for the arrival of significantly more
affluent residents, who as yet probably do not have the appetite for the inner
city.
Later, expect an increasing number of middle-to-upper income people to
actually make the inner city their permanent residence. This will be driven by
the combination of an improving inner city environment along with a declining
average size of household. An increasing number of "double income no kids"
families are expected in future.
Important to realise, however, is that the inner city, with its high density
of economic activity and thus low potential transport cost for residents, will
continue to be like a magnet to SA's very poor.
A significant portion of SA's inner cities can thus be expected to be homes
for this group. However, improvements to the poorer parts of the inner cities
are at hand too, on the back of a significant amount of experience that
landlords in these areas have gained over the years in managing buildings.
Tight security measures, including access via finger print recognition and
strict control of visitors, are probably leading to reduced risk of building
hijacking and non-payment of rent.
Therefore, even for the troublesome Joburg inner city, the future looks
significantly brighter. While there is no single precinct being developed on the
waterfront scale, I expect that the establishment of a new Gauteng Government
precinct in the South Western side of the city will be the catalyst for
significantly higher demand for luxury residential and retail space in this
area, with the Gauteng Government area linking precincts run by some large
corporates to the south, and FNB precinct to the North in one enlarged precinct
that is well-managed, clean and upgraded. Suddenly, living in this part will
become far more attractive for high income individuals. The success of
Braamfontein to date should spill over into this area.
To the east of the city, it looks set to remain a lower income residential
affair, though improvements will be driven by far better building management
than in bygone years.
All-in-all, therefore, the future of the country's inner city property
markets looks brighter than it has in decades, driven in part by a mounting
congestion problem that is set to change the way that South Africans live, work
and commute.