The impact of escalating fuel prices on real estate

Move closer to your workplace, drive less, take a bus, spend less and try to reduce the use of credit.  These are the choices consumers are faced with following the recent spate of fuel price increases.

By Jan Davel

The effect of these increases is probably more far reaching than most South African consumers realise. For example, fuel has a direct influence on a country’s agricultural production and logistics. As soon as fuel costs increase, so too does the cost of everyday produce like vegetables, meat and grains. Not only is it more expensive to produce, it is also more costly to deliver to the local supermarket to meet consumer demand.

For consumers less disposable income means less money with which to purchase commodities and services. Businesses in turn will be less profitable and may be forced to cut their staff complement, leaving yet more consumers with little or no disposable income.

Job creation / employment

FNB Household and Property Sector Strategist, John Loos, states that although South Africa seems to be moving out of recession, the usual post-recession cycle of increased job creation is still slow.

Although South Africans may perceive more job security, expecting less retrenchments than at the peak of the recession in 2008/2009, smaller profit margins may yet result in increased SME closures and corporate retrenchments. Such a ‘simple’ fuel price hike may prove rather detrimental to President Zuma’s goal of creating five million jobs by 2020.

Absa Home Loans’ Property Analyst, Jacques du Toit, forecasts the growth in real gross domestic product (GDP) at 2,7 percent for 2012 (from 3,1 percent in 2011), which will impact levels of employment in the economy.

In terms of the property market, indebted owners may be forced to sell or move into distressed status at the banks. Those holding on to their property amidst increasing financial pressure may consider selling and moving closer to their place of employment. For the Gautengers, such a move may bring relief from the cost of using the Gautrain and the proposed e-tagged toll roads, yet another burden to bear on top of the increased fuel price.

Entrepreneurs favour real estate

Business confidence in real estate is however still evident. RealNet’s National Business Development Manager, Tommy Thompson, agrees and states “RealNet Holdings added 24 franchises to its franchise stable in 2011. This shows that entrepreneurs, who have a wide choice of franchised businesses, still believe in real estate as a promising investment.”

“Some existing franchisees have also bought a second and even a third RealNet franchise territory during 2011, which also happened to be the year in which RealNet achieved the highest registered property transfers of the past four years,” he continues.

Franchising survived the recession far better than independent businesses. Franchisees know that by being part of a real estate franchise group such as RealNet, they are in business with a tried and tested business partner who has been attending to one of the primary needs of man – whether it be a shelter or a status symbol. Real estate is one ‘product’ that will remain in demand, albeit slightly slower at times for reasons not related directly to the ‘product’ itself.

Property supply and demand status

South African sellers are still overvaluating their properties primarily due to the 2004/2005 house price growth boom and indebtedness.

FNB’s John Loos reports that March 2012 showed the highest year-on-year growth since June 2010. For 2012 Loos anticipates an average nominal house price growth of six percent.

However, since nominal growth levels can be deceiving Joe Public is advised to take note of economic indicators in real growth terms. Real growth terms take into account the Consumer Price Index (CPI) which means that the expected average house price growth of six percent, in real growth terms, decreases to anything between zero and 2,3 percent, depending on the size and location of the property.

But take heart, even considering the real growth house price data gathered by Absa and FNB over the past decades, house prices are still moving upwards. In 1995 the average house price was around R350,000 and in 2010 it was nearer the R800,000 mark.

Challenges

The affordability of property is still primarily influenced by access to significant deposits and bond finance. Banks are continuing their cautious lending approach and indications are that the status quo will remain for the foreseeable future.

At present, properties remain on the market for approximately three to four months. It also stands to reason that the additional financial pressure on household spending power and indebtedness will likely result in even greater difficulty in securing bond finance.

Property supply still exceeds demand, and though the gap seems to be narrowing slowly, it will probably still take some years for the balance to recover completely.

International interest

RealNet was recently approached by a French company wanting to secure retail land in South Africa.  International interest such as this bodes well for job creation and the eventual recovery of the property industry.

Consumers may have been blasé about their financial planning in the past, but now finances and asset acquisitions must be planned carefully. While it may take longer than before to reflect significant capital growth, real estate still remains one of the best investment commodities one can acquire and still one of the very few investments one can make by using bank funding.

That’s why RealNet realises that it is in the business of building long term relationships with its clients, not simply providing a quick, short-lived, once-off property service.    

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