Dramatic fall in rand fails to attract more foreign buyers to South Africa
Last Updated: February 11, 2016
The house price index for medium-sized houses rose by 3.9% y-o-y to November 2015, according to ABSA. However when adjusted for inflation, the average house price actually fell by 0.8% - a slowdown from the 9.2% (3.2% in real terms) y-o-y price increase during the same period last year.
Small-sized houses rose least, their prices up only 1.8% (-2.8% in real terms) y-o-y to November 2015. Large-sized houses, on the other hand, rose by 8.3% (3.4% in real terms) y-o-y.
In November 2015:
- the average price of small homes (80-140 sq. m.) was ZAR 877,000 (US$ 52,293)
- the average price of medium-sized homes (141-220 sq. m) was ZAR 1,241,000 (US$ 73,997)
- the average price of large homes (221-400 sq. m) was ZAR 1,989,000 (US$ 118,599)
"Nominal house price growth of 5%-6% is forecast for 2016, with the risk to the downside against the background of economic and consumer sector trends and prospects...real house price growth is expected to remain under severe pressure in the next 12-18 months," says ABSA.
South Africa's rental yields are good
South Africa offers good rental yields in its large cities, especially on smaller apartments.
Gross rental yields for Johannesburg apartments, i.e., the gross rental return on a property if fully rented out, are good, ranging from 6.5% to 9.3%.
Gross rental yields on apartments in Cape Town range from 5% to 8.3%.
So Johannesburg yields are higher, for the sizes that we have looked at. In previous years rental yields in Johannesburg were significantly higher. This difference is not so obvious this year.
In Cape Town is the most popular tourist destination in Africa. Its amazing beaches and weather are ideal for retirees and foreign property buyers. Atlantic Seaboard properties are among the most sought-after because of the beaches and cliffs – upscale neighbourhoods like Bakoven, Bantry Bay, Camps, Clifton, Fresnaye, Green Point and Mouille Point. Some houses nestled on cliffs have sweeping views of the Atlantic Ocean. City Bowl, which includes the central business district of Cape Town, is another upscale residential suburb. It is one of the most stable residential markets in Cape Town, because of its prime central location and vibrant cosmopolitan lifestyle.
Renting a Cape Town apartment will cost from around USD 15 to USD 17 per sq. m. per month, i.e., a 120 sq. m. apartment costs around USD 1,700 per month, and a 300 sq. m. apartment costs around USD 4,650 per month.
The most desirable neighborhoods in Johannesburg are in the north of the city, including suburbs like Dunkeld, Hyde Park, Houghton, Illovo, Inanda, Melrose, Parkhurst, Parktown, Parkview, Sandhurst, Saxonwold and Westcliff. Nelson Mandela has a house in Houghton.
Rental income tax is high
Rental Income: Annual rental income is taxed at progressive rates, from 18% to 40%, for tax year 2014-2015. It is taxed at progressive rates, from 18% to 41%, for tax year 2015-2016.
Capital Gains: Capital Gains Tax (CGT) (CGT) is calculated by adding 33.3% of the capital gain to the individual’s income for that year, and taxing that income at the individual’s marginal rate of income tax.
This curious manner of calculating CGT means that the maximum tax rate applicable is approximately 13.653% (33.3% of the maximum tax rate of 41% for tax year 2015-2016).
Inheritance: Estate duty on inheritance is levied at 20% of the dutiable amount of the estate. Dutiable amount is equal to the value of the estate less ZAR3,500,000 (US$280,000).
Residents: Residents are taxed on their worldwide income at progressive rates, from 18% to 41%, for tax year 2015-2016.
Buying costs are high
Total roundtrip buying costs are between 8.9% and 27.35%, inclusive of the 7.5% estate agent’s commission (plus 14% VAT). Seven procedures are involved in registering a property transfer, completed in about 36 days.
Rental market laws in South Africa are pro-landlord.
Rents: The passage of the Rental Housing Act [No.50 of 1999] marked the end of rent control which had been in place since 1976. This paved the way for the entry of investors to the buy-to-let industry.
Rent Tribunal: If the tenant feels that the rent is too much, he can file a protest with the Rent Tribunal. However, only three of the nine provinces have established such tribunals, to the advantage of landlords.
Bleak economic outlook in 2016South Africa barely escaped technical recession after posting 0.7% q-o-q growth in Q3 2015, following a contraction of 1.3% q-o-q the previous quarter, according to Statistics South Africa. On an annual basis, the country's real GDP rose by 1% in Q3 2015.
The current pace of growth will not be enough to reduce unemployment. In the third quarter of 2015, South Africa's unemployment rate stood at 25.5%, or around 5.4 million, according to Statistics SA. From 2000 to 2014 average unemployment was persistently high, at 24.8%.
To cut the high jobless rate to 14% by 2020, real GDP would need to grow an annual average of 5.4%, according to the government’s National Development Plan. However, this is unlikely to happen. In 2016, South Africa's economy is expected to expand by only 1.5%, followed by 2.1% growth in 2017, according to South African Reserve Bank's (SARB) deputy governor Daniel Mminele. ‘‘Growth continues to be constrained by certain cyclical elements, such as weaker global trade and commodity price declines, as well as more idiosyncratic factors,’‘ says Mminele in a speech.
The South African economy grew by just 1.4% in 2015, after expanding by 1.5% in 2014, 2.2% in both 2013 and 2012, 3.2% in 2011, and 3% in 2010, according to the IMF.
In December 2015, Fitch Ratings downgraded South Africa's credit rating to BBB-, just above junk status. Fitch also changed their outlook from stable to negative due to lower than expected economic growth. Standard and Poor's (S&P) also lowered South Africa's outlook from stable to negative.
South Africa is Africa’s biggest economy, with an estimated population of 54.9 million and a GDP per capita of US$ 5,784 in 2015. It has formidable manufacturing and financial sectors. It is the world’s largest exporter of gold and platinum. Tourism is also a key source of foreign exchange.
President Zuma's dwindling popularity
ANC leader Jacob Zuma became president of South Africa in 2009, despite corruption charges. Zuma is an economic leftist who supports wealth redistribution, but has assured foreign investors that their interests will be protected. Zuma is a polygamist who has married 6 times and is reported to have 20 children, including one "love-child".
He has pledged to create 5 million jobs by 2020, but that target looks increasingly unrealistic.
Critics claim that Zuma is indecisive, appeases factions within the party, while safeguarding his own position. Yet African National Congress support seems only to fall slightly, and in the recent elections the ANC vote (65.9%) crushed the liberal Democratic Alliance (16.66%) and the newly-formed radical leftist Economic Freedom Fighters (6.35%).
Populist measures are not out of the question. Zuma told a ruling-party rally in the northern town of Polokwane in January 2014 that foreigners might face restrictions on buying landed property, and be limited to leasing land. Foreigners can now own immovable property without restriction.
Land redistribution is an ongoing issue. Farmland is still mostly white-owned. Officials have signalled that large-scale expropriation is on the cards, with the government aiming to transfer 30% of farmland to black South Africans.
The president recently got a public approval of 36%, down from 64% in 2011. President Zuma has faced more than 700 corruption, tax-evasion, money-laundering, and fraud charges (which were eventually dropped), among others.
In December 2015 he fired the well-respected Finance Minister Nhlanhla Nene, replacing him with an unknown backbencher, David van Rooyen. The reasons were obvious: Nene had opposed extravagant state spending, including on state-owned South African Airways (whose chairwoman Dudu Myeni is President Zuma's close friend). Nene had also barred an acquisition of a new presidential jet, and advised that South Africa could not afford a trillion-rand Russian nuclear deal.
Nene's firing undermined investor confidence. Middle-class South Africans flooded the streets of Johannesburg, Pretoria and Cape Town on December 16, 2015 as part of the #ZumaMustFall campaign. President Zuma revised his decision a few days later, appointing Gavin Gordhan as finance minister. Investors calmed after Gordhan's appointment, since he had already served in the same position from 2009 to 2014.
Although President Zuma remains powerful within the ANC, his deteriorating popularity is likely to cost ANC losses in the upcoming 2016 municipal elections.
Former Health Minister and ANC veteran Barbara Hogan has publicly criticized President Zuma, stating that Nene's dismissal "crossed a line". “We do not have the power to recall the President. Only the ANC has the power to recall. This man is creating economic sabotage,” said Hogan.
Currently, President Zuma is promoting his ex-wife Nkosazana Dlamini-Zuma, African Union's chairwoman, as his successor. Dlamini-Zuma's main competitor to succeed the presidency is Cyril Ramaphosa, a former union leader.
Although political analysts predict ANC to experience a drop of below 50% support in major cities, the party is also expected to remain in power. “The ANC is not about to lose power, and Jacob Zuma is aware of that fact, which is why he acts with such brazenness,” according to Prince Mashele of the Pretoria-based Center for Politics and Research.