By Jurian Prins, Structured Lending Specialist The start of the recession in the US dates back to late 2007 when employment rates started falling, causing 2.8million lost jobs in 2008. GDP has been negative in Europe and Japan since the second quarter of 2008. Canada, Singapore, Australia and New Zealand struggled from the first half or 2008, with weakness spreading to the emerging markets in the second half of 2008.
Looking at the property market, South Africa is pretty much in the same boat as countries such as the USA, UK and Australia, all of which have been reporting varying degrees of reduction in property price growth.
The severe stress our economy is under is also fuelled by higher-than-CPIX wage increases and soaring oil prices. A tightening of monetary policy produced the 400 basis point repo rate increase we experienced in 2007/8. Less disposable income is therefore a direct result of the higher cost of debt and inflation-related spike in the cost of living.
This, coupled with the deceleration in GDP, is placing a damper on the general demand for property.
From a banking perspective, the worldwide meltdown has created an international scarcity of capital with the subsequent result of repriced lending. Credit used to be easily affordable and for the past few years debt extension has been massive, particularly in the States and Europe, but in SA as well. The international credit markets are experiencing a dramatic shake up and there is a new breeze of increased regulation and foresight rippling throughout the world. In this market credit is a privilege. The sheriff is coming back to town and we are firm supporters of prudent lending.
Our clients are experiencing repriced capital at all banks. The initial reaction is a hesitancy to take on debt at these ‘higher than normal’ costs. Although lending has become more expensive when viewed in terms of discounts to prime, the expected reduction in the repo rate over the next year will drastically reduce the real cost of borrowing. Prudent lending from the bank remains very competitive and even cheap compared to other forms of finance available in this market such as liquidating assets or accessing equity investments.
Lending deal volumes have certainly decreased, however, the average size and complexity of deals have increased to such an extent that we can really prove our worth by structuring debt to suit our client’s unique needs.
Our philosophy of backing experienced jockeys and strong balance sheets allows us a competitive edge when it comes to out of the box thinking and deal structuring.
We are finding much firmer demand from clients where we can structure across business entities to reduce their after tax cost of borrowings.
Focusing on the opportunities
As with most things in life, these volatile times do offer enormous scope for enterprising individuals.
There are real opportunities to consolidate, buy out competitors or bargain hunt in this market. We are increasingly being approached by entrepreneurs who had kept their balance sheets lightly geared and are now using their equity as security in order to access additional funds.
Supply far exceeds demand in the home loan market. With the excess supply, clients are likely to find themselves in a position to drive really good bargains on rental, holiday, and commercial or office properties. It is now taking close to 18 weeks to sell a house compared to around 6 weeks in 2005.
Downscaling due to financial pressure is being cited by estate agents as the single most important reason for selling. Selling due to immigration has taken a back seat in recent months.
‘Bank repossession auctions’ and ‘properties in possessions’ are suddenly the buzz words in a tough economy and we find that gross selling prices on these properties range between 55% and 75% of the true market value.
Commercial and industrial space is also being sold at very attractive yields last seen a number of years ago.
Where to from here?
Despite the reserve bank’s aggressive drive to fuel growth by cutting interest rates, the realistic view seems to be that house prices are likely to fall at a rate of double digits in 2009. It’s not all doom and gloom however, as certain pockets of areas will continue to perform well.
With rates dropping, consumers will experience some relief. Initially we think that they will probably use the cuts to ease their cash flow and reduce their debt to more comfortable levels rather than immediately increasing their spending and consumption.
The patient and sophisticated investor will revel in these times of uncertainty where a range of asset classes are priced at levels last seen years ago.
A clear investment strategy, patience and sound advice are going to be the cornerstone of our client’s wealth plans in the next year or two. At FNB Private Clients we remain focused on using a broad base of solutions to assist our clients to achieve their financial objectives.