Rates, regulation and riding out change

By Denise Mhlanga

In the age of globalisation and digitisation, innovation is the quest of every industry and organisation, and change arrives more quickly than ever before. Add the COVID-19 pandemic and the geopolitics at play, which affects everything from supply chains to investment decisions, and it’s little wonder that the global real estate sector is reeling.

Denise Mhlanga

Freelance journalist, communications and media expert

Simi Siwisa

Head of Public Policy

Absa Corporate Investment Banking

South Africa’s precarious socioeconomic positioning, coupled with regulatory changes mean that the property industry is also facing several changes on the local front. These include an unusual interest rate cycle and the introduction of the new Property Practitioners Act.

Examining the economics

During the global COVID-19 pandemic, the residential property sector was a strong performer, driven mainly by a low interest rate environment and increased home buying, with first-time home buyers entering the market in droves. But a low economic growth environment and rising interest rates may dampen momentum in the sector. There is also new legislation for the industry to contend with.

In response to the effects of the pandemic in 2020, the South African Reserve Bank (SARB) cut the repo rate which reached a record low 3.5% in 2021. However, in November 2021, the SARB started hiking interest rates with 25 basis points (bps), and in May 2022, for the fourth consecutive time since the rate hiking cycle began, the repo rate was increased by 50bps to 4.75% – the highest rate increase in six years. But in July, the SARB raised the repo rate by 75bps to 5.5% citing upside risks to inflation on food, fuel and wage costs.

The Reserve Bank said flooding in KwaZulu-Natal and increased load-shedding will result in the economy contraction of 1.1% in the second quarter of 2022. Economic growth for the third and fourth quarters is expected to be 0.7% and 0.4% respectively.

The economy is forecast to expand by 1.3% in 2023 and by 1.5% in 2024, below the previous projection of 1.9% for both years at the time of the SARB meeting in May.

“The increasing interest rate would result in a significant shift in first-time buyers whose buying decisions have been largely influenced by affordable interest rates,” says Simi Siwisa, Absa Corporate Investment Banking Head of Public Policy.

Siwisa says against the backdrop of a fragile post-Covid recovery, rising interest rates could contribute to significant slowdown in home sales, sellers would not achieve their asking prices, and this would negatively affect consumer and business sentiment.

Furthermore, the Russia-Ukraine war plunged the global market into turmoil, and the risk of global recession has become more pronounced as countries deal with high inflation. The SARB revised its forecast headline inflation higher to 5.9% from 5.8% mainly due to higher food and fuel prices in May.

“High food and fuel prices contribute to higher inflation resulting in interest rate hikes, and all these factors influence South Africa’s property market, which has benefitted from historically low interest rates,” she says.“ Local government plays an important role in releasing available land for the development of affordable housing in close proximity to CBDs.”

Prof Francois Viruly, property economist at the University of Cape Town says South Africa’s economy has been in a long-term downturn cycle that started in December 2013. “Of concern is the length and the effects of this on household balance sheets which continue to be under pressure with inflationary pressures exacerbating the situation,” he says.

An increasing interest rate indirectly reduces housing affordability, resulting in many potential homebuyers remaining in the rental market. Prof Viruly says the low interest rate environment of the last two years was instrumental in underpinning the residential property sector amid the pandemic, and shielding the sector from coming under considerable pressure.

He also adds that there are opportunities to develop affordable housing in CBDs and increase housing supply in different segments of the market. He has long held a view that the built environment needs to move away from the 40/40/40 way of delivering housing, which means small houses of 40m2 are located 40km from work, resulting in households spending close to 40% of their income on transport.

“Local government plays an important role in releasing available land for the development of affordable housing in close proximity to CBDs,” he ends.

New property legislation – and what it means for the industry

In addition to local and global economic challenges, a new real estate legislation, the Property Practitioners Act (PPA) came into effect on February 1, replacing the old Estate Agency Affairs Act (EAAA) that had been effective since 1976.

The PPA regulates property practitioners, including estate agents, managing agents, business brokers, auctioneers (excluding sheriffs), mortgage originators (excluding those who are financial institutions), property developers and property managers, home inspectors, homeowners’ associations and companies selling timeshare and fractional titles, property developers and property managers.

The PPA has also resulted in a new property watchdog, the Property Practitioners Regulatory Authority (PPRA), which replaces the Estate Agency Affairs Board (EAAB).

Tania Marais, principal legal counsel for Africa Retail & Business Banking Legal at Absa, says the PPA’s purpose is to better protect consumers in the property industry. “We are supportive of both consumer protection and regulation of the property industry stakeholders not previously regulated.”

CEO of the National Property Practitioners Council (NPPC) Joseph Sakoneka has welcomed the PPA saying the property sector is a highly regulated environment, and this bodes well for the industry’s professionalism.

“Property practitioners need to have a sound understanding of legislation that defines the property ecosystem within which property transactions take place. This will benefit the general public as they will receive expert service based on generally acceptable principles and conventions,” he says.

Sakoneka explains that the PPA mainly seeks to help transformation in an industry where 25% of more than 40 000 property practitioners are black. The PPA has established a Property Sector Transformation Fund to educate consumers about the property sector so they can make informed decisions.

Anastasia Haji-Pavlou, a director at STBB law firm says failure to comply with the legislation can result in disqualification to hold a Fidelity Fund Certificate (FFC – a licence to trade), monetary penalties, and prohibition against receiving payment for services rendered.

Haji-Pavlou says in imposing penalties, the legislation has involved third parties. For example, it prohibits a conveyancing attorney from paying commission to an estate agent upon transfer of a property to an agent (which facilitated the sale) if that agent and agency is unable to provide an FFC that was valid at the time that the agent facilitated the sale agreement.

“The PPA has potential to improve service levels within the property sector, and consumers are better protected because of the new regulation,” she says.

However, she says the new legislation is a disappointment in that it performed a ‘cosmetic’ transformation without also looking internally to solve problems. She says its well-known that the EAAB has for years struggled to properly deliver administrative support services to the estate agent industry.

Many property practitioners face potential financial ruin because of the EAAB’s failure to issue FFCs on time despite submission of proper applications. Haji-Pavlou hopes this isn’t just a name change, but that the new authority, along with the new board will ensure it's well-equipped to provide the services they are obliged to perform by legislation.

Feeling the effects of turbulent times

Whether the PPA will have the desired effects or have little impact (or, in fact, create unintended consequences) remains to be seen. The general consensus is that it will take a year or two before its efficacy can be properly assessed.

The changes specific to real estate will intersect with broader trends, such as rapid digitisation and the rise of hybrid working, as well as the continuing economic uncertainties locally and abroad. All of this is likely to see the sector remaining in flux for the short to medium term. Adaptability will be required to navigate the uncertain waters that lie ahead.

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