SA Property - FNB Estate Agents Barometer: "Foreign effect" on domestic market

The "foreign effect" on the domestic market increased over the past two years, contributing to excess supply predominantly in the upper-ends of the property market.

In this report, we assess sources of inbound foreigner demand and estimate their net effect on domestic volumes, using the latest estate agents survey results.

Foreign and expat buyer in the domestic market

In the FNB Estate Agents survey, a sample of agents – predominantly in the six major metros of the country – is asked to estimate the number of foreign citizens buying homes as a percentage of total domestic volumes in their respective local markets.

The 2Q19 results show that foreigners have continually played a less prominent role in the Cape Town market over the past year. Volumes attributable to foreigners in the city has come off from a recent high of 10.7% in 2Q18 to 6.5% in 2Q19 (Figure 2). Interestingly, some of the foreign demand appears to be migrating to Durban and Port Elizabeth, possibly in the holiday homes market. Agents perceived both Durban and PE to be experiencing an increase in holiday home buying in the past six months. Nevertheless, the proportion of foreign buyers in these local markets is still lower versus that of Cape Town, at 1.9% and 5.1% of the respective local sales in 2Q19 (versus 6.5% in Cape Town). Johannesburg and Pretoria appear to have been experiencing divergent foreign demand trends in the past two quarters (Figure 3). In Johannesburg, volumes attributed to foreigners have risen from 2.6% in 4Q18 to 4.7% in 2Q19. By contrast, foreign purchases have decreased from 2.4% to 1.3% in Pretoria over the same period.

Data further reveals that the African continent foreigners are largely behind the recent uptick in foreign demand. In 2Q19, these are estimated to have accounted for 24.5% of all foreign purchases (or 0.86% of all sales), up from 18.6% in 2Q18 (or 0.79% of all domestic sales) (Figure 4). That said, demand from the African continent is still a fair distance below its 31% high (or 1.5% of all sales) in 1Q16.

The last aspect of the foreign-related buying relates to the levels of buying of domestic residential property by South African expats. On a four-quarter moving average, volume purchases by South African expats remained stable at around 0.7% of the domestic market in 2Q19 (Figure 5). Longer-term trends reveal, however, that there has been a steady decline in the prominence of expats in the domestic market since the end of 2014, when these sales were estimated at 2.4% of the market. 

Bringing it all together: Net foreign effect

We define net foreign demand as the difference between inbound demand (demand from foreign citizens and South African expats) and emigration related property sales. A negative net foreign demand means that there are more emigration-related home sales than inbound demand, and exerts downward pressure on prices.

Using data from the survey, we estimate that South Africa experienced a period of positive net foreign demand between 2011 and 2014, peaking in 4Q14 at approximately 6% (Figure 7). The trajectory has been downwards since then, and slipped to negative territory in 2Q17.

For 2Q19, we estimate that the net foreign demand was around -9% of domestic volumes. This represents the demand gap due to migration sales, which local buyers must fill to keep the market supply-demand balance constant (i.e. neither improving nor deteriorating). Unfortunately, local demand has been quite muted, weighed on by the chronically low GDP growth and weak labour markets.  The -9% net demand gap implies that 3Q19 volumes from local buyers must lift by about 1 700 units from 2Q19 (preliminary volume estimate), just to clear the migration-related excess stock – with everything else held constant. Importantly, this excludes imbalances that may emanate from other sources of domestic supply such as the supply of new housing units. In part, the negative net foreign demand explains subdued house price growth in South Africa.

Conclusion

Estimates of foreigners buying domestic residential property is perceived to have moved slightly higher, while that of South African expats buying local property have remained steady in the last two quarters. However, agents perceive both sources of demand to be significantly below their high levels from around 2015/16. The weakening in these estimates was arguably reflective of dampened investor sentiment towards South Africa in general, which in turn was probably caused in part by the country’s multi-year economic stagnation and policy uncertainty. The first half of 2019 was largely a continuation of these ailments. Notwithstanding, the improvement in foreigner buying suggests that foreigners looked through the noise took advantage of the currently attractive prices and the favourable conditions of trade (high negotiating power). Nevertheless, net migration effect further deteriorated, due to emigration-related property sales growing faster than inbound foreigner demand. At this stage, we expect net foreign demand to remain a drag on property prices, until perceptions about the country improve materially. In our view, this requires substantially higher GDP growth and tighter labour markets.

Courtesy :Estate Agency Affairs Board