Drought, Day Zero and the fate of Cape Town’s property market

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Cape Town’s property market has consistently outperformed the rest of South Africa, but as ‘Day Zero’ looms – when taps are turned off and its 4 million residents start queuing for their 25 litres per person a day allowance at 200 collection points – the reality of what it means to live, rent and own property in the city is sinking in.

It’s hard to comprehend that SA’s favourite tourist and semigration destination, with homes selling at prices that make the mind boggle, could be the first major city in the world to run out of water. Yesterday, the City of Cape Town announced that Day Zero has been moved back to 11 May (from 16 April), due to a “decline in agricultural usage”. But dam levels continued to drop by 0.8% this past week to 25.5%.

The City says the formal residential sector uses about 65% of the water allocation, and Day Zero can only be avoided if all homes reduce their consumption to 50 litres per person per day at “home, work, school, gym or elsewhere” – meaning a four-person household should now be using less than 6 000 litres per month.

Level 6B water restrictions and tariffs have been implemented as of 1 February, and fines of up to R4 000 are being issued for non-compliance. High-consuming households have been fitted with pressure gauges and homes complying get green dot status on Cape Town’s Water Map.

Borehole and wellpoint water use must be metered and records kept, while outdoor usage is “strongly discouraged” with a maximum of one hour allowed on Tuesdays and Saturdays before 9am or after 6pm. Residents will have to submit an application to install and use a rainwater or greywater system, or other alternative water systems.

So while most Capetonians have no other choice but to adapt and hope for good winter rains, the effects of the past three years of drought will not be remedied overnight.

Will Cape Town house prices survive the drought?

FNB figures indicate the Western Cape has seen exceptional house price growth over the past five years of 50.4% to the end of December 2017, with KwaZulu-Natal trailing behind at 31.9% (graph below). However, year-on-year growth in the last quarter of 2017 slowed to 4.4%, down from 4.8% in the previous quarter and now significantly slower than the 11.1% multi-year high of early 2016.

But Cape Town Metro’s year-on-year house price growth of 9.4% in the 4th quarter of last year, up on the previous quarter’s 9%, still “defies gravity”, says household and property sector strategist at FNB, John Loos.

He says slowing growth in the Western Cape is “not too surprising” given the past 5-6 years of high growth, which saw a marked deterioration in affordability, and the severe drought may also be starting to impact on the more agriculture-driven parts of the province.

Could prices fall in one of the world’s most sought-after locations, where Atlantic Seaboard properties top the charts in super-luxury sales?

Dr Andrew Golding, CEO of the Pam Golding Property Group, reported in November that there had been a “marked increase” in sales over the past 5 years in this segment, between R10 million and R50 million, predominantly in areas such as Clifton, Camps BayFresnaye and Mouille Point, as well as Bishopscourt and Constantia in the Southern Suburbs.

Property24 data show a home in Clifton’s prestigious Nettleton Road sold for R120 million at the end of last year, with two other sales in the suburb of R37 million. In Camps Bay, several transactions between R10 million and R27 million registered in December and January this year, with Bantry Bay similarly showing sales between R12.5 million and R31.6 million.

This begs the question, as to whether international investors and buyers, as well as wealthy locals from northern parts of SA will continue to see value in Cape Town’s property. Or will they head off to greener pastures, where water is freely available?

Buyers want smaller and water-wise properties

While buyers are shifting aspirations and asking different questions, estate agents have not yet noticed a significant change in home buying patterns.

Pam Golding Properties’ Cape regional head, Richard Day says there has been some buyer hesitancy recently, but this could be attributed to several factors including affordability as well as recent political and economic uncertainty. There is also no indication currently, he says, of residents wanting to relocate permanently outside the Western Cape because of the water crisis.

“The CBD has been exempted from a Day Zero water shutdown to minimise the potential economic impact, and we are seeing increased interest in apartments in the city,” says Day. “The impact of the current water crisis on Cape Town’s tourist and property market will, to a large extent, depend on its effect on the local economy and social structures, and also the severity and duration of the crisis.”

Adrian Goslett, CEO of RE/MAX, says this is “virgin territory” and doesn’t believe there will be an immediate impact on property prices or property sales turnover, as “people still need a place to live, and these conditions affect everyone in the same way”. But homes with access to underground water will have a marketing advantage, he says, and a groundwater system will provide a great return on investment in the sales negotiation process.

“While all of us want to ‘dress’ our home for sale to achieve the highest possible price,” says Goslett, he cautions that green lawns and glistening pools may have the opposite effect on discerning buyers mindful of the dire situation.

CEO of Greeff Christie’s International Real Estate, Mike Greeff, says buyers are starting to show heightened interest in homes with considerably smaller or no gardens, while pools are not proving as prohibitive as expected. “Buyers are more concerned about the size of gardens and lawns as well as the availability of a borehole.”

The move to energy and water efficiency is becoming a higher priority than ever before, and homes with existing rainwater tanks and smart landscaping are also receiving a lot more attention, adds Greeff.

Ms Billy Rautenbach, sales director of Seeff Atlantic Seaboard & City Bowl, says they’ve had to quickly amend contracts dealing with the maintenance of a pool and garden for the period between an offer to purchase being signed and the occupation date.

Not all areas are equal and prices could slow

While the market remains strong for now, Tony Clarke, managing director of Rawson Property Group, says it would be naive to assume things will continue as normal come Day Zero, but that the situation will not be as dire as many predict. “Different areas of the property market will be affected in different ways, largely due to the different effects the crisis will have on the province’s various demographics.”

“If we take the middle- to upper-end of the market, for example, I do think sales will start to slow,” says Rawson. “Semigration, a huge driving factor in this segment over the last few years, is unlikely to continue at the same rate until we resolve our water situation. That means we’re not going to have as many affluent Joburgers and Durbanites driving demand for luxury property, and prices could take a slight knock in the short term.”

Clarke says this could actually have a valuable normalising effect on this end of the market. “We’ve seen double-figure capitalisation in Western Cape property over the last two years and that kind of growth isn’t typically sustainable. Left unchecked, there’s a risk that property values would lose touch with their underlying economic fundamentals, and we’d end up in a ‘bubble’ situation – something we definitely want to avoid.”

Denis Quayle, Harcourts Maynard Burgoyne principal, says it’s difficult to predict how the drought will influence consumer confidence as well as investor interest, but emphasises the property market is a sector that has “unprecedented resilience” to external factors, largely due to its long-term investment cycle. 

He believes buyer demand from semigrant provinces like Gauteng might slow down a little, but doesn’t see it being dramatic. “We need to understand that Cape Town’s impressive property growth and demand go beyond the water crisis. The lifestyle allure Cape Town offers, the high quality of schools, the great ROI on property, are only a few of the major attractions.”

Grant Wheeler of Engel & Völkers Southern Suburbs says they foresee values in the short term, at worse, moving sideways and then bouncing back strongly as clarity around the solutions to the water supply problems is found. Properties which are overpriced might feel the most impact, he warns.

CEO of Engel & Völkers Southern Africa, Craig Hutchison says foreign homeowners’ investment, in general, represents only a fraction of their family wealth. “To a large extent, they bought here for the weather, the relative cheap cost of living and access to the sea, wine farms, open space, nature, trails, etc.

“The water supply constraints represent a stumbling block that is being dealt with. For this very reason, there will be foreign buyers looking to take advantage of any negative price movement.”

No ‘Day Zero’ for water-wise estates 

Kobus Taljaard of Engel & Völkers Winelands region, says developers and management of the two estates of Val de Vie and Pearl Valley have been proactive and turned the water issue into a positive. “There will not be a Day Zero in these two estates – at least not in the very near future.”

The estates have disconnected municipal water and become self-sufficient, using underground water supplies and grey water purification, says Taljaard. Water restrictions still apply, but the taps will not run dry and new development phases will continue as planned.

Ross Levin, Seeff Atlantic Seaboard & City Bowl developments director, says they are already seeing that developers are reluctant to start on new developments because they fear a disruption to the water supply will halt construction, resulting in massive holding costs.

In the long term, new developments will slow and new housing supply will drop, as water constraints escalate, says Grant Wheeler of Engel & Völkers Southern Suburbs, while Day says developers are already using water-wise principles for projects and most new builds include water-saving designs.

Implications for landlords, rental agents and tenants

Joe Alves, of Just Property Blouberg, says in the past water was always included in the rental price as this was part of the owner’s levy cost. “We have recently changed this on all our lease agreements to reflect that all tenants will be liable for water costs.”

Alves says some complexes have installed prepaid water systems and this has gone a long way towards conserving water. Just Property has also sent out newsletters to all tenants informing them that they will be liable for penalties associated with ‘water abuse’.

There is no sign at this stage of tenants migrating elsewhere, says Alves, but there has been a lot more interest on properties with water-wise gardens, grey water systems or boreholes, and less on those with large gardens or pools.

It’s too early to tell

Richard Day says Cape Town residents are understandably concerned about the possibility of Day Zero and this could translate into “buyer hesitancy” until there is more clarity about how to manage the situation.

He says Pam Golding Properties is confident that Cape Town will remain an attractive option for prospective buyers. “An ongoing water crisis will undoubtedly impact on the local economy, particularly the agricultural and tourism sectors, and this could affect sentiment in the property market. But it is still too soon to gauge the full extent of this.” – Julia Hinton, Editor, Property24


Source: https://www.property24.com/articles/drought-day-zero-and-the-fate-of-cape-towns-property-market/26959?utm_source=newsletter&utm_medium=email&utm_campaign=weekly_newsletter

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