Demand for property on the rise? Not possible with so many empty units on the market?
For the first time in more than a year and a half estate agents are again advertising to get more properties on their books. This may seem to fly in the face of the general perception that the property market is inundated with unsold properties but talking to agents, I found that there is some sense in their request for an expanded portfolio.
Huge was my astonishment when last week I noticed an advertisement stating “Properties Needed.” This was not the usual serendipitous notice one finds on supermarket billboards, these were serious advertisements through an established channel. Then this week another came through stating “Properties needed urgently.”
What estate agent in his or her right mind would want more properties when those they have are not moving? But after a few discussions with people in the industry, I realised that most property inventories are so low, they basically consists of five, six or maybe seven properties and these have all been sitting on the books since the end of 2016. One agent told me that in the first quarter of 2017, he did not have a single enquiry, nor any of his colleagues in a fair-sized upmarket estate agency. Furthermore, during the rest of 2017, all enquiries together did not exceed ten.
What followed then is that a large number of smaller agents simply closed shop and that many others found something else to do. It was only by around April this year, that this particular agent started receiving five or more enquiries per week. The outcome of this protracted lull was that those agents who remained in the trade, did not hunt for new prospects. They simply kept what they had on their books not bothering to find more properties. Then, almost unnoticed, something changed, and they soon realised their inventories were vastly inadequate.
It is relatively easy to explain the year and a half freeze in the property market. Those owners who wanted to sell did not fetch the prices they wanted, and those who wanted to buy could not get financing. The few deals that went through only happened after desperate owners were prepared to discount their properties by anything between 20% and 25%. In other cases, a property transaction was successful only after a prospective buyer had sold another property, lessening his dependence on financing for the new transaction.
For the rest, a well-known mechanism kicked in. Property owners who wanted to sell but could not get an offer matching their valuation, simply took the property off the market. Those who had financed during the economic boom up to the end of 2015, had to sit out the depressed conditions. If they were to sell, technically they would be under water. Grinding through the dead period, even if it becomes a major drain on cashflow or requires additional short-term financing, is often less damaging financially than selling at a loss. So this group of sellers also left the market.
More than twenty years ago, a highly respected Windhoek estate agent, Mrs Lettie Carstens, told me not to worry when the property market goes down or freezes. From her decades-long involvement in property, her experience has taught her that a slow property market is just that – slow, but not dead. That wisdom she imparted to me in some detail and it has not been proven wrong over two decades.
The fact is, property constitutes a certain value and whether the prospective buyer builds his own, buys from a catalogue or buys an available property, there is a certain cost level below which it is not possible to construct or replicate that property. Add into this location, condition, size, furnishing, zoning and business rights, and it is not difficult to figure out why property has a natural floor.
Even in Windhoek with its vastly inflated property prices, there is a certain level below which property can not go.
In Namibia, there is another dynamic which naturally tends to stabilise the market. Property constitutes roughly 40% or more of the large banks’ assets. So, if the property market goes haywire, the fallout will be much bigger than just an unfortunate home or factory owner that no longer can afford his property. Values below a certain threshold will be disastrous for the banking sector. If too many dominoes fall on the ownership side, eventually the banks’ dominoes will also fall. The overall property market has to stay at a specific valuation level otherwise the entire economy is threatened through the banks’ excessively large exposure to property on their balance sheets.
The property market will probably not come out of its slump overnight. The history of the past year and a half has shown that prices in the lower and middle segments have stagnated, that volumes have all but collapsed, and that the upper segment is in the throes of a major correction, but I do not believe these factors will impact the overall market much. As unbelievable as it seems now, property will remain a good investment despite the market being in the process of rebalancing, and sooner rather than later, the immediate impact of credit legislation, the slow uptake on new credit, and the sluggish property market will be something of the past. If it were not so, estate agents will not be looking for inventory.