Joburg’s inner city property boom

22 November 2004

South Africa’s inner city residential market is being driven by “staggering demand” and “attractively low property prices”, according to a recent survey.

And Johannesburg’s property sales, although off a low base, have been rising steadily, according to the Trafalgar Inner City Report 2004, released in October.

Conducted by Trafalgar Property and Financial Services, a company that manages some 2 500 units in the city, the report aims to provide useful and practical information for investors, tackling some of the risks they might run into in these markets.

“Johannesburg, perhaps more than other cities, is where an inner city turnaround has been most evident,” the report says. “Strong and consistent demand for residential space combined with a stock of properties that are cheap to purchase, offering tempting potential for capital growth, are a potent combination for investors.”

The report was compiled from three sources: questionnaires from 250 tenants resident in buildings managed by Trafalgar, a forum panel discussion attended by industry specialists, and data from the city’s Deeds Office.

Joburg’s residential heart
Johannesburg’s residential heart is referred to as Zone 4, and consists of eight suburbs: Hillbrow, Berea, Yeoville, Lorentzville, Troyeville, Judith’s Paarl, Bertrams and Doornfontein. Around 208 000 people reside in this area, and residential properties range from freehold, to medium density to large blocks of flats.

The report compares Johannesburg’s Zone 4 area to Durban’s Albert Park suburb and the suburb of Sunnyside in Pretoria, both of which are similar to Joburg’s inner city area in that they are high-rise residential areas with a similar socio-economic profile, but with smaller populations.

Rentals in Joburg have experienced a 33 percent growth, slightly below Sunnyside’s 39 percent, but considerably below Durban’s 114 percent growth.

Property prices in central Johannesburg have risen from an average of R28 470 in 2000 to an average of R42 339 in 2004, while 663 sectional title units have been sold in the inner city since 2000. This represents an average sale price of R417/square metre over the past five years. Sales in Durban were 2 556 units over the same period, while 3 273 units were sold in Pretoria.

Andrew Schaefer, managing director of Trafalgar, says the possible reason why Joburg has lagged behind the other cities is that its residential areas “degenerated to a greater extent than the other cities,” coupled with a more virulent problem of slumlords and “flat hijackers”.

The recovery therefore, is much slower, but the demand for residential space is equal to the demand in other cities.

Problems
“Flat hijackers” are people who move into a flat and progressively invite in more tenants, thus severely overloading the amenities of the flat. Slumlords encourage this overloading because they charge per head instead of per flat, often pocketing rent meant for municipal rates.

The residential property market has been bedevilled in the last decade by slumlords, building hijackers and delays with clearance certificates (required by law before the owner can sell a property).

The condition of some of the units has deteriorated: around 25 percent of Joburg’s residential buildings have been described as being in an “extremely poor”, “very poor” or “poor” state of repair.

“The number of bad buildings in the inner city has almost doubled since 1999, from 120 to the current count of 235”, the report states. A “bad building” is one that has deteriorated to such an extent that the market value is below the outstanding debt owed.

This has led to a drop in rates income in Zone 4 areas – between 2000 and 2004 there was a drop of 25 percent. Doornfontein in particular was hard hit, experiencing a 61 percent decrease.

Solutions
These restraints aside, the report says investors have begun to find ways around the problems, where “anecdotal evidence suggests that successful landlords can achieve yields on high-density residential blocks in Hillbrow or Berea as high as 30 to 35 percent”.

While very few individual buyers can access finance, large investors have moved in and are buying blocks in these two suburbs, encouraged by the high demand for rental space. Trafalgar is now signing 110 leases a month, compared to around 80 leases a month a year ago, with rentals averaging between R1 200 to R2 500 a month.

To avoid the persistent problem of defaulting tenants, the report notes “a move to stricter debt control measures, backed up by strong, day-to-day operational management”. This means that month-end rents are strictly monitored, access to the building is also strictly controlled and debt collection is swift.

“Defaulting tenants can expect little mercy, and property managers don’t hesitate to start the eviction process where necessary”, the report says.

Northdene: a success story
The report cites Northdene, a complex of 26 sectional title units in Princess Place in lower Parktown, as an example of a residential block that Trafalgar has successfully turned around.

When Trafalgar took over Northdene, there was no body corporate and arrears stood at R300 000. An audit was done and the complex’s financial statements were brought up to date. An annual general meeting was called and a residents’ committee was established.

“Slowly but surely, residents started to pay their levies and catch up on back payments”, the report states.

In exchange, the property manager fixed the electronic gates, provided secure lock-up parking, and got tough with non-paying residents. By the end of June 2004, arrears had dropped to R28 000. As a reward, Trafalgar allowed residents to convert the basement flat into a prayer room.

As a result, the complex has started to turn around its sale prices – in 2002 a two-bedroomed unit sold for R50 000, while in October 2004 a three-bedroomed unit sold for R450 000.

Urban development zones
The 2002 announcement by Finance Minister Trevor Manuel of urban development zones (UDZs) as an inner city development incentive has become a reality in Joburg. Cape Town has also been granted permission to declare such zones

Designated zones will qualify for an accelerated depreciation allowance. This means developers obtain a 20 percent depreciation on the asset over a five-year period on refurbished properties, and a new development qualifies for a 17-year incentive, with 20 percent in the first year and five percent each year thereafter.

The city estimates that if developers of existing projects were to use the incentives for the next five years, they would be worth R32.4-million.

The typical inner city tenant
Based on their questionnaires, Trafalgar has ascertained that the typical inner city tenant is young, black, male and single, has been living in the inner city for around 18 months, and would ultimately like to move to Sandton, where they’re likely to rent.

Further findings reveal that:

  • 82% feel that the inner city is a safe place to live.
  • 96% believe that their buildings are safe.
  • 17% are university educated.
  • 61% use shops, 26% use schools, and 13% use entertainment facilities in the inner city.
  • Most tenants found their accommodation through newspaper ads or via word of mouth.
  • 75% have no private transport.
  • 23% of households earn between R5 000 and R10 000 a month and 47% earn less than R3 000.
  • The majority prefer to pay their rent through bank deposits.

The report says these figures are significant for investors, as they highlight the requirements of potential tenants – their need for affordability, the attraction of nearby shops, and the need for access to public transport to get to work.

Tenants respond positively
One of the themes to emerge from the forum panel discussion, attended by five city heads, Brian Miller of the Property Owners and Managers Association (POMA), Trafalgar CEO Neville Schaefer, and Financial Mail property editor Ian Fife, was that tenants are responding positively to “clear symbols of governance, because they represent stability”.

Says Fife: “I think the main change in the inner city is that tenants are heartily tired of badly managed, insecure or ill-kept buildings. There’s a need for a lot of education in the sectional title sector, but tenants are banding together more and more to pull the complexes together.”

He said that by empowering tenants with information regarding their rights, flat hijackers would be less inclined to get access to buildings.

The issue of enforcement of by-laws – raised by participants – is still a sensitive one, says Graham Reid, head of the Johannesburg Development Agency.

“By-law enforcement requires a change of mindset, and security works best where the public and private sectors co-operate”, Reid says. “Johannesburg still has quite fragmented enforcement agencies which need to be consolidated.”

Li Pernigger, programme manager 2030 in the city’s economic development unit, replied: “There are strategic plans in place but the operational plans have not always been pulled together. It’s often a question of whether or not there’s a champion to drive the process.”

Miller indicated that POMA was busy setting up five residential improvement districts, an initiative which sees suburbs divided into blocks, where problems like cleaning, security and gardening maintenance are identified.

The building owners then undertake to install CCTV, patrols and cleaning agents to uplift the block, before moving on to the adjacent block. The owners are aware that these improvements add value to their investments.

The first district in the process of being set up is in Berea, where the owners have agreed to CCTV and street guards, who will also help clean the area. Final agreements with the owners will see the guards and cameras in place around March 2005.

Schaefer/Fife model
This model of turning around a badly degenerated building was developed by Neville Schaefer and Fife, an inner city investor. The model goes beyond simple debt collecting and saving “bad buildings” from total deterioration.

“Our aim is to rebuild the value that has been destroyed”, says Schaefer. “Persuading owners that they have an asset worth defending and nurturing is, to us, the key to stability in inner city sectional title.”

After stabilising a building, Schaefer and Fife work with the owners and occupants to come up with a plan to make it work. This involves identifying the municipal debt and arranging with individual owners or tenants to pay and catch up arrears, calculating a levy to maintain the building and getting residents’ buy-in, and upgrading the building by making it more secure, undertaking repairs and improving the parking situation.

The model has been applied successfully in Pretoria and Johannesburg.

The crucial element, according to Trafalgar MD Andrew Schaefer, is the involvement of the city council in each city. After all, it is the councils who lose out on unpaid rates when a building runs into the ground.

But, says Schaefer, they have realised this, and “they are coming to the party”, in support of the dire need to turn the situation around.

Source: City of Johannesburg