South Africa – The Rainbow Nation
- Africa’s biggest economy
- The worlds largest producer and exporter of gold and platinum
- Capital = Pretoria
- Population = 47 million
- Currency = Rand
If you are a private investor sitting in New York / London, and you want to look at the possibility of investing in Africa, where would you start? (I say possibility, because many people still see Africa as a basket case, and even the thought of investing there would warrant you a trip to the hospital and getting intimate with a straight jacket!!)
Normally you would make a list of all the countries in Africa and start from top to bottom…….but in the case of Africa; you would have to start from bottom to top J
South Africa (yes the country and not the region) has since 1994 flourished under majority rule and is set to capitalize on this momentum for future generations.
- South Africa is ranked 24th in the world in terms of GDP, corrected for purchasing power parity.
- The Johannesburg Stock Exchange (JSE) ranks among the top 20 in the world.
- The South African Rand (ZAR) is the world’s most actively-traded emerging market currency, and was the best performing currency against the United States dollar (USD) between 2002 and2005.
- South Africa is also Africans largest energy producer and consumer.
So enough with the coulouring in the pretty pictures and forgetting about reality” bit …lets get on with the hard facts, as Africa isn’t called “the dark continent for nothing:
- South Africa has one of the highest rates of income inequality in the world.
- Unemployment sits at approximately 25%
- The crime rate is one of the highest, but it is the increase of violent crime that is the biggest worry.
- With the crumbling of the Zimbabwean economy, refugees are streaming into South Africa with an estimated 2 million Zimbabweans already residing in South Africa.
So you may say, “Please STOP”!!! With these statistics why would anyone in their right mind even have the notion of even looking at South Africa as an investment hotspot???
I’ll tell you why, and I promise to make it short…..but sweet:
- The emergence of a black middle-class known as “Black Diamonds”.
- The 2010Soccer world cup.
- The ratio of disposable income to household debt which is still only at 76%.
- 93% of land claims by the have been completed.
- Interest rates are still at 25 year lows from height of 25% in 1998. Without trying to illustrate every point made above; I have focused on the correlation between interest rates and inflation below. And without further ado, let the pictures do the talking…………. J
Tito Mboweni (The south African Reserve Bank Governor) implements a monetary policy within an inflation targeting framework…….so what do these fancy words mean???:
- In “layman’s” Terms – If the inflation goes up, then the interest rates go up.
- If inflation goes down, then interest rates go down.
So to illustrate this, have a look at what the graphs tell us below:
So how do these graphs above explain the growth experience in the property market?
- If inflation goes up, interest rates go up and house price growth slows
- If inflation goes down, interest rates go down and the house price growth increases.
Property Market Review
So, as mentioned in the Economic Review, there are 5 major factors that make South Africa a great place for property investment……but what exactly are these 6 factors and how will they affect the property market?
Let’s discuss these one by one:
- “Black Diamonds” – An emerging black middle class
- Of the 28,8m adult South African population, 21,9m are of black origin:
- Of those, 2m fall into the category called “Black Diamonds” – Black diamonds are a group characterized by a certain amount of wealth, education and other middle-class determining factors.
- Black diamonds make up 10 percent of black South Africans, but are responsible for 43% of black consumer buying power, amounting to the value of approximately R130-billion.
- Their growth has been recorded at 30% over the space of the last year
- 2010 Soccer World Cup (SWC) – the biggest event in the world
- The estimated 450 000 soccer fans are expected to visit South Africa for the SWC.
· These fans will spend in excess of R30 billion while enjoying the tournament.
· This ‘cash injection’ will push the economic growth rate up to 6%
· 150 000 jobs will be created during the tournament.
· R5 billion for spending on stadiums (Renovating existing and new-built)
· R24 billion spending on Gautrain linking Pretoria, Johannesburg and OR Tambo International airport.
- ‘The Ratio’ – Disposable income to Household debt
· Disposable income is the amount that you’re left with after all taxes have been paid.
· Household debts include mortgage / vehicle finance payments, credit cards and loans.
· South Africa’s disposable income to household debt is 76%.
o So for every R1 that you make after taxes have been paid, you have to pay 76c toward payments and you are therefore left with 24c.
Now you think, WOW, ‘for every R1 I earn I have to fork out 76c before I can start saving’??? (That’s if you’re the saving typeJ) That’s ridiculously high!!! So, let’s compare it to some other countries:
Germany = 115%
Japan = 140%
UK = 142%
Australia = 171%
As you can see South Africa’s ratio pales in comparison to other countries around the world!!
- ‘The Zimbabwe Scenario’ – To take or not to grab the land
- 97% of South African land claims have been settled, thereby leaving the issue of ‘Zimbabwe Land Grabs’, becoming a reality in South Africa, as very unlikely.
5. ‘The Interest Rate’ – Currently at 25 year low
- From the record interest rate of 25% in 1998, South Africa is experiencing 25 year low interest rates.
- The current Repo Rate (the rate at which the SA Reserve Bank loans money to commercial banks) is currently at 10% while the prime rate (the rate at which commercial banks loan to the public) is at 13,5%
- With inflation being kept in the monetary policy range of 3-6%, any significant increases seem likely.
Just to give you a little bit of time to digest all the heavy information above, let’s look at some pictures.
Look at the house prices to income graph below:
- As you can see, compared to the UK, Australia and USA our house prices are still very much under valued.
- And coming from such a low base regarding property growth, so this where the party ends? To quote the song from BTO…….. ‘You aint seen nothing yet’ J
As South Africa moves into almost 15 years after the end of ‘Apartheid’, there are signs that the ‘Lighthouse of Africa’ still had a far way to go in order to be competitive on the world stage.
But with onset of a new era, with the new black middle-class, 2010 Soccer World Cup, comparatively low disposable income-household debt ratio, the Zimbabwe non-issue’ and low interest rates at 25 year lows………..things are definitely on the up for the ‘Rainbow Nation’.
Sources: www.globalpropertyguide.com, www.wikipedia.org, Reuters, www.absa.co.za, & Daily Telegraph