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Real Estate Investing

How COVID-19 Could Affect South Africa Real Estate Investing?

The main highlight continues to be COVID-19 and since this is an issue that could persist for a few more months, we have to make plans and anticipate any unwanted outcomes. I’m your host Ofir Eyal Bar and given that I’ve been active in the South African real estate market for a few years, I would like to talk about some critical aspects that investors should take into account as they try to navigate this uncertain period.

One-in-a-lifetime shock

Based on the research I’ve done over the past two months; I did not find any other similar economic shock like this one. Generally, an economic downturn is more predictable, and we see a progression before bad things start to happen. In this case, however, we’re dealing with a sudden global economic stop, with demand collapsing due to lockdowns imposed in many countries. Airlines, hotels, and tourism as a whole are under pressure, but as we’ll see in the following paragraphs, this difficult period will leave behind its huge opportunities in the real estate sector.

If we talk about South Africa, President Cyril Ramaphosa had already decided to put the country in full lockdown, in order to contain the spread of the virus. At the time of writing, South Africa has around 1,300 cases, and luckily, it’s not among the most affected cases. Acting before a lot of people can spread the disease will definitely help the country navigate the months ahead with fewer cases and eventually, a faster economic rebound.

Real estate transactions dropping

Based on the data already released by other affected countries like China, Italy, or South Korea, South Africa should expect to see a drop in real estate transactions. Given the uncertainty, people and businesses will be conservative with their finances for a while, until things will start to show signs of improvements. I believe this could last for a few months, at most, and the lockdown will be gradually eased, once the spread shows significant signs of slowing and also, we have at least a cure that could limit the mortality rate.

A vaccine is very unlikely until the end of 2020, or early 2021, but a treatment that will speed up the recovery period for infected individuals will be of great help and will alleviate the fear. There are several drugs currently under testing and some specialists believe that we should have some concrete results by the end of April.

Poor growth balanced by good equity

Since this pandemic comes at a time when we have an oversupply from the buyers and tenants’ point of view, additional strains on the South African real estate should be expected in the months ahead. Despite pressure on property price growth, investors who bought before 2016 are still in a good position and have more equity in their property, as compared to the 2008 crisis. This isn’t a financial event and although a V-shaped recovery is very unlikely, once the medical tensions will start to ease, economic activity will gradually get back to normal and the real estate market will enjoy fresh inflows of capital.

A downturn followed by huge opportunities

People generally get scared when economic uncertainty spike, but we as investors should be able to get past our fears and make rules-based decisions. The world had to face many crises throughout history, some of them much worse than the one generated by COVID-19. Eventually, things got way better than they were before and that’s what will happen again this time around.

From my personal point of view, this crisis is a big opportunity. Stock markets around the world had already crashed and since many investors don’t want exposure to risk assets (stocks, ETFs, etc.) some of them will get back to where they’ve started – the real estate market. Especially if we consider that prices will start to ease in the months ahead, property valuations in South Africa will become attractive and profit margins will increase.

At present, there is a huge gap between the sentiment of big investors and the majority of people, suggesting that investors see how many opportunities will arise over the upcoming months and with markets flooded with liquidity, capital will start to move once we get back to normal.

Summary

It’s not my intention to minimize the effects of COVID-19 and I want to advise all of you to respect social distancing measures as long as authorities ask us to do that. However, I know that all bad things pass and in order to avoid being trapped in a negative bias, we should look at the long-term picture, because that’s where positive things lie. I’m Ofir Eyal Bar and I hope this article managed to provide some insightful thoughts on the current situation in South Africa real estate.