World Cup no boost for South Africa real estate

Supply-demand imbalance creates dismal recipe for recovery

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jul. 16, 2010

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Supply-demand imbalance creates dismal recipe for recovery

Steve Bergsman
Inman News

Every couple of years, one of the world's most interesting cities gets to throw a great party, either because of the Olympics or another global sporting event.

For the first time ever, a venue in Africa was made host of one of the world's great athletic contests, the World Cup for soccer, or as they say everywhere else but in the United States: the World Cup for football.

The host city is actually a country, South Africa, and I visited there in the spring to try to gauge the impact of such an event on the local residential market just as everyone was putting the finishing touches on stadiums, signage and roadways.

Although the World Cup finals would be held in Johannesburg, I focused on Cape Town because it is generally considered one of the prettiest cities in the world, the safest large city in South Africa, and the place moneyed immigrants and second-home buyers from the West usually settle down.

I checked in with Julian Reynolds, who two years ago had acquired one of the country's older real estate brokerage firms, Durr Estates, and who is now CEO of the company.

Before I dribble across the soccer field, however, a little background.

In case you're wondering, the global recession, like everywhere, tackled South Africa, and Reynolds bought a struggling business.

"I came in when things were really bad and it's been tough," he tells me. "We're treading water now, which is OK. Deals are being made, just not at the volumes we want."

Like the last man standing in Donald Trump's "The Apprentice" TV show, Reynolds laughs, "I knew coming into this it was going to be about survival." Indeed, survival was a significant accomplishment because over the past three years 70 percent of the country's real estate brokers (called estate agents) left the business.

If that wasn't bad enough, like in the U.S., the mortgage business collapsed. In South Africa, however, that took down a lot of estate agents because during the boom years -- which corresponded with the boom years in the Northern Hemisphere -- many estate agents also got involved with mortgage origination companies and those investments are now worth nil.

Into this fragile landscape comes the World Cup.

Visibly, the most recognizable change to the Cape Town skyline is a brand-spanking-new stadium, one of many built in South Africa's largest cities for this contest. The most significant alteration is not so apparent, but even better.

"The good thing about the World Cup is it forced South Africa to spend money on infrastructure," Reynolds says. "Unfortunately, it is the nature of government spending in African countries that huge volumes of money get spent on things that really can't be explained. With the World Cup, South Africa spent money on things like roads that will be of great benefit to the country."

The other good thing about the World Cup is that it will end up to be a massive advertisement for the country, which should attract, or re-attract, foreigners to South Africa's property markets -- at least that's what I thought.

When I was there I was a bit perplexed because the local papers weren't very jingoistic. In fact, they were more of a bummer. The Business Report newspaper, citing TPN, the South Africa credit bureau, was cautioning residential landlords not to be too optimistic about the expected impact of the World Cup on the rental market, particularly as the number of foreign visitors was to be much lower than initially anticipated.

These comments were part of a larger story noting the proportion of tenants in the residential property market who were in good standing on rents had once again declined after two improving quarters.

The credit bureau -- always a bit of downer -- finally concluded, as the World Cup rolled into town, "it would be irresponsible to look only at the brighter side of how the rest of the year might unfold."

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