Thursday, October 22, 2020

The property market enigma

The ‘property slump’ that recently rocked the national economy caused intense consternation among players in the local property market. It resulted in a mouthful of theories being put forward as nerves cracked in the face of soaring prices. A subsequent plunge in prices also set tongues wagging as doomsayers warned of an impending property market slump.

However, industry captains stayed calm and dismissed talk of a property market crash as alarmist, instead positing that the market was simply settling and correcting itself. However, there is no doubt that the small man stands to benefit as slowly but surely tenants and buyers are now setting the tone on prices that they will accept, while the market is experiencing a steady trickle down of prices. The value of property, together with the rent that can be fetched from it, is slowly slipping down.

Modiredi Maruping, a leading property expert, points out that for a long time property companies and landlords were making hefty points as rentals were on an upswing. He points to the pre-determined annual escalation of rentals by 10 percent as a major contributor to the continuous hike in prices.

“Rentals are mostly escalated by the 10 percent annual escalation clause in the lease. Because of this escalation, rentals end up higher not because of the market but because of a clause on the lease,” he said.

However, Maruping points out that the trend will inevitably be reversed through new lettings as new tenants will only accept rentals that do not bite too much on their incomes.

“At such rentals it is not a given that property owners are losing, they simply have an asset that is properly valued by the market. Property still remains a gainful and safe long term investment,” said Maruping.

With regards to the relationship between businesses and the property market, Maruping highlighted that property supports businesses in that it houses their operations.

“If business can’t afford operating space, then business will suffer,” he said.

The residential property market was also not spared as prices escalated at alarming rates, a situation that Maruping described as unstable as high rentals bred an environment of risk.

“In most cases, property loans fall into arrears especially in situations where rentals pay the loan. More than that, high rentals breed an environment of risk. This is because when incomes trail behind towering rental prices, tenants fail to keep to the pace and they will desert the property owner,” he said.

However, Maruping believes it is not all doom and gloom because the residential market in Gaborone and surrounding areas remains active at the right price.

“People still need accommodation” he says.

The dynamics of the property market are made more interesting by the borrowing trends in financial institutions. A closer analysis of borrowing trends in Botswana indicates that there exists an abnormality in which people prefer to purchase property with personal loans. In fact, this was confirmed by Bank of Botswana (BoB) in its 2013 annual report as it indicated that ‘property financing’ was very prominent on the indicated uses of personal loans. This has resulted in Batswana bearing very high costs of borrowing, a grave inconvenience that has led to less people buying and owning property.

“When it’s difficult for the ordinary person to get a mortgage, less people buy property,” said Maruping.

The inaccessibility of mortgage financing comes from the reality that banks seldom fund properties outside what they consider prime areas. Additionally, when banks started falling short of loanable funds, they dramatically cut off the unsecured lending stream, which makes ownership of property much more difficult than it previously was. As banks tighten their screening processes, and unsecured loans become somewhat of a no go area, the bitter reality is now sinking that less and less people will get to buy or own property.

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